How to Evaluate a Cryptocurrency for Investment

Do you know that there are more than 18,000 cryptocurrencies listed on CoinMarketCap, one of the largest crypto tracking platforms? Also, Binance, one of the most reputable crypto exchanges, has listed more than 400 crypto tokens.

The world’s rapid shift towards decentralization and the introduction of Web 3.0 have put the crypto coins in the driving seat. Now, multi-national corporations like Microsoft, Twitch, Tesla, and others accept crypto as a payment method.

However, it’s a fact that not all cryptocurrencies have the same value or usefulness.

A few tokens prove their stability with time, while others become alt or meme coins. Also, with thousands of coins available today, it becomes increasingly complex for beginners to evaluate whether a token is worth investing in.

Having said that, I’ll teach you a few ways to choose the right cryptocurrencies. Also, as my target audience is crypto beginners, I’ll stick to spot trading.

So, let’s start!

Determine the Type of Cryptocurrency

Before you invest in any cryptocurrency, it’s incredibly important to understand its nature. Generally, there are three major types of cryptocurrencies. These include Stablecoins, Altcoins, and Memecoins.

Stablecoins

As the name indicates, these are the least volatile and most stable cryptocurrencies. Even though there’s no harm in investing in stablecoins, keep in mind that profitable returns can take significant time.

Additionally, stablecoins are pegged to financial assets and commodities like fiat currencies or gold. This way, their price stays relatively stable as compared to other cryptocurrencies, and hence, can be used to trade other coins.

Altcoins

Alternative or altcoins are simply all those coins that are not Bitcoin. Sometimes, Ethereum is also not included in this list, as it can also serve as a separate blockchain for other cryptocurrencies.

Altcoins are designed to address various financial and real-world issues digitally. Additionally, these coins also extend the blockchain’s applications by offering unique solutions. Having said that, as more people invest in altcoins, these are generally more volatile and have greater market volume than stablecoins.

Memecoins

These are a type of altcoin, but they rarely have a real-life use case or utility. Besides being tradable and convertible into other tokens, memecoins don’t have many useful applications.

Memecoins are usually created on trends, memes, or in the name of famous personalities, and their price usually surges when they’re newly registered on an exchange.

I’ve shared some famous stable, alt, and memecoins in the table below:

Analyze the Liquidity of Cryptocurrency

Besides market cap and volume, I always analyze a coin’s liquidity before investing in it. Frankly speaking, I rarely invest in a less liquid coin, simply because it’s extremely difficult to convert it into another digital asset or cash at a fair price.

Additionally, liquid coins are difficult to manipulate, and their prices don’t move sharply either. And, as there is always liquidity (buyers and sellers actively trading in a coin), such digital assets are less volatile and are ideal for beginners.

Having said that, you can use TradingView or CoinMarketCap to analyze a coin’s liquidity.

But ensure that you have a reliable connection, because these platforms update data in real-time. As for me, I use a 5G Home Internet connection, which is fast and reliable enough to update data and analyze different market metrics on TradingView. This way, I can easily assess if a coin is worth investing in or not.

Nonetheless, always ensure that whichever coin you’re investing in, it’s highly liquid so that you don’t face any problems while selling it.

Read the White Paper Carefully

Every cryptocurrency publishes a white paper when it is introduced. It is a complete and thorough report that provides answers to questions like:

• Who are its founders?

• How does it work?

• Why was it created?

• What real-life problems does it solve?

Additionally, you can also find relevant blockchain information, scalability plans, products, economic partnerships, and parameters. Speaking from experience, reading a white paper can be a bit complex. With technical jargon and confusing terms, it can also be boring for beginners to read an extensive white paper.

However, you need to read and understand it. This way, you’d be sure about what the crypto coins stand for, and if they’d be useful in the long term. Also, as there are a lot of scams and frauds in crypto, thoroughly reading a coin’s white paper can explain if it's worth investing in or not.

So, these are a few ways to determine if a cryptocurrency is worth investing in or not. But before winding up, here’s a little advice. Once you enter the market, you’ll find plenty of people spreading rumors and creating a sense of urgency about a coin’s price.

It’s called FOMO (Fear Of Missing Out) in investor terms, and I’d suggest not to pay any attention to it. Trust your fundamental and technical analysis of a coin, carefully analyze these factors, and then make investments.

Also, don’t forget to diversify your portfolio and stay away from futures until you become an adept crypto trader. Good Luck!