Two important concepts to be aware of while you begin your crypto journey.
- Fundamental analysis: Finding out why a project is a good investment
- Technical analysis: Using graphs to represent price action
Technical analysis will give you a good idea of when to invest. Fundamental analysis will tell you what to invest in. You need a bit of both, but I will argue Fundamentals are more important in cryptocurrency.
There are certain parameters you need to look at before investing in a crypto project.
- Market capitalization: Commonly referred to as a Market cap. It tells you the total valuation of a coin or token I.E the total worth of the project. It can be calculated with a simple formula: Market cap=Price of one token x Available supply of the token. You oftentimes don't have to calculate this as www.coingecko.com and www.coinmarketcap.com will give you a rough estimate, although sometimes wrong. Market cap matters for several reasons. The first reason is simple the larger the market cap the less risky the project is and vice versa. bitcoin is currently the project with the highest market cap (just Above 1 trillion dollars as of the writing of this article) and so in essence it is the safest cryptocurrency. Another reason Market cap matters because it gives you an idea of expected returns. The smaller the market cap the higher the potential reward. It's easier for a project with a 10milion dollar market cap to get to 100 million than for a project with 100 million dollars to get to 1billion. Although investing in smaller caps Is riskier, higher risk comes higher reward but higher chances of losing it all. The price of one coin does not really matter and should not play a big decision in your investment decision. For example at the time of writing of this article XRP has a price of about 90 cents while Kusama has a price of about 450 dollars per coin. Which has more room to grow? if you say XRP you are wrong. That question cannot be properly answered with just price alone, you need to actually know the market cap. XRPs market cap is 45billion dollars and Kusama’s market cap is 4 billion. Now can you answer? Yes, you can. Kusama has a better chance at doubling your money if you factor in just the market cap although there are other things to consider.
- Inflation: Some crypto projects are inflationary. They keep printing more tokens and so the original tokens you bought are worthless and less because there are more available tokens. Its another example of demand and supply determining price. If the demand for the token outweighs the supply the price would not be affected and vice versa. That's why some people love bitcoin so much, it has a fixed supply of 21 million.
- Circulating supply: Some crypto projects whose tokens are not intrinsically inflationary can have a total supply of let's say 100,000 but they make only 10,000 available on the market. once they release that 90,000 coins into circulation it would theoretically reduce the price but it would depend on how fast they release these tokens into circulation. So the token release schedule of such projects should be found. You can often find it by asking on their telegram group.
- Holders: You always want to know the number of tokens each address involved in the project is holding. If most of the supply is held by a couple wallets they can dump the coins on the market and crash the price. you can explore the holders of such projects on etherscan or bscscan E.T.C depending on which blockchain you are on.
- Liquidity locking: You won't have to care about this if you are buying on Binance or any major exchange. But if you are buying on Uniswap or pancakeswap you must check if Liquidity (the underlying money that is used to buy and sell a cryptocurrency ) is locked. If it isn't locked there is a chance you can get rug pulled. sudden Liquidity removal and the tokens you bought become worthless. you can check on etherscan or bscscan for the status of liquidity. You can watch Youtube videos on how to navigate Etherscan or Bscan.
- The Team: Is the team behind the project anonymous. Anonymous teams can easily scam you and pull liquidity because they often will face no consequences. It's safer to invest in Projects whose Founders are members are known and have a good reputation and careers.
- Token use case: What is the token going to be used for? You need to figure out if there would be actual demand for this token. A token that you need to hold to access some valuable service is always going to be in high demand. Example: The CRO token of crypto.com or DOT and Kusma for Parachain Auctions.
- Pumpamentals: Is there hype around the project? Is it part of a trending sector? E.G NFTS or DEFI. The more the hype the better your chances of a good return on your investments. But be careful not to buy at the peak of the hype.
TWITTER: @Cryptio Telegram: Cryptiocommunity
