5 Things To Ask Before Investing In An Altcoin
In case you haven’t heard, there’s more to cryptocurrency than Bitcoin. In fact, the father of all cryptocurrencies paved the way for newer ones with more advanced tech and use cases such as Ethereum, De-Fi, and NFTs to take center stage as of late. Fast forward to today, there’s a total of 5,398 cryptocurrencies listed on coinmarketcap.com.
The success of Bitcoin is very compelling and it’s hard not to be tempted by the thought that this new breed of coins could potentially see the same success. However, as with any investment of opportunities, it’s never a good idea to invest out of FOMO, all the more with uncharted waters – after all, cryptocurrency is still in its early phase of adoption.
So, before you go ahead and get carried away by the hype around new or up-and-coming coins, here is a list of the bare minimum scrutiny and due diligence that you should do before diving into it with all your investment money.
1. What is its business proposition?
Cryptocurrency projects are the same as every other startup, they aim to solve problems. So, when a new altcoin gets released, the first thing that you should ask is, does it solve a problem? Unearth more information about its use case, the tech behind it, how it works, and how it could potentially change the world.
The problem that it solves and the team behind it
When cryptocurrencies are launched to the retail market, they usually come with a white paper that explains what the coin is all about, and that is probably the best place to start. This will also give you a better look at the team behind the coin and evaluate whether or not their long-term goal and strategy are feasible. Scrutinizing the people behind it will put you in a better position to discern shady and questionable groups and coins from the legitimate and trustworthy ones.
What type of coin is it?
Another aspect to look out for is whether the coin is a security token, where owning a coin means owning a piece of a company – much like stocks. Or is it a utility token, which works in a way that tokens are redeemed for services on the blockchain?
In every investment, it’s important for investors to understand the assets that they’re betting their money on because it can make or break their conviction in it. It will also prevent you from succumbing to FOMO or hype because you know its potential and limitations.
2. How much is the overall and circulation supply?
The total supply of a coin is the maximum amount of coins that exist in the market. Circulating supply, on the other hand, is the number of coins that are already in the market. A portion of all coins will be held by their founders/creators, so there will be a difference between the two figures, and it’s important for you to take note of it as it’s crucial to the price of the coin.
Why does supply matter?
Bitcoin is deflationary by nature as its supply is only limited to 21 million. Due to this, the number of Bitcoins that can be mined is always decreasing and the supply increasing. However, once all Bitcoin has been mined the total number in circulation will be fixed and no more will be created.
The supply of a particular cryptocurrency refers to the total number of coins in circulation.
Purchasing a cryptocurrency with a fixed/limited supply is an effective way to profit from future value.
The same principle can be applied to other cryptocurrencies. Understanding how demand and supply can drive the price is key in determining its potential growth. Cryptocurrencies with a finite supply are more likely to see a price surge than those unlimited ones.
The supply’s influence on the price of a coin
Due to the basic principle of supply and demand, the supply of coins has a large influence on the price of the coin. For instance, Dogecoin’s current value metrics as of writing are:
- Price – $0.26
- Total supply – 129.5 billion coins
- Market cap – $34.7 billion
It can be argued that a ridiculous number of coins could prevent Doge from reaching a Bitcoin-level value. Increasing Dogecoin’s value to $1 would equate to an almost $129.5 billion market cap, which is already a third of Bitcoin’s.
This is not to say that coins with an unlimited supply hold no value. Ethereum for one has no fixed supply but it’s the second-largest cryptocurrency in terms of market cap. Dogecoin is also inflationary and was created as a joke (a meme coin), but it exploded to what it is now.
At this point, everything is possible in the crypto space, but if you’re a newbie investor who wants to play safe, understand that hard-capped cryptocurrencies have a greater chance of preserving their value over cryptocurrencies with an unlimited supply. The whole point in understanding the significance of its supply is to have a more realistic insight in evaluating new altcoins that have yet to stand the test of time. This will give you a more realistic look at its billion-dollar vision.
3. What is the range of its price trend?
It’s no secret that cryptocurrencies are highly volatile, and this is mainly because the prices are easily influenced by speculations. Pump and dump schemes are almost as certain as the sunrise due to the lack of regulatory oversight. So, zoom out of that price chart, look at its price history – it’s got a rich story to tell.
Pump and dump
Altcoins with lower market caps are usually the subjects of the pump and dump schemes due to their lower price per coin. Newbie investors are easily lured into the illusion of a get-rich-quick potential of this type of coin because a few hundred dollars could yield millions of coins.
The more people who buy into the hype, the faster its price will go up in 10, 20, a hundred, or even a thousand folds. By the time it reaches its peak, experienced investors and whales will cash out their coins, massively pulling down its price and leaving the inexperienced, hype-driven investors at the top with less valuable coins on hand than when they bought it.
Cheaper coins with lower market caps are usually prone to pump and dump schemes. The earlier you recognize this, the earlier you can avoid unnecessary losses by betting on those new altcoins with billions and billions of supply.
This is not to say that coins with a pump and dump trend at some point in their chart are bad, what you should take note of is you can base your entry and exit positions based on it. When a coin’s price is relentlessly climbing in such a short period, it’s almost guaranteed that it will eventually drop. If you haven’t invested in it yet, sit through the hype and just watch it unfold, and plan your entry. But if you’re willing to risk it because you just want to make quick money, make sure you know when to enter and when to exit like a good day trader!
External influence on altcoins’ prices
A coin’s price can easily be influenced by Bitcoin prices, world events, and the economy. For example, when Bitcoin’s price drops, it’s almost guaranteed that 98% of altcoins drop in price. This is because most of the exchanges use Bitcoin as the reserve currency.
Another factor that could affect an altcoin’s price is the number of exchanges where the coin is available to trade. If the altcoin is in major exchange platforms like Binance and Coinbase, their prices should increase significantly since they’re available to more people to trade.
Cryptocurrency is similar to stocks, the key to evaluating its value is to understand why its price moves up and down
4. What are the developers currently up to?
The devs are the people literally running the projects. See what they’re currently working on, get a pulse on whether or not the devs have active projects beneficial to the coin. Strong projects mean high developer activity. If there are little to no projects, that should be a cause of concern.
The easiest way to measure developer projects of a coin is by viewing their project(s) on GitHub.
The activity metrics of a project and the entire work done on GitHub are public. The activity metrics that you should look into are the following: updates the coin project has received, how many people are watching it, the number of forks (different variations) it has created, and the total stars it earned
Also, observe whether the devs are regularly fixing issues and bugs and if the number of developers getting involved in the project is increasing. If developer activity is growing, take that as a good sign that the project behind the altcoin is a strong one.
5. Does it have a strong community behind it?
One of the easiest ways to gauge the community size is to check out the coin’s Twitter page. How many followers does the project have? How much activity is occurring in the account? Use hashtags to see if people are talking about it and find discussions around the altcoin to understand it better and its community’s sentiments. Usually, Twitter is very reactionary to news and announcements, if you want to find real-time sentiments, this is the place to look for.
Reddit is another platform rich in cryptocurrency discussions – it’s ground zero for cryptocurrency news, announcements, and conversations about different coins. Not to mention, the discussions here are almost real-time, much like in Twitter. Find out if there are subreddits related to the crypto project you’re eyeing and if they are highly active.
A project with a strong community is just as important as high developer activity. The larger and more involved the community is, the more valuable the coin should be.