Hello everyone,
Today, in this post, I will continue the mini-series that I've started a few days ago with the sole purpose to explain in my own words some basic stuff from the crypto-world. If you haven't read my previous three posts, I will put them here, so that you can easily have a look on them too:
One morning I asked: What is Bitcoin halving?
Stablecoins through the eyes of a newbie
ETH 2.0 through the eyes of a newbie
Going back to today's story, I will explain how to choose the right crypto-currency to invest by following five simple steps. I will caution you from the beginning, that these 5 steps or rules are extracted from all my readings that I've done so far while researching everything I could find about crypto.
There are many people out there that tell you to buy one crypto-currency or to choose another one and that it will triple its value in no time. Well, do not listen to them, not because they are not right, but because you have not done your research.
Many times, few of them will be right on spot since many YouTubers or bloggers know their stuff well, but will you base your entire investment in someone else's hands?
Personally, I will not. I do listen though to what other people have to say, but I conduct my own research before proceeding to any investment.
How do I do that?
Well I follow a set of steps or rules that help me pick the right crypto-currency to invest in. You can apply those rules or steps to both short or long term investments, Personally, I can't say that I'm a long or short term investor, because I've just started this new adventure. Up until now, all my investments are for a long term. In other words, I bought some crypto-currencies and I wait. 80% of my portfolio is composed of XRP, where I invested 1000 EUR, when the price per coin was 0,49 EUR. But I also have some CVC, GRT and DNT and I keep them for day trades.
Anyway, let's start my presentation. As I said, I came up with 5 rules.
My rule number 1: read the whitepaper of the coin you are about to invest. Pretty much all the coins have a whitepaper. That explains what the developers are aiming to do and how and when they plan to execute it. It is essential for you to check out the problem they set out to solve, the solution they have come up with, the team behind the product and their roadmap to see in which states they are at the moment. All those are the basics that you need to know before you invest in any crypto-currency.
Rule number 2: check the circulating supply of the coin and its price. In other words, the crypto-currencies market capitalization. Be careful on your calculations, because some coins have partially circulating coins and not the full amount is tradable. That can affect the future price of the coin since more coins will hit the market over time. Also, current price is an indicator of a perceived value, but not much else. The price should never be a deciding factor behind the investment. The technical and future potential are the driving factors. If you are new to investing you might tempted to buy at a low price, but you shouldn't base your decision solidly on that.
Market capitalization can also represent an inflated price too. If you see a coin with low daily volume, but high market capitalization, you've most likely seen a manipulation of that coin's price, also, named pump-and-dump.
A pump-and-dump scheme is a type of fraud in which the offenders accumulate a commodity over a period, then artificially inflate the price through means of spreading misinformation (pumping), before selling off what they bought to unsuspecting buyers at the higher price (dumping). Since the price was inflated artificially, the price usually drops, leaving buyers who bought on the strength of the false information at a loss. The bellow picture can be viewed as a script abstraction of three main stages—accumulation, pump, and dump. The accumulation phase usually occurs incrementally over a more extended period of time, in order to avoid raising the price before the pump.
That brings me to rule number 3: check the liquidity and the volume. Check the trading volume of the coin on the last 24 hours. There are many website where we can find the price expressed both in US dollars and Bitcoin, and not just that. A higher 24-hour volume reflects a more established coin with a solid base, at least one function in exchange and perceived value by the trading community. Try to choose a coin with at least ten million dollars trading volume. It shows that the coin has already been traded and there's a certain percentage of the network that believes in that coin. There are success stories of investors buying a coin for few cents with an incredibly low trading volume, but these are rare incidents. Don't be misled. You have more chances of success by sticking to averages instead of chasing miracle trades. You also have to watch out for the so-called pump and dump situations, as I mentioned before. They are set up by developers who buy the currency in large quantity, drive the price up and sell as soon as the currency reaches a peak. Eventually, dropping the price significantly.
Rule number 4: it is extremely important that you check the developers activity. The truth is anyone who knows how to code can design their own crypto-currency and that unfortunately comes with a lot of scams. The majority of successful or promising coins are announced on forums into our public software repository. If a developer is releasing a new crypto-coin, there should be a history behind that person. Nobody who brands new to the network will join with a new coin announcement. To come up with a successful idea behind crypto-currency takes times. Hence, there should be a visible activity of a particular developer. If you are not a coder yourself, then it will be impossible to judge from a complicated code whether the coin is legitimate. But there are other factors to look out for:
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regularity - its constant updated about the coin new futures added to the coin on a regular basis
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original idea - a lot of new altcoins are just a minor improvement of Bitcoin. How do you know it's a gold mine when it brings something fresh and revolutionary to the crypto-currency market. That's how you know.
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activity - if the developer genuinely believes in a product, he or she will answer questions, respond to comments and will be available to help
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last but not least, a core wallet - a new coin means that no major wallets will be able to store it. Keeping the currency on the exchange is never a good option and the legitimate developer should release a specifically designed wallet. Now keep in mind that many of the coins are based on Ethereum, so they always have the Ether water. So that's the exception. But if they are based on Bitcoin code, they need to have a functional wallet.
Rule number 5: last but not least, check the social presence of the crypto-currency. It is extremely important that the crypto-currency you are looking to invest for long or short term to have a good base of supporters. Look at the social media, but not be fooled by Facebook and Twitter numbers. Check the conversation about the crypto-currency on Reedit, on Bitcoin talks, join their Telegram to see if it's active. Then, you can find the true community behind the coin and to see if it has a strong support. A coin with strong support has way more chances of succeeding in the market.
If you follow these rules or steps, you will significantly reduce your investment risk It does not guarantee success, but it definitely improves your chances. Not only you will be putting your money into a more secure coin but you will have a clearer vision of your investment.
Personally, I will start analyzing crypto-currencies that are currently in the market.
I have to repeat myself: do not invest your money based on other's research. They may be right, but they may be wrong. Always, do your own research before investing.
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Stakecube (over 20 single click faucets per day)
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