How to Evaluate which Cryptocurrency will be the Next Big Thing (10 Steps)
In essence, what investors really do is try to pick the winners and avoid the losers. As a cryptocurrency investor, I often myself find myself wondering about the next big thing in the cryptosphere.
How do you really evaluate a cryptocurrency before you commit any capital to it? Unlike stocks, real estate or most investable assets, cryptocurrency is a completely different class of asset. This is why we can’t really apply the same techniques to analyze them.
But there is a way you can systematically assess and evaluate cryptocurrencies. In this article, I was to discuss how we can evaluate cryptocurrency and try to pick the winners and avoid the losers.
For the sake of simplicity and clarity, I will take a steps-based approach to cryptocurrencies analysis. This way, if you are new to cryptocurrencies you won't feel overwhelmed by all of the different things you have to consider and you can always look back the article as a reference.
So, shall we begin?
10 Steps for Evaluating Cryptocurrencies
1. Look for Practical Applications
If you take a look at CoinMarketCap, you will see a huge list of cryptocurrencies. There really are too many of them and most of them don’t really offer anything specific. If you look at the successful cryptocurrencies, you will find one mutual aspect among them all. They all offer something more than just the ability to digitally transfer money.
Bitcoin was the first decentralized digital currency. It was also the advent of the blockchain, a revolutionary technology. Ethereum is another incredibly successful cryptocurrency. Ether is currently trading for $970. Last year, it was trading for around $8. Meaning, in just a year, its value has appreciated by around 12,000%.
There is a very good reason why ether has appreciated by so much while so many other cryptocurrencies had meager returns compared with ether. The reason is simple, ethereum is a platform for digital contracts, which offers a clear and distinct application in the real-world. For all we know, it could revolutionize the way to enter into and execute contracts.
You need to ask yourself, does a new cryptocurrency offer a real-world application? Does it improve our productivity? Will it allow us to save resources? Will it improve the world?
Ripple is another cryptocurrency with a real-world application. Look at its market capitalization. It has appreciated by over 50,000% in the last year. If a cryptocurrency has a real-world application, you will be able to see it in its valuation.
2. Potential for Mass Adoption
After you’ve got a list of cryptocurrencies that offer a real-world application, the next thing you need to look for is its potential for mass adoption and consumption. The reason for internet’s ubiquity is that it is available to literally everyone.
It wouldn’t matter if a cryptocurrency can solve a real-world issue or has a distinct real-world application if it cannot be adopted for mass consumption. Namecoin is the perfect example of this. Its flagship feature allows us to create censorship-resistant domains, namely, .bit domains.
Despite its practical use, most people don’t create their own websites and those who do are more than happy with .com or .net domains. Namecoin is currently trading around $4 and it has been in existence since 2011. This perfectly illustrates the importance of scalability and potential market size.
Look for a cryptocurrency that offers practical use but also has the potential for mass adoption. It doesn't matter how good of an investment you’ve found. You want to invest in a technology that everyone knows about and can’t help but talk about it.
3. The Development Team
Once you have found these two attributes in a cryptocurrency, you want to shift your efforts towards figuring out the legitimacy of the cryptocurrency.
The first thing you want to examine is the developing team behind the cryptocurrency. Just like how investors look at a company’s management team before investing you want to know if the team of developers is dedicated to the cryptocurrency.
A promising project with immense potential can easily go down the drain if the team falls apart, you don’t need malicious intent for something to fail. However, this way you will also eliminate the potential for malicious intent.
Remember a few years back, OneCoin used to be all the rage. Well, when I started researching the team behind OneCoin, I found out on Reddit that its creators were also involved in BigCoin, a well-known Ponzi-scheme, one that fell apart. Researching the development team is a good way to avoid fraudulent cryptocurrencies.
When researching the development team remember that anonymity is a major red flag. All of the legitimate ventures provide information on the team of developers working on the project.
Once you feel some confidence in the development team, you will want to look at the roadmap they’ve put out. The thing is, no technology or software is ever complete. There will be updates and patches that will improve and further grow the existing software or system.
Studying a cryptocurrency’s roadmap will allow you to understand the progression of the cryptocurrency. What to look for in a roadmap? Well, the first thing is the development timeline and how long it will take. Then you will go through the cryptocurrency’s features like how many coins will be in existence, it's halving, its blockchain, etc.
You also want to make sure that a new cryptocurrency has not been pre-mined. The problem with pre-mined currencies is that its original holders will always start selling when the price starts to rise. This will create a continual downward pressure on its price in its early stages. Although this doesn’t always happen, it still is a likely possibility and one you should look out for.
A whitepaper is designed to inform us, the investors, about the project. It is an excellent way to figure out what the development team is trying to accomplish. A whitepaper is a bit like a roadmap, just more detailed, which explains the methods of reaching goals and benchmarks.
When examining a whitepaper you want to adopt a venture capitalist mindset. I mean, you are in a way a venture capitalist if you’re investing in new cryptocurrencies. So, you want to evaluate the blockchain the way VCs evaluate startups.
Also, when you look at a whitepaper, don’t think of it as the final product. A whitepaper is literally where the journey begins, you don’t know precisely where this journey will take you a few years from now, but you should understand the general direction.
The four things to consider is the team, their vision, the scope and lastly, new or existing markets. Apple is the perfect example of a company entering into an existing market. It didn’t do anything new with its iPod or iPhone, it just did it better than everyone else to become the most valuable company in the world.
