Trading Beasts

How to Properly Evaluate the Potential of a Cryptocurrency for Investment or Trading

Apr 12, 2019, 4:04PM
7 min, 46 sec READ
Brought to you by Trading Beasts

Learn how to properly evaluate the potential of a coin and put the odds in your favor when trading or investing in cryptocurrencies.

As a cryptocurrency investor, you unquestionably want to know which coins have the best potential to grow. Even though no crystal ball can predict the future of a coin with absolute certainty, we have a few ways of evaluating the potential of a cryptocurrency. This guide will explain the most important aspects to consider when evaluating the potential of a cryptocurrency for investment or cryptocurrency trading.

The Uniqueness of the Cryptocurrency

It is an undeniable fact that the prices of cryptocurrencies are primarily driven by speculation than valuation. However, the potential of a digital asset is assessed on the ground of how unique it is in value rather than how speculative it can be. Unfortunately, most of the existing cryptocurrencies are carbon copies of Bitcoin and have no uniqueness in their nature and function. When Bitcoin was launched in 2009, it was the only existing digital currency that could blend both the intriguing nature of decentralization and anonymity to deliver services to people. Bitcoin was unique. Most of the altcoins that came later presented themselves as the alternatives to Bitcoin with a lot of similarities. These similarities have rendered most of the altcoins irrelevant as their functions are similar to hundreds of the coins in the market. This also explains why Bitcoin has stayed on top as the most popular cryptocurrency despite having thousands of digital currencies in the market.

To properly evaluate the potential of a digital currency, put the selected coin under critical scrutiny by assessing the uniqueness of its functions, the new solutions it brings on board in an attempt to solve underlying problems, the uniqueness of its technical operation and how it can stand out in the market. A typical example is Dash. Aside from its normal operation as a complete anonymous cryptocurrency, Dash makes use of Instant transaction and private transactions. It gives way for the operation of self-governing and self-funding which makes it possible for the Dash network to reward people who add value to the network, and this makes it unique from other coins that prioritize anonymity. On this note, it is always important to read a lot about the coin from its whitepaper before making any investment decision. 

Check the Team behind the Cryptocurrency, and Consider the Community 

To evaluate the potential of a cryptocurrency, assess the credibility and the experience of the team behind it. Most fake cryptocurrencies list some prominent individuals in the cryptocurrency space as members of their team, so it is essential to research whether the listed individuals are really part of the project. Some of the cryptocurrencies also have team members who are usually unknown in the industry. On this note, there is the need to research the listed team members, their experience and track record, to guide you in predicting how far the project can go. It is essential to know whether the founder is just a social media cryptocurrency expert or has a real track record in the field before you entrust his idea with your hope and funds. When evaluating the team members, conduct a comprehensive search on the previous project they undertook as a group or individuals, and check how successful those projects were. Also, check whether they have any history of scam or fraudulent schemes. 

Also, it is essential to understand that cryptocurrencies that have a much active community are destined for greatness. The size of the community of a digital asset usually indicates how well the ideas and the functions of the cryptocurrency are being accepted and how far it can spread. To properly check the community behind a coin, go through their fan bases on Twitter, Facebook, Reddit or Telegram to determine the size and how active they are on social media. 

Do Not Ignore Tokenomics

Tokenomics in actual sense talks about how and why a token is implemented within an ecosystem for easy adoption by the people for a transaction of goods and services and other uses. It is also described as the design of a token or cryptocurrency and also, the framework within which the introduced asset functions. To successfully launch a coin into the market, there is a framework within which the fate of the token can be decided. The question of why the cryptocurrency was issued and how this was done defines whether its tokenomics is good or not. In other words, the tokenomics defines how well a cryptocurrency or token has been designed and, it provides a good insight into its future performance. Making this easy, a well-designed cryptocurrency must have the ability to resist inflationary pressure, must have utility in its ecosystem, must be fungible and be able to store value. A well-designed token must also incentivize its use, must be scalable, must be accepted by people at large and more importantly, and must be traded on exchange platforms. It must be able to reward users and investors for being early adopters of the asset, and must also reward users for bringing new users on board as part of its marketing strategy. 

Evaluate the Details of the Cryptocurrency

This is one of the most important parts of evaluating the potential of a cryptocurrency, if not the most important. This aspect of the cryptocurrency guide is very important for beginners who intend to start cryptocurrency trading. To know the potential of a digital asset, take a closer look at its Market Capitalization, Circulating Supply, Trading Volume, and Total Supply. These provide excellent information to know how far the price can go, the rate of the price movement and even calculate for the price using assumed figures of market cap and circulating supply based on its determinant factors.

Circulating Supply

Circulating supply is the number of coins that have been mined and technologically available in the market. This does not include coins that are yet to be mined or coins that have been mined but not available in the market. Bitcoin, for instance, has a Total supply of 21 million out of which 17 million are available in the market. The real amount of circulating supply cannot be known since most of the coins might have lost or held in escrow. The circulating supply is important in the quest to identify the potential of a cryptocurrency through its multiplication with the price and its division with the market capitalization.

Market Capitalization

The market capitalization is defined as the price of an asset multiplied by the total amount of assets available in the market. Market Capitalization = Circulating Supply × Price. In other words, the price of the cryptocurrency can be found by dividing the Market capitalization by the Circulating supply. Price of an asset = Market Cap ÷ Circulating supply.

The potential of a cryptocurrency can be found in the size of the circulating supply and the market cap when all other factors are assumed to be equal. The smaller the Circulating supply, the more easily the efforts of the team behind the coin would be seen, and the faster the price would rise. Bitcoin is rising faster in price because it has a circulating supply of just 17 million. In this case, the more the market cap increases, the more the price rises at a top rate.

Let us use XRP and Litecoin as an example of why the circulating supply matters. XRP has a market cap of $15 billion while Litecoin has a market cap of $5 billion. However, XRP is trading at $0.35 while Litecoin is trading at $92. The reason for this can be found in their circulating supply. XRP has a circulating supply of 41 billion while Litecoin has a circulating supply of 61 million. The market cap of XRP would have to equal the size of its circulating supply to trade at a dollar. The smaller the size of the circulating supply of a coin, the faster it is for the price to rise or fall when there is a change in the size of its market cap. For investors who intend to invest in coins that rise faster in price, consider their available supply to evaluate its potential of getting to the moon.

Trading Volume

This provides a good indication of the number of cryptocurrencies that are exchanging hands within a period. In evaluating the potential of a digital asset for investment purpose, take note of the trading volume. It is worth noting that different exchanges provide different volumes depending on the total transactions that happened within the specified period, usually 24hrs. With regards to this, it is essential to check their volume on different exchange platforms.

Total Supply

Total supply comprises of both coins that have been made available in the market and new coins that are not available in the market minus coins that have been burnt. The Total supply of Bitcoin, for instance, is 21 million.

To summarize these, checking the relation between the available supply, Market cap and price should be an essential way of evaluating the price potential of a coin. Also, it is advisable to check whether the coin has real value or exist as a speculative asset. Though most of the cryptocurrencies are speculative, some of them provide a real value aside from their speculative nature. These should be noted for proper evaluation of a coin.

Disclaimer: information contained herein is provided without considering your personal circumstances, therefore should not be construed as financial advice, investment recommendation or an offer of, or solicitation for, any transactions in cryptocurrencies.