Since Bitcoin was launched in 2009, the world of cryptocurrencies has exploded. There are well over 5,000 coins and tokens in the market today, with frequent new launches and project announcements.
The reality, though, is that many of them turn out to be bad investments or fake projects. The question now is, how to identify a good crypto project? When it comes to investing your hard-earned money, everyone will ask you to DYOR (do your own research) – and rightly so. According to a report by Chainalysis, cryptocurrency fraud reached a record-breaking $14 billion in 2021. On the plus side, though, crypto adoption is growing faster than ever before. In the same report, Chainalysis reveals that the total transaction volume in 2021 was $15.8 trillion, up 567% from 2020. So there is definitely scope for amazing returns on your investment, if you can learn to weed out the bad projects from the good ones.
How to Evaluate Coins and Tokens
There are coins and then there are tokens. While a coin is usually built on a blockchain, a token, on the other hand, tends to use another coin's blockchain. For example, Ethereum is a blockchain, whose native coin is Ether. Several tokens operate on the Ethereum blockchain, like BAT and BNT. Coins have a higher level of flexibility and independence because of their own protocol. Tokens are bound to the usage and limitations of their host network.
Although it’s debatable whether coins or tokens are the safest investment option, both have a common factor – utility. All projects, whether coins or tokens, serve a purpose. When evaluating a crypto project, the most important thing to note is whether the purpose of the crypto aligns with your interests/values and the potential revenue it can generate.
Here are some points you should consider when evaluating a crypto project:
- Analyze the Whitepaper
- Go through the Project Roadmap
- Social Media
Analyze the Whitepaper
The whitepaper is a comprehensive, all-in-one document that tells you everything that you need to know about a cryptocurrency. It begins with conceptualization — why was that particular crypto created, the founder’s vision, and whether the token/coin will solve any market problem. This is where you’ll find all the technical details and understand whether the project has realistic goals or not. If the project doesn’t have a whitepaper, that’s a red flag and you can be sure to avoid it.
Go through the Project Roadmap
While the whitepaper gives you theoretical details, a roadmap is much more tangible and lays down specifics, e.g., which exchanges will the crypto be listed on, will it have smart contracts, or what’s its plan for scaling? The roadmap will be organized into phases or a timeline that will give you a peek into the company’s vision for steering the project to success. Dive into the details before deciding to invest. Do the goals look feasible? Are they too good to be true? Are they transparent in their communication and progress? Studying the roadmap can clear up a lot of questions.
Look at their Market Cap and Tokenomics
Market cap can be calculated by multiplying the number of coins/tokens in circulation with their price. The bigger the market cap, the more stable the crypto is. It is, in fact, a much better indicator of a crypto's potential than its price.
Tokenomics refers to the economics of a crypto token and gives a good reference to all the qualities that can make a crypto token appealing to investors. You can understand the crypto’s tokenomics from its whitepaper. Here are some questions to consider:
- How are the tokens distributed?
- How many tokens are in circulation?
- How many tokens do the founders hold?
If the project developers plan to slowly increase the circulation supply, then the value of the token is likely to go up. On the other hand, if there's no limit to the number of tokens that can be minted or if there are plans to create millions more tokens, it may cause a devaluation of your crypto.
Follow their Online Activity
An online presence lends authenticity to a project. If you cannot find a project’s social media presence or if their social feed is inactive, it could mean the project has been abandoned or potentially be a crypto scam too. Look up these different kinds of online activities:
- Social Media and Website: Do they have a website and do they regularly post updates on their website and social media?
- Community: Do they have an active community on Discord, Reddit, or Telegram? Check how involved they are with the community and how frequently they interact.
- Trading Volume: How frequently is the currency changing hands? A high trading volume is a good sign that the crypto is stable and has liquidity.
Check out their Team
Look for the people in charge. While anonymity is a popular trend in the crypto world, transparency about the team brings a lot of credibility to the project. If a project is serious, you'll be able to learn about its strategic investors, team members, project location and funding sources. Also check how much money they are putting into development vs. marketing. More often than not, most scam projects focus on marketing rather than development.
Any project with these strong fundamentals is a good buy. However, before investing, you should first evaluate your own risk appetite and financial goals. This will give you the confidence to weather the lows of the market without losing your hard-earned cash.