There is an endless number of people out there who will assume a position of authority and tell you what you should do with your money. Some of them are outright scammers and pyramid schemes. Some of them have vested interests or just aren‘t as knowlegeable as they make themselves seem (Elon Musk). A massive component on successfully investing in cryptocurrency is doing your own research (DYOR).
Why It’s Important
The last 6 months or so we’ve had an almost non-stop bull run. Altcoins in particular benefit from this (altcoin season). While Bitcoin and Ethereum have seen gains in the upper hundreds of percents, that‘s nothing compared to returns the rest of the industry has seen. Altcoins have had much greater gaines, with the HODL index (https://www.bloomberg.com/quote/HODL:SW), which tracks the top coins by market cap, showing gains of nearly 800% for the past year. There have plenty of altcoins generating 1000+ percentages. With various staking and mining oportunities returns have been far greater than just what you could earn buying and holding bitcoin.
People are wildly throwing their money into the market and have mostly been getting returns out of it. Even projects with no purpose (like Dogecoin) have seen insane returns. A new coin can be created by anyone within an hour. People will still throw money at them without second thought.
With great rewards come great risks. There is nothing like a bear market to come and teach people what’s important. The type of person who invests in meme coins are also pretty likely to dump their holdings when the trend ends, leaving someone holding the bag. People who are investing in technology they believe in, will be more likely to see past the token price. Coins backed by actual technical substance will most likely make it through.
Fundamentals Research
1. Does this coin have a purpose to it? Favor utility tokens over security tokens. Besides the inherent value of the project providing utility, security tokens have a large legal headache to comply with (in the USA).
2. Is there active progress towards the stated purpose? Is there a working product already? The team should form a community and provide regular updates on technical progress. They should have outside developers building on top of the platform. Ideally they’d also host hackathons now and then
3. Seek to understand it’s strengths and weaknesses in comparison to competitors. This could include reading the whitepaper. It may be difficult for non-technical users however. You should be able to ask how x project compares to competitors y and z. A good project will have people who can help you understand the surface area of what problem they’re trying to solve.
4. Is it decentralized? If not, will it be soon? With this being the main benefit of blockchain technology, it really defeats the purpose if the answer is no
If you can find a project that has everything on the list, you’re likely looking at a solid project. At the end of the day, try and invest in something you understand and believe in. Lastly, do a quick google search of “project name scam” to make sure there aren’t any major red flags you’ve missed.
Token Economics
Next, head to a token listing website like coingecko. Take note of the cryptocurrencies market cap, current price, and their total supply.
Some coins have infinite supply, some have a limited number of tokens that will be in existence. The supply multiplied by price gives you it’s market cap. You should set your expectations for the coin based on this. Things like Dogecoin will never reach a token price of even 100 dollars. It’s market cap would be much higher than the number of USD in circulation.
It can be cool to see a million tokens in your wallet, but it’s meaningless when a million tokens are printed every hour. Market cap is the important number here. If a coin has high inflation, then you should take into consideration that it will have to get a lot more invested for the token price to increase. A coin like Dogecoin for example is definitely closer to the top of it’s potential even though it’s nowhere near the price of Bitcoin.
High inflation and infinite supply aren’t bad in isolation, but can be bad together. Similarly, something very deflationary with low supply might have issues in the future. A utility token needs to have enough circulating supply for people to actually use it instead of treating it like gold. In general, compare the coin numbers to something like Bitcoin or Ethereum.
Conclusion
A very good buy would be something with good fundamentals (working product, good adoption by developers) and yet a low market cap. Make sure you do your own research and don’t let people sell you what they’re already holding. It’s always going to be more profitable to invest in something of value.