Welcome to Part 5 of a series of articles about CryptoTrading for Beginners.
For an overview of previous parts, scroll to the bottom of this article.
In this article, I will explain what things I look for when selecting a new cryptocurrency to invest in.
1. What is the main purpose of the coin?
The way I see it, there are 3 types of Coins
The main purpose of a (crypto)currency is to be a value container and perform transactions. With transactions, I mean to exchange of value between users.
Bitcoin, Litecoin, ZCash, Monero, Dash, ... Their main purpose is to be digital currency. Some focus more on security and privacy, others focus on speed. But all these are pure cryptocurrencies.
Platforms allow third parties to build (decentralized) applications on top of their framework. The idea is that not everyone has to be an expert in blockchain (or more modern variants) and cryptography). Companies can build smart contracts and decentralized applications on top of the framework that these platforms offer.
Good examples are Ethereum, NEM, NEO, Qtum, [ARK}(https://ark.io/) and more...
Applications offer a specific functionality to its users. They have their own coin that often is needed to use the application.
Applications can be cryptocurrency exchanges, prediction platforms, financial services, social networks and many more.
Some of these have their own blockchain, others are built on top of a platform.
Examples of applications are STEEM, Binance, Auger, Basic Attention Token, and many others.
2. Who is on the team behind the coin?
When I say coin, I really mean the company or foundation driving the product. The coin is just the tradable product for us cryptotraders.
There are a lot of cryptocoins on the market (around 1000 and counting) and a lot of them are scams. It is very easy to create a new coin. Because a lot of cryptocurrencies are based on opensource software, anyone can make a copy, put a new name on it and introduce it as a new coin.
Also, there is a trend of ICOs (Initial Coin Offering), where companies offer to buy/invest in their coin without having a finished product. Some only have a technical whitepaper describing future functionality and looking for investors to fund development.
Investing early in a new promising company or product can be very lucrative if this product becomes a big success. But there is also a big risk of losing all your money. One such example is Tezos. The company raised $232 million via an ICO but one year later the team fell apart, there is no product and the coin is worthless.
That's why it's so important to do your research before investing large sums of money into new coins.
Look at the company directors, developers, investors and the community behind it.
If there is no trace of a team, if the source code is not available, then probably it's a scam or at least a very amateuristic attempt to create a new coin.
3. What is the total supply?
Look at the circulating and total supply of a coin. If there is no maximum supply or the maximum is very high, it may not be a good investment opportunity. Because of the law of supply and demand, the value of a coin should rise when all coins are in circulation and the coin is in popular demand.
This is the big difference with fiat currency where central banks can decide to print more money, resulting in devaluation of the currency.
CoinMarketCap is a great website where you can look up a coin, see their circulating and total supply and find links to the company websites behind the coin.
4. What makes this one so special?
This is an important question to ask yourself. A new coin always has to offer something that is not already available.
Here are some examples:
- Bitcoin was the first and has the biggest market share and brand name.
- Litecoin came later and focused on offering faster transactions. ZCash focusses on privacy.
- Ethereum was one of the first platforms for building smart contracts.
- NEM promises more stable smart contracts by providing an API instead of a full development language, thus limiting the risk of bugs.
- IOTA focusses on the world of Internet Of Things and uses a Directed acyclic graph instead of a Blockchain.
- Quantum Resistant Ledger promises cryptography that cannot be broken by quantum computers.
Besides the core functionality, it is also worth looking at the underlying technology used by the product.
- Blockchain was a groundbreaking technology but today there is talk about graph based ledgers that could replace blockchain in the future.
- Bitcoin uses Proof of Work algorithm for their transactions, but that uses a lot of computer power and thus energy. The growing complexity to mine a block also brings the power to a smaller group of miners that have dedicated mining farms which brings the decentralized nature of blockchain technology at risk.
Other coins use different algoritms such as Proof-of-Stake and Delegated Proof-of-Stake to reduce the transaction time and computing power needed to validate a block.
- A lot of Cryptocurrencies use SHA256 for their cryptography hash function, which is not quantum proof.
Bringing it all together
When investing in a new coin, first of all, look for a project that you like.
Personally, as a software developer, I like to invest in platforms that make it easier to create new decentralized applications. I also invest in STEEM because I like the idea.
Make sure to do your homework, know the team behind it, the features it offers and promises and be skeptical about it. Can they deliver what they promise? Do you believe in the team?
I (almost) never invest in a coin that has no predefined maximum supply. Unless I invest for pure idealistic reasons and not to make a profit in the long run.
Ask yourself if this coin offers something unique or can easily replaced by another.
Verify that the technology behind the coin is state-of-the-art. A new coin has to have something new and special to take a spot in the market. After all, it has to compete with 1000 other coins already out there.
Play the long game. Invest and hold on. Bitcoin was created 8 years ago, it takes time to become a big player in the market. Give a newer product time to develop and evolve.
Previous Parts in this Series
In Part 1 I talked about choosing your portfolio. We did everything on paper before actually buying any coin.
In Part 2 I explained how to buy your first coins using Coinbase.
In Part 3 I discussed how to use Exchanges.
In Part 4 I showed how to transfer Bitcoin from Coinbase to your Bittrex wallet
Anything else you want me to cover? Let me know in the comments or join my free group on Facebook
Stay tuned for Part 6 of this series! And don't forget to upvote my post on SteemIt :)