Money continues to pour into cryptocurrencies, both for Bitcoin and the seemingly endless supply of altcoins (Ethereum, NEO, ARK, etc.). Traditional investors see incredible returns happening literally overnight, but many don’t know how to begin evaluating these digital coins for value.
In stock market investing, publicly traded companies always have balance sheets. Here investors can see in detail the health of the company’s finances. Further business and industry research is required, but it’s a major help for value hunters.
Crypto doesn’t have balance sheets. Prices are largely based on the promise of innovative new technologies and a whole lot of hype. So is there no way to understand the underlying value of these coins and the technologies/companies they represent? Fortunately, cryptocurrency investors are finding a way, and it’s really not so different from the way stocks are evaluated by everyday value investors.
— econyo$hi (@econyoshi) August 17, 2017
- First, find out about the creators and developers that are building the technology which the coin represents. Many people have great confidence in the leadership and skills of Vitalik Buterin, Ethereum’s creator. This buoys the price of Ethereum at about $300/coin, even while consumer-facing applications of the technology are not yet commonplace.
- Find out which markets sell the coin. In the early days of many digital currencies, a buyer might only be able to make a purchase at a single web exchange (Bittrex, Poloniex, etc.). As coins become more popular, they become available through more exchanges, which increases trading volume and price. If you buy an undervalued coin before it becomes available in multiple exchanges, there is great potential upside. Also pay attention to coins bought and sold primarily in the East or West. Cryptocurrency mania can quickly cross oceans, adding millions of new potential buyers.
- Find out if other companies and entities are using or partnering with the coin/technology you’re interested in. Microsoft’s involvement with Ethereum is a good sign, for example. Real-world uptake is essential and will greatly increase the value of a new coin.
- Look carefully at the price history of your coin. Does it stay stable over many weeks and months? Did it respond to a hype cycle, then come crashing down (pump and dump)? This will help you more accurately anticipate future price movement.
- Make sure you understand the technology for any coin that catches your interest. Because so much of cryptocurrency tech is based on coding, it can be hard to comprehend, but make sure you don’t invest in something with a real world application that you don’t understand, even if that application won’t come into being for months or years.
- Coins worth investing in will make available a Roadmap that explains future plans, release dates, and other events of note. Achieving these goals in a timely manner tends to raise coin prices, so understand what’s coming up and try to invest before big events launch.
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While you do these things, pay attention to conversations on forums like Reddit and BitcoinTalk. Here, you will find people who have a great deal of knowledge which they are usually willing to explain.
At the end of the day, there is no way to predict which coins will succeed or have strong staying power. Investing in cryptocurrencies is risky, but you can allay this risk by doing your research.