How To Analyse A Cryptocurrency Before Investing

Which crypto should you invest in? It is a million-dollar question, and that is what we will try to answer in this blog.

With cryptocurrencies gaining momentum, many people are looking to make them a part of their portfolio. But there are over thousands of cryptos out there, and it is difficult for you to decide which ones to put your money in.

So here we are helping you with a framework on how to analyse cryptocurrencies.

Top 5 Factors to Consider While Analysing Cryptocurrency

You can be looking at a dozen factors while evaluating cryptocurrencies, but if they stay strong on the following points, it may be a good investment.

1. The Whitepaper 

A whitepaper is a detailed document issued by the founding members of every cryptocurrency project. It tells you about the goals of a crypto project and all the essential details related to it.

Evaluating the whitepapers is like conducting a fundamental analysis of a project. Just like the fundamental analysis of a stock helps us understand the company’s financial health and business, the whitepaper can give you an idea about the proposed project’s potential. 

For instance, consider Ethereum, it has many use cases other than being a digital currency, but when we look at Bitcoin, it is a store of value. So, depending on the investor’s needs, they can choose to invest considering the long-term value.

Consider finding answers to these questions through the whitepapers: 

  • What is the use case of this cryptocurrency or its underlying blockchain? (Know more about blockchain here)
  • What problem are they solving? Is the problem big enough to be solved? 
  • What is the proposed timeline?
  • How has the progress been so far? Are they sticking to the timelines?
  • Is there any other project solving this problem? If yes, who has a competitive advantage?

The idea is to get a basic sense of what the project is trying to do and then decide if it is worth investing in or not.

2. The Team 

The next step is to study the team behind the project. No matter how good a project looks on paper, it is the team who will bring it to life.

Here are some questions you can try to answer while evaluating the team:

  • What are the qualifications of the team members? 
  • Do they have any prior experience in working with a notable or similar project? 
  • Are they part of any other major blockchain community or ecosystem? 

    You should be able to find the team data in the whitepaper, and if there is no such information available, it might be a red flag.

    For example, there are also many of the shitcoins in the market whose sole purpose is pumping and dumping investors. Such coins do not have much information about the team’s founder.

The whole idea here is to evaluate the credibility of the team members. If the team is credible, any investor would feel confident investing in their project.

3. The Community Backing the Project 

The community of a project is equally important as its team.

The crypto industry is big on communities; they have the power to make or break a project. Some crypto projects have thrived even without any fundamental value just because of their community involvement.

An involved community indicates interest in the project, so the more involvement, the better. If a project interests you, join their communities and observe the conversations on Twitter, Discord, and Reddit. Besides, regular updates about the project are also shared in such groups. This is where the community discusses and scrutinises a project’s potential. 

4. Liquidity 

Liquidity is another important factor to consider when investing in cryptocurrency. It refers to how easily a crypto asset can be sold. The liquid a cryptocurrency is, the easier it is to sell it and vice versa.

Investors prefer to invest in liquid cryptocurrencies because they are easier to sell. One way to identify if a cryptocurrency is liquid is by looking at its trading volume. Higher trading volume indicates more people engaging with the crypto and thus better liquidity.

For example, Bitcoin has better liquidity when compared to altcoins because of its high trading volume.

5. Tokenomics

The tokenomics of a project is very important and can influence its potential to a great extent. It essentially refers to how, when, how much, and how long the tokens of a particular project will be created and distributed.

Try knowing the below details –

If the project has a limited or unlimited supply of cryptos, do they have token burns? Is there a vesting period for the total supply? Have they locked in some supply for founding members etc.?

For instance, a crypto with limited supply, which has great use cases, might do better than its unlimited supply counterparts. If a crypto has reserved some portion of its supply for founding members, then you might want to be wary about how that may influence decision-making within the community, etc.

This will help you better understand whether you should be investing in a crypto. 

Wrapping Up

As a new investor, it may be overwhelming to do the research. It is much easier to give in to the FOMO. But it is exactly what you should not do. It is important to evaluate the cryptocurrency and project properly before investing.

You can use the above points to scrutinise the project and understand its fundamentals. Ask those questions and try to find out their answers. Then make an informed and unbiased decision. 

P.S – Stay clear of the hype and social media trends and the self-proclaimed crypto gurus. Taking advice from such gurus or riding the hype may prove to be costly. You need to invest based on your personal investment goals and risk appetite.

FAQs

  • How do you pick a winning cryptocurrency?

You can identify a winning cryptocurrency by analysing the fundamentals of a project and some other metrics mentioned above. The key is to observe all the metrics together and make a decision rather than relying on one or two factors alone. 

  • Is it good to invest in cryptocurrency?

Cryptocurrencies have become an important asset class, and many consider them to be an essential part of their portfolio. If you invest in cryptos with proper research, it may turn out to be a great investment. However, if you invest blindly or in FOMO, you might regret your decision. 

  • How do you know which crypto will go up?

If you look at certain factors (such as the whitepaper, the team, the liquidity and trading volume), you should be able to find cryptocurrencies which have the potential to grow in the long run.  

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