Investing in a blockchain project often involves thorough research to assess its potential viability. Several key factors can guide this assessment.
Aspects to consider when evaluating altcoins
Understanding Market Capitalization
Market capitalization, simply put, is the product of a coin’s price and the total coins in circulation. Websites like CoinMarketCap provide rankings based on market capitalization. Typically, coins beyond the top 50 or 100 are lesser-known projects, possibly due to obscurity, fraudulent activities, or untapped potential. Investing in these lesser-known coins poses higher risks due to their uncertain trajectories. Investing in these lesser-known coins involves escalated risk, possibly leading to project failures or scams. However, hidden gems occasionally lurk in these depths, awaiting discovery.
Assessing Traded Volume
The traded volume within the last 24 hours reveals the total value of transactions. High-volume cryptocurrencies like Ethereum, with exchanges reaching billions, offer increased liquidity and accessibility. Conversely, low-volume coins, often restricted to a few exchanges with questionable credibility, pose risks. Limited trading volume can easily be manipulated by individual transactions, leading to drastic price fluctuations. Scammers exploit this vulnerability through pump & dump schemes, artificially inflating prices before selling off their holdings.
It’s advisable to exercise caution with coins trading below a $1 million daily volume. Favoring well-established, highly liquid coins on reputable exchanges minimizes risks associated with low liquidity.
Analyzing Coin Supply
Understanding the circulating coin supply offers insights into potential scarcity. Coins like Bitcoin and Litecoin have finite maximum supplies, limiting their total circulation—21 million for Bitcoin and 84 million for Litecoin. Comparatively, XRP boasts a circulating supply of 48 billion with a maximum of 100 billion, indicating a less constrained supply than Bitcoin.
For coins lacking a maximum supply, infinite coin creation is possible, leading to inflation. Projects employing Proof-of-Stake protocols creating new coins annually illustrate inflationary tendencies. Inflation inherently impacts a currency’s value, making it an important consideration during evaluation.
Evaluating Exchange Listings
Prioritize cryptocurrencies listed on reputable exchanges known for stringent evaluation processes such as Bitvavo. These platforms conduct in-depth assessments before listing tokens, reducing the risk of fraudulent projects for investors. However, note that even coins listed on major exchanges can experience significant price drops, sometimes up to 80%, during bear markets. For instance, the Terra/LUNA debacle highlighted the consequences when the stablecoin UST lost its dollar peg, causing LUNA’s value to plummet from over 90 euros to zero despite its presence on major exchanges.
Importance of White Papers
A crucial aspect of assessing a blockchain project is reviewing its white paper—a comprehensive document outlining the project’s concept, roadmap, and ICO details. Key sections include the project’s background, team and advisors’ information, existing and future products or features, and the ICO’s objectives. The roadmap visually delineates project goals and timelines. Additionally, white papers ideally present forecasts regarding revenue, user growth, market opportunities, and strategies to capitalize on them. Pertinent details about tokens, including issuance quantity, allocations to teams and advisors, token holder benefits, ICO procedures, and distribution methods, are outlined.
Evaluating Project Activity
The level of project development significantly impacts investment risk. Investing in an Initial Coin Offering (ICO) for an idea without any substantial progress poses higher risks compared to an ICO by an established company. Established entities launching their tokens often aim to enhance their existing platforms and offer added advantages to token holders. This reduces investor risk due to the project’s existing operational background.
Assessing the Team’s Credibility
Conducting a thorough background check on the team leading an Initial Coin Offering (ICO) is essential. Scrutinize their professional trajectories, assessing whether founders possess adequate experience and expertise. ICOs with teams comprising former members of reputable tech giants generally hold an advantage. It’s also pivotal to examine if the team has prior involvement in the crypto sphere. This meticulous investigation is crucial in uncovering potential deceit or scams within the project’s leadership.
Consider the cautionary tale of the Centra token ICO. This venture aimed to market VISA prepaid credit cards linked to a cryptocurrency wallet, enlisting boxing icon Floyd Mayweather for coin promotion, resulting in a $30 million raise. However, the company was founded by two 26-year-olds lacking financial sector experience, aided by a fictitious CEO, Michael Edwards, who claimed to have a Bank of America background. Subsequently, it was revealed that no collaboration with VISA existed, and the company hadn’t taken any steps towards its ambitious plans. Moreover, one of the founders had a prior fraud conviction. Such cases have led regulators globally to caution against celebrity-endorsed new coins.
Inquire directly with the leadership of smaller ICOs through webinars or dedicated communication channels like Telegram groups if questions persist even after reviewing the white paper.
Assessing Technological Disruption Potential
The most promising ICOs are those capable of fundamentally disrupting entire sectors. Reflect on how Uber revolutionized the traditional taxi industry. Similarly, many services could potentially be restructured in a decentralized manner, eliminating the influence of major corporations. Identifying projects with the potential for such groundbreaking transformation provides key insights for investment considerations.
Evaluating the Presence of a Hard Cap
The presence of a ‘hard cap’ during coin issuance holds paramount importance. A hard cap sets a maximum limit for coin issuance—for instance, capping fundraising at $15 million. Unsold tokens post-ICO must be eliminated, augmenting the stake of token holders. For example, if you buy 1,000 tokens from a total issuance of 100,000, and only 50,000 tokens sell, your stake grows from 1% to 2%.
Some ICOs lack a hard cap, continuously releasing tokens as long as funds keep pouring in. This opens the floodgates for any willing buyers. Subsequently, upon token listing on exchanges, the absence of a hard cap diminishes the probability of upward price pressure, given that tokens were available to everyone throughout the ICO.
Navigating the Altcoin Casino
The vast array of coins in the crypto market is often likened to an “altcoin casino.” Just like in a casino, there’s a chance of striking gold, but the reality is that disappointment often outweighs the wins. As long as one recognizes it as a gamble, it’s less worrisome. However, it’s vital not to bet your entire fortune on these fledgling coins, all of which still need to prove their sustainability.
Altcoins inherently pose higher risks as they’re frequently young blockchain networks yet to encounter severe market conditions. Moreover, vulnerabilities in code or smart contracts might exist, creating opportunities for coin theft by hackers.
Furthermore, many of these projects are helmed by untrustworthy individuals. In the case of Terra, attempting to stabilize the UST stablecoin led to the mass production of LUNA tokens, rendering them worthless. This highlights the importance of understanding a project’s decision-making power—a key difference between Bitcoin’s fixed protocol and the discretionary governance in projects like LUNA.
Bitcoin’s popularity among seasoned investors stems from its protocol’s immutability. With a capped supply of 21 million coins, the protocol is safeguarded by miners and nodes. In contrast, projects like LUNA wield governance power, leading to the creation of trillions of new tokens, causing network disruptions—a scenario impossible in the decentralized structure of Bitcoin.
During major crypto bull markets, hyped projects emerge, gaining prominence across exchanges, only to reveal their worthlessness or fraudulent nature post-hype. Tales abound of individuals losing entire fortunes to sinking projects.
Remember, exposure to the crypto market is possible through Bitcoin. Altcoins carry higher risk; if considering them, ensure a diversified portfolio. Finally, allocate only a fraction of your investment portfolio to crypto.
