Selecting Altcoins with Potential
Altcoins is an umbrella term that includes all cryptocurrencies and tokens besides Bitcoin. Since altcoins have been increasingly popular over the past several years, crypto exchanges now provide a large selection of cryptocurrencies.
After signing up for an account and buying Bitcoin (BTC) or Ethereum (ETH), you are likely to be intrigued and consider investing in other projects. Altcoins provide a simple way for investors to diversify their portfolios and gain exposure to the wild swings and opportunities of the emerging crypto market. The possibility of great profits is of course coupled with a high level of risk.
Altcoins are the modern-day equities of the digital economy, enabling investors to take part in projects by contributing to their funding. Many projects are the brainchild of founders aiming to solve real-world problems and potentially transform the landscape in their respective industries. Others are created by entrepreneurs without a vision or clear roadmap, who are primarily motivated by the possibility of gaining access to funds.
It is not always easy to tell the difference between the two. Projects created with the best of intentions, like start-up firms, have a high likelihood of failing. Many cryptocurrencies have been crushed because the project that issued them collapsed or ran into regulatory complications. In order to find the next big thing, investors must learn how to evaluate projects, conduct their own research, and avoid pitfalls like pump and dump schemes.
Altcoins are especially appealing to new market participants. As they believe they are late to the game and missed the chance to invest in Bitcoin early, they feel obliged to hunt for the next big crypto opportunity, whether that’s a currency, token, or NFT.
Some traders invest in altcoins to increase their Bitcoin holdings. They load up on altcoins in anticipation of a typical strong upward move, before converting back into Bitcoin. In previous market cycles, this technique was easier to implement and quite effective as it was common for an ‘alt’ season to follow the Bitcoin bull run.
Solid projects can deliver incredible gains between bear market lows and bull market highs. Identifying the trough and peaks, however, can be quite tricky, and investors tend to time their entries and exits incorrectly. The trough is the level that offers the greatest opportunity to join a project. Unfortunately, the low levels bring despair and are characterized by panicked investors fleeing rather than shopping at a discount. This is the ideal time to enter a position gradually using a strategy such as dollar-cost averaging.
The peak of the cycle carries the most financial risk. Once again, many investors will be misled by hype and rush in for fear of missing out (FOMO).
So how do we conduct proper research to choose altcoins that will do well in the next market cycle? Follow these 9 steps to evaluate a cryptocurrency project before investing in altcoins:
What is the project’s current status? Is it still being worked on? Is the team still delivering on their roadmap, or have they stopped development without informing anyone?
Is the project adequately funded? How much money do they have saved? What if the crypto winter (which is ideal for building) evolves into a crypto ice age? Is it possible to raise additional funds if necessary? Projects that are already generating revenue, such as exchanges, play-to-earn games, and lending protocols are better suited for self-financing during sustained bear markets.
3. The Team
Is the project supported by a strong team? In the quickly changing crypto ecosystem, a team must be technically savvy and stay on top of the newest technological and regulatory changes.
Can it pivot in the face of adversity? Does the team work well together? Are the members trustworthy and accountable? Do they have the necessary communication skills? This has become increasingly critical as members operate remotely.
Who is joining? Reputable partners conduct due diligence before getting on board, so their presence is a positive sign. Are important personnel abandoning ship?
Does the project offer utility? Does it have the potential to disrupt its industry?
Ethereum, for example, served as a framework for decentralized app development as well as a technical standard for tokens created on the Ethereum network. Peer-to-peer lending protocols (such as AAVE) have the potential to upend the banking industry. Monero (XMR), a privacy coin, addresses the ever-present need for quick, anonymous, and low-cost payments.
Consider the potential consequences of such disruptions. XMR is frequently delisted from exchanges because it is suspected of being used for illegal activities.
Check which competitors in the same category have undergone a security audit (an assessment to identify vulnerabilities). Do they reward ethical hackers for discovering flaws before anyone else?
6. Market Cap
The total dollar value of all coins that are in circulation at the current market price indicates the potential for growth during the next bull market. A cryptocurrency with a market capitalization of less than $1 billion is thought to have more potential for multiple X gains than a cryptocurrency with a market capitalization of more than $10 billion.
Tokenomics refers to the supply characteristics of a cryptocurrency. Because the price is determined by the intersection of demand and supply, it is critical to acquire this information before entering a position. How many coins are in circulation right now? What will the overall supply be when all of them are released? At what rate will these tokens be distributed? What factors influence the rate of release? If the overall market cap when all tokens are in circulation, aka the fully diluted valuation, is large relative to the current market value, the supply could lead to severe selling pressure in the future.
Well-constructed, easy-to-understand documentation will tell you more about the validity of a project than a beautiful website. A lack of documentation, or documentation that is poorly produced, is a red flag. For the average investor, the white paper may appear technical and complicated, but the project should be able to clearly express its goal, what problem it intends to solve, and how it expects to achieve it.
9. Community and Sentiment
The community surrounding a project reflects its viability. Is it passionate and committed? Does the project have evangelists? What happens if there is an issue? Do the supporters step up?
What is the crowd psychology or sentiment towards projects? How many people have joined Discord? What are the current holders tweeting about? These modern metrics are becoming increasingly important in determining a token’s valuation.
Before ‘apeing’ into the next project promoted by an influencer on your favorite social channel, consider the principles above and do your research. With so many cryptocurrencies on the market and new projects launching every day, you will need to be selective about the ones you devote your attention to.
Discover the different types of altcoins, how they came about, and what problems they solve, by reading 'Altcoins - Made for Everyone'.
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