After the invention and growth of Bitcoin, the number of Blockchain tech-powered crypto coins is growing. Almost every week, you can see new variants of crypto coins being launched. These are also referred to as altcoins. The newer generation crypto coins are laden with specific technologies to cater to the needs of specific types of users and some of these are also linked to well-known and tangible assets.
Importance of picking the right altcoin
Not everyone who invests in the crypto sector has a solid understanding of it. There are instances of several investors investing in certain crypto projects without doing adequate research and analysis and losing their money. Some of them also got carried away by the hype in social and online resources on some such tokens. So, you should be careful about picking the apt type of altcoin.
Things to analyze when you pick an altcoin
The abundance of altcoins or alternative cryptocurrencies can make picking the right one tough. If you are new to the sector, the selection can seem even more tedious. To ensure you choose the right cryptocurrency for trading or investment needs, it is necessary to assess a few important factors carefully. These are:
- The underlying technology- There are a lot of crypto coins that you can buy and trade but not all of them have a USP. You should not invest in a cryptocurrency that offers you just an alternative to Bitcoin. You should look for those altcoins made with a specific purpose. The purpose has to align with your interest and investment objective. Ethereum, for example, lets users and developers create smart contracts and develop Dapps. In fact, the Ethereum model and technology is being deployed by several other cryptocurrencies.
So, you need to think of the utility of the technology being used to develop an altcoin. It is necessary to see what existing financial problems can be resolved by it. Coins without a strong technology as the backbone do not survive the upheavals in the crypto sector.
- The Daily trading volume- There are crypto exchanges and platforms like CoinDesk using which you can learn about daily trading volumes of various altcoins. A low trading volume indicates low growth prospects. In fact, you need to check daily trading volume for an altcoin for some days continuously and that will help you track the growth or lack of it. A coin may have hefty daily trade volumes for a few days and after that it may show opposite trends. This can happen if a prominent tech-pundit applauds it. A coin with consistent high trade volumes is indicative of good trading prospects.
- The team behind it- Before you invest in any altcoin, think of the core team behind the project. Some of the new generation coins such as BAT and Polkadot are known for core teams comprising of technology stalwarts in the crypto sector. A cryptocurrency project with a robust team with expertise in the sector can be relied upon, in most cases. They are also likely to address usage issues seen after unveiling the altcoin. Ideally, you should go through the project whitepaper to learn more on the underlying technology and the roadmap.
- Choose more than one coin- The crypto sector is quite volatile and price of both well-known coins and new ones can rise and fall drastically, often without any prior hint. So, you should invest wisely to minimize the risk of making loss. So, it is prudent that you divide your crypto investment in two or more coins. This diversification will reduce the risks involved. Investing a part in stable coins is what experts recommend.
- Market cap- Market Cap denotes the total size of any cryptocurrency. Multiply the price of a single coin with total amount of tokens presently in circulation and you get it. The size of a crypto coin enables you to calculate the amount of growth. For a cryptocurrency to grow double in value, an infusion of capital is necessary. Bitcoin grew 1000 times within Sep 2010 to Mar 2013 and next 1000x growth took 96 months. Another 1000x would take the market cap to 1.14 quadrillion dollars and that may not happen. However, a $1 million altcoin may witness a 1000x growth and need less than $1 billion fresh capital infusion. Even then, it will not be within the top 100 coins in terms of market cap.
- Multiple attributes- The trends in crypto sector are often not long-lasting and it can be hard to gauge what the users will prefer in the future. Some crypto projects become much sought after for a period and after that the popularity wanes, as it has been seen several times. In early 2020 DeFi based projects were very popular and the interest in projects supporting NFTs followed these. In recent times, the demand for crypto gaming projects has been rising. Projects grabbing user attention can outshine others easily and so you should invest in a project that combines more than one trend or attributes. Examples are Seedify and Altura.
- Tokenomics- Not all crypto projects have similar tokenomics, as it is. You need to know the total number of token that will be unveiled and the interval of releasing the token as well. It is also necessary to know the token percentage held by the project founders and early investors. The current market cap of the project also has to be taken into account.
- Strong online community- A successful and popular crypto project is likely to have a robust online community. You will find community of such projects on popular social media and online platforms. They will have a solid presence on platforms like Reddit, LinkedIn, and YouTube etc. The notable thing is you can learn a lot on the project and its future roadmap and prospects from the community members. Some of them are crypto sector experts as well. So, you will get required tips and guidance on ways to invest, diversification of portfolio etc.
- Pricing resilience- The crypto sector is known for its unpredictable and wild fluctuations. These fluctuations are driven by several factors and some of these are beyond anyone’s control. When the market plunges, the effect is felt by each and every token, to an extent. However, the noteworthy thing here is price resilience of a token to sector fluctuations. Typically, price surge of Bitcoin and Ethereum has ripple effect on most other tokens but the margin of rise and fall is not the same for all. It is prudent to invest in a token that has exhibited better resilience than other competing coins during those periods. You can understand that by checking the history of price rise and fall of a token since its inception.
- Adherence to roadmap- Typically, with the whitepaper of a crypto project, the team releases a roadmap. It contains the future plans and developments pertaining to that project. It makes sense to opt for a crypto coin with solid and well-defined roadmap. Look for the upcoming developments and version update timelines.
- Total Value Locked- It is the sum of all assets locked or deposited in a protocol. The assets get locked to provide loan collateral, create interest and for staking needs. Cryptocurrencies are valuable for varied reasons. Ethereum is valuable for its power to generate smart contracts and Monero serves as a private currency. Total Value Locked refers to a third kind of value. The idea is the value can be stored in a crypto token just by act of depositing, and it can be staked for earning interest. In different crypto coin projects, TVL denotes different values. In AAVE, the fees created are utilized to buy back the coin for burning. Some ecosystems generate considerable cash flows on value locked. The cash is distributed back to users.
- Inflation Rate- Every token has a rate of inflation-described in the Official Documentation. Inflation represents the token creation process in an ecosystem. As tokens are created, and get added to the market there has to be demand for it. If demand cannot outpace supply, crypto price will nosedive. Some crypto tokens are deflationary. Ethereum will be deflationary after mining entire supply. However, inflationary supply isn’t always bad and a deflationary supply may not always be good. The inflation rate analysis helps you understand how supply of a cryptocurrency alters and production affects demand and supply.
- Coin Distribution-It denotes the distribution of coin across the network. You need to see if there are risks of concentrated distribution. The chief principle behind any cryptocurrency is decentralization. If coin distribution is concentrated, network integrity is compromised. Uneven distribution of tokens also enhances risk of price manipulation. Distributed networks thwart a handful of users from getting excess control over the protocol. The project whitepaper typically contains coin distribution norm. While some users will buy a large amount of token in any crypto network, its excess is not good.
Summing it up
Picking the right crypto coin to invest in can be tricky but it is not an impossible task either. You have to analyze some important factors related to the sector and specific tokens. This can be time-consuming. However, the time spent doing the research is definitely worth it.