The right way to evaluate a cryptocurrency
Summary :
Take a deep breath!
The worst thing you can do is panic when the market is down, that is not to say your investment will be safe or that you picked the right coins. All it does is allow you to make a more educated decision on the situation and it allows you to better evaluate the market. If you haven’t dived right into the market yet, then you are starting out right. Lots of people are entering the space without even a basic knowledge of how crypto currency works/functions and little to no knowledge on blockchain technology. In this course we will look over the necessary steps you should take when deciding if a currency is worth your investment. Sneak Peak: It doesn’t involve magically reading chart graphs.
Lets do some independent reflection.
Do you understand Blockchain Technology? Most people investing in cryptocurrency don’t understand blockchain technology and how it works exactly. That is like buying a car before you have a license or understanding and not understanding its safety precautions. If you don’t know how cryptocurrency works or blockchain technology then you need to pull out of the market and do some research.
How are you receiving your investing advice? Are you buying into it because your friends are jumping up and down from 1 successful 5x trade in a short amount of time? (Crypto fever ) Or are you investing because you see potential from actual research and not “news articles”. The best way to invest of course is from your own personal knowledge and the combined thought of others. News articles are good but come with a great responsibility! Use it as a guide but not advice. Often times, people will read a “buzz” article about a coin and then go on and invest into it without doing ACTUAL research on the coin. This causes a lot of problems and will make your cryptocurrency investing experience horrible.
Do you understand the risk of cryptocurrency? 99% of these coins that are out on the market today will fail. Most of them are like politicians and promise innovation that is not technologically possible or a white paper that looks good but does not actually work out for one reason or another. With that knowledge that most of the coins are going to fail, you should really think about how your Return on investment (ROI) and Expected Value (EV) will be affected.
What is EV?
EV is very important when thinking about cryptocurrency coins and potential investments.It forces you to think outside of the box and think more about the stastically chances of failing and succeeding.
A example of EV:
When you are driving into a parking lot, do you take the first spot you see that is the closest to the building. Or you do you drive up past your vision and hope there’s a better spot? The answer is simple, it is +ev to pick the closest spot that you can see, rather than driving past your vision. ( this is in terms of time ) You will spend more time looking for a spot that is past your vision and not finding a spot and having to circle back around, than you would if you just picked a farther spot and decided to take the initial longer distance. This is taken at a large population of times. If you did this 1000 times, what would work best? Taking the closest spot you can see. Of course luck does play a role like it does in many business situations, however when you think about variance luck does deteriorate as time goes on. If you play that scenario 1000 times, regardless of your luck you would find that parking your car closer would be more beneficial in terms of your time. ( Which is your most valuable resource)
How does this relate to cryptocurrency?
Just like in programming, you need to think of the market in this “if this than that” mindset. If you can think about a specific scenario such as government regulation, hacks, or a market decline that happened to a coin you are invested in or potentially invested in you can think about the comprehensive outcomes. These outcomes will then help you get a range of variables that you can evaluate and put together with your risk management strategy. However you don’t have to specifically look at possible scenarios, you can also take a look at information such as trading volume, market capital and supply circulation.
Another example of EV:
Lets say you want to invest in a crypto currency and if it succeeds it will 5x your money. You have $30 to invest, and you know that most crypto currency coins are bad investments so you decide to invest in 6 coins. Thus investing $5 into each of the currencies. If you figure you will go broke or make 5x, is it within your best interest to invest?
Looking at this scenario one can conclude that you have a 5/6 probability of winning nothing. So the value of your investment is at $-5 since that is the remainder of your investment. The chance of you being successful and 5x’ing is a 1/6 chance which means you will get $18. ($5*5 -$2) So the formula of your investment is $-5 (5/6)+$18(1/6) = -1.166666666666667
Meaning if you actually went ahead and did this, you would be losing on average $1.17 per coin you invest in. However you could get lucky the first time and win, giving you the get rich fever.
Of course this could be easily translated to the scale that you are personally investing in, and of course you are not guaranteed to lose all your money or gain 5x on a single coin. When evaluating a coin you want to think about all aspects, and try and figure out what investment makes sense with your precised risk. Thus giving you a +ev investment.
Instructions on how to evaluate:
#1 The first thing I would suggest you do, is go to CoinMarketCap
If your coin is existing you should be able to look up the ticker and find it, however if you are trying to evalaute a ICO it wont be on there just yet and you should skip number 2.
#2 Take out a piece of paper and write down the current price of the coin, circulating supply, max supply, daily volume and market cap. We will give into these numbers down the road.
#3 Basic questions you will need to answer via the whitepaper.
What Market is this coin trying to capture? What industry is it in? Is it tackling a new or existing market?
Is this coin a registered company?
Where is this company located? Be careful, the company might be located somewhere and be registered somewhere else. So where are they currently located, and where are they registered. This is important because different countries and areas might have different laws regarding businesses and cryptocurrency. So it is important to learn about the different government regulations that different countries have.
What legal boundaries are they going to have to get through? Have they explained the legal structures in the white paper?
How is their security? How will they be making the coins safe? How will they be keeping internal control? Will they follow similar laws regarding internal control?
Have you read the terms of service? Do you understand it?
How are they established on the blockchain, are they a ERC21 token etc?
How does the team look, when you google them are you able to find legitimate information on them. If so, how well do you think they will represent your interest and making the coin successful. Also make sure to do research on the advisors and their compensation terms. If they are able to receive their coins within a month, then a possible dump of coins could happen etc.
What risks are you able to see, and how can you see these risks minimized in your investing strategy?The whole idea is to invest in the best coin, with the lowest amount of risk.
Does this company have a successful record? A example would be if Microsoft decided to create a coin. Although it is not the most important thing, it can help you evaluate the coin in the end.
Are their exchanges that are ready to list the coin, or have no exchanges publicly agreed to launch the coin. Make sure to check the legitimacy of these claims
Are they communicating well? Often times the coins will have Twitters or other social media accounts that they will update with information often.
What role will this token/coin play in the cryptocurrency ecosystem? Does it actually have a utility? What is the economic structure behind the coin? Why does this coin have to exist?
Are you able to use this coin outside of its application? Is this coin specific to its application or can it be used in other markets? For example: You can use bitcoin to buy physical items in stores using a debit card or buying it directly from the store. Is their a market that you can analyze outside of their marketplace?
Is it absolutely necessarily to have the coin? What makes this coin essential for the project? For example: Does the ICO or existing coin/token have to exist or can someone simply make a similar company and accept bitcoin. If the company doesn’t have a purpose making a coin/token then they are likely only creating it to crowdfund.
This is very important and is especially important when deciding to invest in a ICO. You will notice when you look through ICO’s that they are basically a hidden “crowdfund” and not a good investment. They will talk about how they will make so much money with their application, but you should note that just because they are profiting doesn’t mean your coin will increase in value. When buying a coin, you are most likely not receiving a equity in the company. All of this information should help you formulate an idea at how much the market capital of the coin could reach and then dividing that by the number of coins available will give you a good price that it could potentially reach.
You will want to calculate the average daily volume. Which is very valuable information because it will tell you how quickly money is changing hands. In the above example on Dec 12 ETH had a recorded 5,179,830,000 24hr volume in a 50,286,400,000 market cap, so divide and you will get 0.1030065783193866 or 10.3% which is amazing. Typically you should be looking for coins that are doing around 4%+ in daily volume. Now of course the 10.3% is not a average daily volume, so you will need to go down the list and find the daily trading volume that it is doing which will certainly be less than 10.3%.
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