Find hidden gems in the crypto market and important points to consider before investing
With more than 10,000 crypto tokens in the burgeoning crypto market today, investors must consider their investments for positive returns
Ever since the launch of Bitcoin BTC/USD as a peer-to-peer digital currency that championed the virtues of blockchain technology, the world has increasingly warmed to the concept of a decentralized future where people can transact with each other and businesses, without the involvement of any central banking authority. A growing number of digital currencies, or cryptocurrencies as they are better known, have emerged since then, with many competing with each other to gather more users and investors. Over the past few years, the rapidly growing pace of crypto adoption has led to a boom in cryptocurrency prices, drawing even larger swathes of investors to this booming asset space. However, this has also led to an increase in the number of crypto tokens going bust, as bad actors try to defraud investors of capital through pump and dump schemes, racketeering and initial coin offering (ICO) scams are among other types of cyber theft. This makes it even more important for beginners to do their own thorough research and only invest in those crypto tokens that pass a number of evaluation criteria listed below:
Choosing crypto tokens with real-world use cases
Although every crypto token is tradable in the short term, crypto investors would do well to invest in those tokens that have good fundamentals to benefit from long-term capital growth. From this value investing perspective, it is advisable to invest in only those crypto tokens with an underlying blockchain project that offers a product or service and that adds immense value by decentralizing traditional businesses such as banking, art, gaming and commerce among others.
Despite cryptocurrencies like BTC, Ethereum ETH/USDSolana SOL/USDCardano ADA/USD , and also apparently more popular crypto tokens, it is important to note that there are many other new time projects that also offer services. These new age projects are cloud computing, video streaming, decentralized storage and energy marketplaces, which can potentially be game changers in the space they operate in. Crypto tokens like Polygon MATIC/USDPolka dot DOT/USDStorj (STORJ), Golem GLM/USDCosmos ATOM/USDTheta THETA/USDZilliqa ZIL/USDFilecoin FILE/USDQuant QNT/USDArweave AR/USD are just a few good examples that investors can consider when studying new projects.
Ensure that the governance and financing mechanism is robust
While most crypto tokens use a proof-of-work (PoW) or proof-of-stake (PoS) consensus mechanism to validate transactions on their blockchains, there are a number of scaling solutions being launched that take a slightly different approach to governance and use a off-chain consensus function to accommodate a higher transaction speed on their platforms. Although this may not seem important to the average crypto investor, it is important to ensure that the crypto token can consistently function even during bouts of market volatility and support the central product or service, without crashing in value as in the case of the Terra and Luna tokens. With a number of different types of crypto-tokens such as meme coins, altcoins and stablecoins available today, investors should be sure of the stability provided by the primary governance structure before committing their invested capital.
When crypto tokens are launched through an initial coin offering (ICO), the cryptocurrency equivalent of an initial public offering (IPO), the funds raised are used to power the underlying blockchain project and are documented in the token’s whitepaper. Investors should read this document carefully to validate whether the funds raised through an ICO are secured, put to use effectively, and do not raise suspicions that may indicate a potential rutting in the future.
Evaluation of tokenomics, market potential and market value
For investors looking to invest in a particular crypto token for the long term, it is crucial to understand the token’s economics, or tokenomics as it is known within the crypto community, to identify potential red flags and avoid investing in risky tokens. Factors such as the maximum allowed token supply, the current number of tokens in circulation, the percentage of tokens held by large investors or crypto whales and how the tokens are minted or burned are important in understanding how the particular token will perform in the longer term. Limited supply crypto tokens that are held more evenly across the investor base are a better bet than those controlled by a select few crypto whales.
Gain insights from technical indicators, direct competitors and peers
Despite all the above factors, it is relevant that investors consider key indicators such as volatility, risk/return ratio, Sharpe ratio and other technical indicators before taking a new position in a particular crypto token. Tokens that are in a long-term bear should be tracked for re-entry on signs of a reversal. On the other hand, these crypto tokens that are in an extended bull run require investors to exercise caution to avoid buying at the top of the rally.
It is always a good idea to look at all the crypto tokens operating in a particular sector or industry, to understand which ones offer better investment potential. Competitor tokens will always be each other’s best critics and can be found on social networking platforms such as Telegram, Reddit and Discord.
While the above framework provides crypto investors with a basis for making investment decisions in the bustling crypto market, there are risks associated with investing in cryptocurrencies due to the ever-changing market dynamics. Choosing fundamentally sound crypto projects that are undervalued compared to peers or traditional businesses operating in the same space offers a higher chance of not only generating great returns in the long run, but also the opportunity to invest in projects that will bring people to a decentralized future.
