How to Value Cryptocurrency to Know What to Buy
When investing in cryptocurrencies, investors need to vet the projects before they invest. Because the cryptocurrency market is largely unregulated, it is often compared to the Wild West, where you can strike gold and be robbed blind. In 2021, investors lost $2.6 billion in pump-and-dump coins or other junk tokens.
To avoid scams, rug pulls, and weaker projects, investors need to know how to value cryptocurrency to identify viable crypto projects. We’ll explain how to research cryptocurrency projects and determine if the project has value. You should vet each project carefully before buying to protect your investment and reduce risk.
How to Research and Determine a Cryptocurrency’s Value
Here are the critical metrics for researching and determining the value of a cryptocurrency:
The project team is generally made up of lead developers, founders, key members, or investors. Sometimes in cryptocurrency projects, teams prefer to be anonymous (undoxxed). In contrast, other teams are transparent (doxxed) because of the strength, confidence, and credibility the team members have at launching successful projects.
Be very wary of undoxxed teams; they can be scams. Transparent teams tend to be more trustworthy but don’t guarantee the success of the cryptocurrency.
After the team, the white paper is the best way to learn the most about the cryptocurrency project, its technology, scope, and business plan. It should clearly document the project in-depth, defining the following:
- Project utility
- Technology differentiators
- Technical specifications
- Road map
- Marketing Plan
The white paper may indicate team or project weaknesses if it isn’t fully fleshed out. If the white paper doesn’t have specifics about how they plan to execute, it could be a red flag for a scam token.
As the cryptocurrency market matures, a cryptocurrency must have utility. By utility, we mean the cryptocurrency business needs to have a practical purpose that:
- Solves a problem
- Adds functionality
- Provides a service
- Delivers a product
Meme coins that exist as a joke or a result of hype will be at higher risk because they have no function or use once the hype or joke dies. An example of this is Dogecoin or Shibu Inu.
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Another critical element to a successful cryptocurrency project is a clear, transparent road map for milestones and deliverables. Strong projects will outline their quarterly deliverables and goals for their investors to hold them accountable.
Strong projects will also regularly update their roadmap and communicate with their investors about their progress to achieve deliverables on the roadmap. The road map also helps you know when projects will be viable because many projects will release their token during early development as a way to raise funding to complete the project.
Website & Social Media
Dive deep into a project’s website and socials to vet whether the team has credibility, a clear direction, funding, and strong communication. Good projects have strong lines of communication with their investors and a clear business plan. You can usually sniff out a scam from a poorly executed website.
Many project devs will actively update investors abreast of project developments through their socials like Twitter, Telegram, or Discord. You can interact with the team, ask questions, and learn more about the project.
Also, evaluate their social following. If the project has thousands of followers, you can see the project has strong buzz and interest. Be careful; some coins are great at marketing and terrible about utility or deliverables.
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Like traditional stocks, you want to evaluate and scrutinize a cryptocurrency’s market metrics:
- Market Capitalization: Market cap is the price of the coin times the number of coins in circulation. Higher market caps are safer investments. Lower market caps are riskier but could produce higher returns.
- Trading Volume: Like stocks, the trading volume indicates how many tokens are traded within a specific time frame. If the token has a high volume, it has more investors, liquidity, and price stability.
- Token Supply: For crypto tokens, there are two token supply numbers you need to understand. Maximum supply gives the total amount of tokens that will be issued for this cryptocurrency. Circulating supply refers to the number of coins currently available. These numbers can be different. Some coins release the entire token supply, and others do a tiered release to control token scarcity.
- Price History: Evaluate the fluctuations in price over different time spans. Identify all-time highs and lows, look for gradual price increases, etc. Note: Bitcoin does influence the whole market, so you want to avoid coins that drop dramatically and get out of rhythm with Bitcoin’s price action.
You want a cryptocurrency project with a strong community and following. Evaluate how active the team is on their socials and their interactions with their community. Do they:
- Communicate regularly?
- Interact with their community?
- Get a solid response to updates and news?
If they are a blockchain platform, you want to see a strong developer community and a growing number of dApps. The project should have a robust developer’s toolkit and forum.
Investors & Partnerships
Another key indicator of a strong cryptocurrency project is if the team has big investors or partnerships with other businesses. If the team is continually forging new partnerships or bringing on big investors, it’s a good sign of longevity and viability for the project.
Researching a Cryptocurrency Project is Critical
To protect investors, the US Securities and Exchange Commission strongly encourages researching potential crypto assets. Vetting a cryptocurrency project is critical to safeguard you from bad projects and scams. While you can’t predict the future, you can recognize signs of a viable project and team, which generally yield substantial returns.
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