You don’t have to look far to find someone recommending a new cryptocurrency or blockchain project. The increasing interest in cryptocurrency has resulted in a massive influx of cryptocurrencies and there’s no shortage of people recommending each one.
Within the cryptocurrency community, it’s common to see someone say DYOR (Do Your Own Research). How exactly should you go about that?
Knowing how to evaluate a cryptocurrency as an investment opportunity might just save you from buying a coin or token that tanks in value a week or month later.
There are 18,461 cryptocurrencies according to Coinmarketcap, and they’re not all worth your money. However, some of them might be hidden gems.
Are you ready to learn how to evaluate any crypto as an investment opportunity? Let’s dive in.
Approach Your Research Skeptically
Before we get to the actionable steps, it’s important to have the right mindset during your research. Your goal as your research should be to disqualify the coin. Don’t be optimistic and overlook red flags, embrace them. Make every crypto pass your test before you buy-in.
Evaluate the Cryptocurrency’s Listing Profile
CoinMarketCap and CoinGecko are the two major sources of cryptocurrency information. Check both if you can’t find the target crypto on one site since they have different listing requirements. Either site will serve as the starting point for your research.
To help illustrate the steps below, we’re going to use Cardano (ADA) as an example.
What’s the Current Market Cap and Rank?
Both sites rank coins by market capitalization by default since it’s a vitally important metric. The market cap helps you gauge interest and global investment in the coin. Look at the market cap in relation to the market cap for all crypto. For example:
Cardano’s current market capitalization is approximately US$30 billion and the entire asset class’ market capitalization is $1.7 trillion. The coin is currently ranked 7th out of all 17,000 coins. That’s a great sign and indicates the price will likely have smaller fluctuations than coins with smaller market caps.
Examine the Price History and Trading Volume
CoinMarketCap and CoinGecko both provide historical data reaching back to when the coin was launched. Examine the major historical checkpoints: daily, weekly, monthly, yearly, and all-time.
Are there any significant dips or spikes? These major movements often reflect trends in the asset class overall, but can also reflect harmful or positive news about the project. Both CoinMarketCap and CoinGecko show relevant news articles below crypto listings, explore them to learn more about major movements.
Trading volume indicates the total value that’s been bought and sold within the past 24 hours. Trading volume gauges other investors’ faith in the coin, good or bad.
Cardano currently has a 24-hour trading volume of around $1.2 billion with a price history ranging from US$0.75 to US$1.26 over the past month, with a current price of US$0.89. This tells us that it’s recovering from a drop but traders are still actively interested in the coin.
What’s the Total Supply, Circulating Supply and Max Supply?
A common error new investors make is focusing on the price of the coin as a way to compare cryptos. However, the price of the coin is entirely unique to that coin. The supply statistics help put the price in context. Each metric means:
- Total supply: A hard statistic about how many coins are currently in existence and have been mined. Burned coins (meaning they were destroyed) are deducted.
- Circulating supply: This statistic is not precise and it’s the best estimation of how many coins are moving around in exchanges or peer-to-peer transactions. It may also include coins in lost crypto wallets that nobody can access.
- Max supply: This is what gives context to the other supply stats and describes how many coins will ever exist
These statistics for Cardano are:
- Total Supply: 34,143,444,450 ADA
- Circulating Supply: 33,648,165,027 ADA
- Max Supply: 45,000,000,000 ADA
The max supply tells us that there are around 10 billion coins left yet to be mined. As those coins are mined they’ll increase the total supply, and depending on the level of demand, that might drop the price.
Yet, the circulating supply and total supply tell us that most people with Cardano are using or trading it, a great sign that reflects active interest. The coins not circulating are likely staked, as Cardano is a proof-of-stake crypto and rewards users for staking. They may also be held in cold storage or a crypto vault as a long-term investment.
Critique the Cryptocurrency’s Online Presence
Analyzing the coin’s listing page is the first step, but it’s not the last step. If a coin has passed your criticism, it’s time to dive deeper into the crypto’s online presence.
The listing page contains links to the official website and social media profiles. Load them all and start analyzing.
Who’s the Team Behind the Crypto?
It’s easy to forget that we’re talking about software that was created and is maintained by a team of developers. Even Bitcoin, with a creator that infamously disappeared, is still developed by a team.
Does the team have any relevant experience? How successfully have they been so far in continually developing the coin? Have they stuck to their stated roadmap?
There should then be plenty of information about the team as a whole. For example, Cardano is developed by three development teams that work together, and there’s plenty of information about them. You can tell that they’ve maintained their roadmap and the coin is considered fairly reliable by the greater crypto community.
What is the Crypto’s Utility? Examine the Whitepaper and Roadmap
What is the entire point of the crypto? You can usually learn this from the official homepage, but you need to dive deeper.
Whitepapers are in-depth technical reports that spell out everything about the coin: its stated utility, the roadmap, the technical aspects of mining it, the total supply, and other important information.
Roadmaps are publicly stated goals for how the project will grow. They should show past milestones – have those been reached?
A whitepaper that’s lacking important information or a vague roadmap are both red flags. Not having either is an even bigger red flag.
Even if everything checks out, does the utility actually make sense? Are people going to use it for the stated purpose? You’ll have to do additional research into the specific problem it’s trying to solve to determine that.
Is There an Active Community?
Community is everything in crypto. True believers of the project band together online and many of their meeting places you can view without joining. Start by looking at the activity on their social media profiles, and then look at its subreddit. Lastly, see if they have their own place for the community to gather.
Activity is the name of the game during this step. Is the social media profile inactive? Is anybody posting in the subreddit? Both indicate the lack of true believers in the project.
Both Discord and Telegram are popular in the crypto world, but you have to join those communities. If you’re willing, sign up and if there’s meaningful activity.
Cardano has its own forum, an active subreddit, and both a Discord and Telegram community. All great signs.
Successful Crypto Investments Require Thorough Research
At this point, you probably know more about the cryptocurrency than the person who recommended it.
Now you can make an informed decision based on hard statistics, the stated utility, roadmap successes and future goals, and the activity of the community.
Consider all of these factors alongside your risk tolerance and it might be time to buy.
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