What Maggi is for noodles, Bitcoin is for cryptocurrencies. Bitcoin is the largest currency by market capitalization. But are there other cryptocurrencies in the market that could be the next bitcoin or probably bigger than that? Yes, there are, with the likes of Ethereum (ETH), Litecoin, Bitcoin Cash, Dash Ripple, our very own Indian Polygon (MATIC), Cardano (ADA), Polkadot (DOT) and many more being around. Then there are coins that promise to send you to the moon. But ask yourself: who would bring you back?
So, similar to diversification in your stock or mutual fund portfolio, how should you go about creating your own crypto-index to diversify? Let’s understand the parameters to apply before you invest in any cryptocurrency:
Total supply and circulation
Check out the market capitalization and total circulation of a particular coin. The supply of any coin signifies the maximum number of coins that can enter the market and its circulation means the total coins available in the market. Understanding these aspects is very important for evaluating any crypto project. If a coin is not infinite, which means it has an unlimited supply, then, on the basis of the demand and supply theory, anything which is not scarce may not command a good price, provided there is a good demand. As you might be aware, Bitcoin’s overall supply is restricted to 21 million coins that can ever be mined.
Pump and Dump: Look at the price movements
Look out for the price movement of any coin since its inception, because that can tell you a lot about its story. You must be knowing about the Dogecoin which was created as a joke/meme coin but thanks to Elon Musk, its price had a vertical climb. Now, whether dogecoin was used as a ‘pump and dump’ coin or would be a part of mainstream coins, only time will tell.
Avoid investing in a meme coin or, if I were to call it, a penny coin, as that is not investing, but gambling. If your risk profile allows, go for it, but not otherwise. Avoid those coins which trend because of some influencers or speculators. Of course, this may not always be the case, given how the cryptocurrency world operates.
Finding out about the people behind any cryptocurrency is one of the most important things to do. The success of any company depends on a good CEO and a good leadership team. Similarly, you need to be assured of the people behind the curtains and their vision. You need to check whether the founders are personally invested in their own coins or the project and what their prior experience or track record is.
Any coin’s successful run can also be attributed to its followers. Choose coins that have strong support from communities. It is an indication of people’s faith and interest in a particular cryptocurrency. You should go all out and check their YouTube channel, Reddit forum, Telegram, Twitter and more. A coin or a project that has strong community support is very important because the bigger the community, the larger the value.
The White Paper
For successful promotion, all ICOs, or Initial Coin Offerings, require a white paper, which defines the purpose of the coin, the technology behind it, the working methodology, and the overall vision. It literally spells out the fundamentals that can be evaluated and one should never invest in coins before reading the white paper. Your chances of picking up the winners will increase substantially with the number of white papers you read. They can tell you a lot about their realistic plans, vision, supply and circulation, use cases, and so on.
The underlying technology is one of the most important factors to watch out for in terms of knowing the edge against competitors. If you look at Ethereum, it has a lot of use cases, such as its smart contracts, which are used in the banking and financial sector to hasten transactions and also for predicting markets, replacing escrows and so on. So, apart from being a cryptocurrency, Ethereum is used for a lot of the above-mentioned transactions.
So, look out for those disruptive technologies that are quickly becoming the biggest cryptocurrencies. This also possesses a potential threat because, ultimately, they are solving a real problem and if someone develops a better solution, they will get replaced. Hence, it has to be constantly monitored.
It is time for you to move from economics to learning some tokenomics, i.e., Token Economics, which defines how cryptocurrencies will work in the overall ecosystem. It describes how the tokens will be distributed and used, as well as the quality of the tokens and the factors that may affect their value. These two factors are important before you decide to get into the crypto space.
Investing in cryptocurrencies is a highly risky affair and should not be done without first analysing your risk profile and the government’s regulations.