There are hundreds of Blockchain-based currencies now available. The vast majority of average investors have only elementary knowledge about Blockchain technology. Newcomers must try to choose the best digital asset to invest in based on the degree they understand the criteria. The more you know, the more you stand to gain. Below, I have summarized a few important parameters one should consider when selecting a Blockchain company.
What Function Does it Serve?
The most important factor to consider is whether the world really needs this particular Blockchain technology and its cryptocurrency. Does it have unique features that solve, common problems? This will be a major factor in determining whether or not it survives the first wave of crypto-mania. Identify if it solves a real problem, in order to ensure that its technology is unique and will not become obsolete in the future.
Read the White Paper
The White Paper is an official document written and posted by the development team that introduces and defines the Blockchain project. This information is usually the first thing available on each cryptocurrency website. It will give you insights into the unique technology the Blockchain uses, the reasons the coin was created, and an explanation of its functions and possibilities in a simplified way, as well as the team’s roadmap for the future. It is important to note that a White Paper is not adequate evidence on the credibility of a Blockchain project since it comes directly from the creators. Seek third-party opinions from experienced investors and analysts who have enough knowledge to differentiate whether a project is legitimate or fraudulent. Read the White Paper but don’t rely on it entirely.
Volume Liquidity and Market Cap
A good indicator of a cryptocurrency’s trustworthiness is their trading volume on exchanges. To make it simple, a high volume of trades on a particular coin means that investors are showing interest in it and there are many buy or sell orders in place. Such information can be found on websites like CoinMarketCap, where you can gain access to the history of every cryptocurrency.
It is important that a cryptocurrency have high liquidity. Low liquidity means a slow-moving market, in which a single significant transaction could cause a large price movement with a negative impact on your assets. You should also be aware that exchanges could virtually inflate liquidity in order to attract investors, so you should be very careful when choosing which exchange to work with and cross-check across more than one exchange.
While market cap is a trusted parameter in the regulated stock market, it’s not quite the same when it comes to cryptocurrencies. The reason being, often the total number of the available coins are not actually available for trading because people are holding onto them with no intention to sell. This results in an over-inflation of the cryptocurrency’s price, while only a small fraction of the total number of coins is circulated in the market.
Presence in Social Media
Similar to ICOs, you can judge a cryptocurrency’s credibility to a degree from the dev team’s presence and transparency on social media. Prior to exchanging your fiat money for digital coins, you could try to reach out to the team members through their website’s contact details. Their responsiveness and promptness will provide you with some useful insights about the organization’s reliability. You’ll also have the opportunity to have your questions answered. Slack, Bitcointalk, and Reddit can all be good sources of information as well, where experienced investors share their opinions and knowledge. Inadequate communication with potential investors from the dev team should raise an alert.
Depending on the functions and usability of a Blockchain, its coins may be considered as securities, in which case it will privy to regulation by the SEC. As a general idea, a project that has passed the Howey test and has been approved by the SEC will have higher legitimacy and credibility than ones that haven’t. They’ve been fully investigated and come out legitimate.
While new, low-priced altcoins attract investors due to the apparent potential for massive gains, you should not choose a Blockchain based on its price alone. Extreme growth in a short period could represent a “pump and dump” scam, where the creators inflate the coin price intentionally to attract investors before they liquidate all their positions and abandon the project. All the aforementioned factors should be equally evaluated when you make your decision. As the majority of altcoins will not have longevity, and as scams are in some cases disguised as credible projects, making an educated decision will mitigate the risks when investing in cryptocurrencies.