What coin should I buy?
Crypto Basics: Answering what cryptos are worth investing in & how to make investment decisions in crypto?
understand 'how to decide on cryptocurrency investments' with Justin Ho, crypto trader and Head of Operations at bitsian, a cryptocurrency aggregator.
If you were anywhere near digital assets in 2017 and 2018, it’s likely a question you may have fielded yourself or asked of others. For those who can recall the equities market of the early 2000s, this question probably sounds like an updated version of “which dot-com stock should I buy?” Strikingly different times with different rationales for exuberance.
In the post digital asset bubble world, the question still occasionally comes up, but in a different context. The “I want to become a millionaire overnight” mentality has gradually shifted and matured towards the “I want to own cryptocurrencies for diversification but subtly want to be a millionaire by next week” mindset. This is obviously a tiny step towards a more achievable goal, but the same fundamental question exists: How can I tell which coin to buy?
Before we dive into factors that one might take into consideration, we should acknowledge that well developed charting patterns and indicators exist both in equities and cryptocurrencies. Our focus here will not be on these technical indicators, but rather on other key considerations which differentiate cryptocurrencies from equities.
Answering Fundamental Questions in Crypto Investing
The most fundamental questions you should ask of any coin include:
What does it do?
What is that coin’s value proposition?
Just as you should have an idea of what a company does/produce before sinking your hard earned money in their stock, so too should you understand what a coin’s intention is.
Is it meant to represent ownership of a physical object? A basic understanding should be established, otherwise your approach is no better than rolling dice. Here are some tips for answering your fundamental questions.
Get Dirty - Assign Value
For example, there exists a decentralized platform where anyone can list their unused harddrive space for rent in a distributed cloud based system. Renters can then source the cheapest listing and rent out that storage space. This platform uses its own token (Siacoin) for payments rather than USD or Bitcoin or any other coin. As a result, the value of Siacoin is highly dependent on the adoption of the platform. Simplistically speaking, the greater the demand for the platform, the greater the demand for the coin and the higher the price. If this is a business model that you believe in, in much the same way that Apple or Google runs a business model that you believe in, then the first hurdle is cleared. The best way to find out what the platform does is via the whitepaper, the coin’s website, and good old fashioned rolling up the sleeves and trying it out yourself.
The people, they matter.
Alongside the business model is the team behind the cryptocurrency. Just as corporations seek experienced executives to run a corporation, the development team behind a coin plays as big if not an even more significant role in the future of the coin. What are some of the features of the coin or platform that will be coming out in the near future? Are they privacy focused? Are they transactional speed focused? Again, just as you want to know what products are in the pipeline for Apple in order to make an educated investment in their future, so too should you look at the roadmap for the developers.
Trust Based Business - Security & Security
Another item you should concern yourself with is the safety and security of the coin in terms of network strength via hash rate (if it’s a Proof of Work based cryptocurrency). Hash rates are essentially the quantification of compute power behind solving the cryptographic puzzles in a PoW based coin. The greater the hash rate and the greater the distribution of the hashing power, the less susceptible it is to fall victim to a 51% attack. Many of the smaller coins are quite vulnerable to bad actors renting out computing power to launch a 51% attack.
Crypto51 provides excellent details around how much it would cost to launch such attacks and it’s apparent that it does not take much compute power at all. In fact, even for some of the more established coins, a redirect of hashing power from Bitcoin mining pools to other SHA-256 based coins such as Bitcoin Cash, could lead to double spend attacks. That said, a healthy cryptocurrency typically shows a growing hash rate as it means infrastructure is being “built” to support the coin.
Community - the growth engine
Finally, the community behind a coin can be very telling. Social media is ubiquitous and you’ll find no shortage of people shilling random coins in order to make a quick buck. But if you take the time to look at Twitter/Facebook/Reddit followers and community size, you’ll get a better sense of the legitimacy of the coin. I’m not advocating a herd mentality, but strength does come in numbers.
There are a many of other metrics that we haven’t even discussed: availability on established exchanges, governance of future coin development, trading liquidity, etc. that may play roles in the decision making process, but understanding some of the fundamentals is a good way to get involved in cryptocurrencies.
Wrapping it up
Making decisions on your cryptos are similar to how you make decisions in traditional markets. Establish a baseline: what does it do?, then work on understanding the different aspects of the coin including team, security and community. Don’t throw your money out because some Twitter influencer told you to bet on a coin. That’s a bad way to play the markets.
Get informed and make principled decisions that you can stand behind. Know what you are buying and why. If there’s a coin you’re considering and would like to hear more about the coin’s features, reach out to us on Twitter at @gobitsian
This isn’t financial advice. If you’re looking for financial advice, please contact your financial advisor. If you don’t have one, we have crypto financial advisors we can recommend.
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