6. Potential for Competition
Today, Google has become synonymous with online search. In fact, Google has morphed from a noun into a verb. To Google it, means, to search it. But you know what, Google was not the first online search engine, but it definitely is the best search engine.
Just because a cryptocurrency is the first of its kind, doesn’t necessarily mean it will be successful. You have to see if it will face competition. And, if so, try to understand nature of the competition. You always want to bet on the winning horse, not the runner-up.
7. Partnerships and Exchanges
Collaboration is a vital aspect of the equation that ultimately results in success. You should look at the partnerships a new cryptocurrency develops. Similarly, a cryptocurrency’s ability to list on exchanges is just as important.
First, let’s talk about exchanges. A cryptocurrency’s value is determined by market forces. In order for the public to have access to a cryptocurrency, it must be listed on an exchange. Also, the number of exchanges that supports a cryptocurrency not only increases its visibility and interest in the currency, it also help legitimize it.
The number of reputable exchanges that support a new cryptocurrency is an excellent measure of its potential success. This is where partnerships come into play. In order for cryptocurrencies to be listed on popular exchanges, it needs to nurture mutually beneficial partnerships.
Partnerships can come manifest in a number of ways. For example, partnerships with governments can have the most legitimizing effect on a fledgling cryptocurrency. ConsenSys is an excellent example of a blockchain firm partnering with a government agency to increase its viability and acceptance.
Tron (TRX) is another example of a cryptocurrency partnering with an existing business to foster potential users and investors. Ripple seems to be the leading cryptocurrency with it comes to corporate partnerships. So far, it has built up an impressive network of partnerships with a number of large banks, including USB, American Express, RBC, Santander, Standard Chartered and so on.
Aside from partnering with existing businesses, partnerships can take other forms as well. For example, liquidity providers can partner with a new cryptocurrency to provide liquidity in its markets, which helps increase interest from traders and investors.
8. Online Community
Community support is a particularly crucial indicator of a cryptocurrency’s potential success. Cryptocurrency is an exclusively online phenomenon so naturally, its supporters tend to dwell in online spaces such as Reddit, Bitcointalk, and other social media platforms.
Since prices are determined by perceived value, hype tends to have a direct relationship with the price of a cryptocurrency. In fact, this is true of most investments. Success tends to beget success.
Being part of the online community will help you avoid bad investments as well. If there is anything to be cautious about, you will find out. Words tend to travel at light speed on the internet. You just have to look in the right place and you will find people talking about the cryptocurrencies you should avoid.
9. Seek Out Platform-based Cryptocurrencies
This, in my opinion, should be a really important consideration when deciding to invest in a cryptocurrency. There are some cryptocurrencies that merely offer some features, which important and useful as they may be are not as robust as cryptocurrencies that offer an entire platform.
For example, bitcoin is an entire platform upon which a number of other altcoins are based on. Litecoin is another example. It is a bitcoin-derived blockchain. The only difference between litecoin and bitcoin is the time it takes to process a block or group of transactions. Litecoin offers faster transaction confirmation time. That is its only feature, hence, why I call it a feature cryptocurrency.
Ethereum, on the other hand, is not really a cryptocurrency. Instead, it is a platform for digital contracts with ether acting as the currency used for facilitating transactions. Similarly, Ripple has its own native blockchain and serves a distinctly different purpose than bitcoin and other bitcoin-derived blockchains.
The point is, most feature-based cryptocurrencies are merely coat-tailing off bitcoin’s popularity. No doubt, they also add value. But platform-based cryptocurrencies are paving their own ways they will prove to be viable investments even in the long-run independently of bitcoin.
This is why I believe if you want to invest in cryptocurrencies for the long-run, you should only risk your capital in platform-based cryptocurrencies. Yes, you can make money off feature-based cryptocurrencies as well. But for long-term investment, platform-based cryptocurrencies are your best bet.
10. Initial Coin Offerings (ICO) and Tokens
A Token is a term used to represent an asset that is reliant on an external factor. In the case of cryptocurrencies, tokens don’t have their own blockchains and reside on top of another blockchain.
Tokens have become an increasingly popular form of crowdfunding for project development. Tokens are sold to the public in a process called initial coin offering. I am sure you’ve heard about ICOs or initial coin offerings.
ICOs may not be a cryptocurrency in the conventional sense but they do offer an excellent opportunity for investment. So obviously this article cannot be complete without touching the subject of tokens.
The thing about ICOs is that most tokens only have a conceptual white paper and next to no proof of concept. Hence, they offer an extremely high-risk investment, which is validated by astronomically high valuations and payoff potential.
The topic of investing in tokens is a full-sized article on its own and I think we should reserve it for another day. For now, this should suffice.
These days the cryptocurrencies market is in a general bull market. Literally, every coin is appreciating. You don’t need to be a sophisticated investor to benefit from the current market environment.
However, if history is to teach us anything, there will always be pauses in the market. Markets always correct after a long ascent. And the successful investors are prepared for different market conditions.
This article should help you filter out those cryptocurrencies that will be able to stand the test of time from the momentary successes. And if you are in this for the end game, being invested in the next big thing today will definitely pay off in the long-run.
I hope you found value in this article. A lot of effort and time went into it. And nothing would make me happier than to help you better understand and navigate through the crypto-markets.
So, if you want more such articles, you should definitely check out the rest of the blog. Each and every article on the website will help you become a better cryptocurrency investor.