Want to start investing in cryptocurrencies but aren’t sure where to start? We look at five crypto research strategies to help you assess a coin’s investment potential.
With crypto and other risk assets in a slump following last year’s bull market, you may be wondering if the current crypto winter could be your opportunity to get in while prices are low—like the lucky few who made huge profits as early investors in Bitcoin and Ethereum.
But before you dive right in, it’s important you understand how to research what crypto to buy now. Investing in crypto, after all, involves considerable risk given the volatility of cryptocurrency markets, making it essential that you do your due diligence.
In this post, we’re sharing five useful crypto research strategies to help you decide what to buy, plus tips for avoiding crypto scams. As always, there are no guarantees when investing, and you should never invest more than you can afford to lose.
Crypto Research Strategies
Bitcoin and Ethereum have typically been the starting point for many crypto investors due to their familiarity and relatively large market caps. Naturally, the further you venture down the list toward lesser-known cryptocurrencies, the more risk you may shoulder. However, if you want to delve deeper into other crypto assets, read on for tips on how to research what crypto to buy now by assessing their investment potential.
Before making investment decisions, it’s useful to consider both quantitative and qualitative factors. Quantitative factors include the price and market cap of a token, whereas qualitative factors include considering how you heard about a digital asset and whether the source was credible.
For example, if you heard about a currency through claims of its value quadrupling overnight, consider it a red flag and fact-check the data. Only consider investing in currencies you hear about through trusted sources, and never invest based on word of mouth alone.
If you believe the source is credible, consider the tactics below as you develop your own crypto research strategies.
1. Perform a Fundamental Analysis
If you’re interested in a coin, do a fundamental analysis as the first step in your crypto research process. It’s important to understand the fundamentals, especially if you plan to hold a coin or token for the long term.
When investing in stocks, traders often review a company’s profit and loss statements, EBITDA (earnings before interest, taxes, depreciation and amortization), and other potential indicators of the health of the business. While this same level of reporting is unlikely to be available, before investing in a digital asset, you should understand what problem the coin solves and whether there is demand for it. Doing so will help you determine whether the underlying project has real value.
Trading volume is another factor that can help determine a coin’s value. If there’s little or no trading volume for a coin with a lot of hype, ask yourself why that is.
However, it’s important to be aware that trade volume by itself is not a gold standard, nor should you look at the trade volume listed on just one exchange or analytics site. Recently, research by Forbes found that half of Bitcoin trades reported by exchanges were the result of wash trades.
Questions to ask:
- Does it solve a problem?
- Is the problem big enough that it needs to be solved?
- What are the potential use cases?
- Is there steady trade volume?
- Is the trade volume relatively consistent across exchanges and sites?
2. Read the White Paper
The details of blockchain-based projects are typically shared in a white paper that is made readily available to the public.
Typically, these informational documents detail the project’s concept, plans for the future, expected timelines, and long-term value creation. A robustly constructed crypto project will have a well-defined roadmap explaining how the crypto asset derives its value and how developers plan to support its growth.
Keep in mind though that the existence of a white paper alone doesn’t necessarily signify legitimacy. Case in point: The Squid Game* currency had a white paper. Yet it collapsed after its creators fleeced investors.
Before investing in a cryptocurrency, read the white paper to understand the problem it addresses. If the solution it proposes doesn’t make sense, seems far-fetched, or appears too good to be true, you should probably avoid it.
*It’s also worth noting that purchasers of the Squid coin quickly learned they were barred from selling it.
3. Investigate Whether a Coin Has an Active Developer Community
Although many major cryptocurrencies are built on decentralized networks, legitimate ones will typically have publicly listed developer communities.
Take some time to learn about the people involved to assess whether you can trust them. Be wary if the currency’s board members have shared only first names or hide behind the anonymity of Twitter handles.
In the case of Bitcoin, the creator(s) chose to stay anonymous but put forth a solid white paper and were prolific in their writings, at least until Satoshi Nakamoto went quiet.
While you won’t know or recognize every board member or supporting company, you should be able to look them up to verify that they are real and genuinely involved. It’s also wise to look into how much of the currency its key stakeholders own, where they are based, whether they have a supporting team, and who notable investors are.
Additionally, make sure the currency is active and new tokens are being minted. You don’t want to invest in an asset that has been abandoned or is a scam.
Signs developers are active include:
- An up-to-date website
- Regular social media activity
- Community activity on platforms like Reddit, Telegram, or Discord
- Developer activity on GitHub
- Trading volume that indicates other people are investing in or trading the asset*
*Typically, the higher the trading volume, the greater the liquidity in the market, which can be a positive sign. However, as noted earlier, you should not form an opinion on trade volume alone.
4. Examine Market Sentiment
Market sentiment is what causes price fluctuations in cryptocurrencies and motivates investors to buy or sell. Pay close attention to the chatter and hype about a currency before investing in it. To do this, it’s helpful to follow crypto social media handles, news channels, and discussion groups on platforms like Reddit and Discord.
However, keep these pointers in mind as you take the pulse of the market:
- Take what’s said on Twitter with a grain of salt. Not everything you read is true.
- Beware of pump and dump schemes, in which false information is spread online to create demand and pump (drive up) a currency’s price so that a small group of people may dump (sell) their existing tokens while their value is high. The price of an unknown coin skyrocketing without reason can be an indicator of such schemes.
- People seldom give away free coins. If it sounds too good to be true, it probably is.
5. Analyze the Technicals
Technical analysis of a currency involves studying its price chart, identifying trends in past price movements and coin distribution, and assessing factors like market cap. For example, a large market cap indicates a well-established coin that is likely more stable.
This kind of technical analysis can be helpful in predicting changes in value and in determining when to buy or sell a token. (Keep in mind, though, that in the long run, time in market is often a better strategy than trying to time the market.)
Find out if the cryptocurrency imposes limits on how many tokens can be issued and how they will be distributed. Pay close attention to anything that doesn’t feel right. For example, if a few people hold a majority of the tokens, they have the power to influence price. Not to mention that if a project plans to create millions more coins, especially over a short period of time, the value of each coin might drop precipitously due to excess availability.
Hopefully this guide to crypto research strategies will help you in determining what crypto to buy now and in the future. Just keep in mind that there are exceptions to every rule.
One More Consideration Before You Invest in Crypto… Taxes
As a final note, it’s important to consider how you plan to invest in crypto. Not only do you have a range of options, your tax responsibilities vary depending on the route you take.
Without getting into the details of centralized and decentralized exchanges, wallets, keys, and the like, be aware that every purchase and sale of crypto constitutes a taxable event. So if you’re new to crypto investing, be sure you have a plan. (Don’t know where to start? Check out the Crypto Taxes 101 post our friends at CoinLedger wrote for us.)
Or you can invest with a crypto IRA and avoid the process of reporting trades on your taxes each year. In fact, with a Roth crypto IRA, you can avoid paying taxes on crypto gains altogether as long as you wait until you’re 59-1/2 years old and have had your account for at least five years.
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