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Crypto is the biggest investing opportunity in a generation. But how do you find the best cryptocurrency to invest in?
This is an especially vexing question for investors new to crypto. Frankly, even a lot of veteran crypto investors struggle with it.
How can you know which ones are the most likely to pay off and which are black holes for your money – or worse – outright scams?
Longtime stock investors quickly discover that you can't analyze cryptocurrencies in the same way you can analyze equities. Cryptos have no revenue, no cash flow, no CEO, no price/earnings ratio.
In fact, crypto critics often point to such things as the lack of cash flow as "proof" that cryptocurrencies have no value.
What they don't get is that crypto is a brand-new asset class. You can't value it using metrics for other types of assets like equities.
But that doesn't mean there's no way to measure the value of a cryptocurrency.
Crypto has its own set of metrics investors can use to analyze and rate each coin.
And today we're going to tell you exactly what they are and how to use them…
What the Best Cryptocurrencies Have in Common
At first it may seem like cryptocurrencies wouldn't have much information you could analyze. But they do – and it's out there if you know where to look.
Good places to start your crypto analysis include websites like CoinMarketCap, CoinGecko, Defi Pulse (for DeFi-related tokens), CoinStats, and CoinMetrics. You might also want to look at crypto rating sites such as TokenInsight and Flipside Crypto's Fundamental Crypto Assets Score (FCAS) tracker.
Of course, you should absolutely also look at the cryptocurrency's official web site. There you will find a lot of background information on the coin and its developers, as well as the "white paper" that defines the project and its goals.
And like stocks, you don't just want to look at numbers. Other aspects of a cryptocurrency are just as important.
Here are the key things investors need to check:
- Tokenomics: This is the mechanics of how a coin works. So we're talking about how the coins are created (Are they mined? Created all at once then distributed? How are they distributed? Is there a release schedule?), the maximum supply, and whether a mechanism exists to "burn" or destroy coins. You'll also want to know whether the project creators have retained a portion of the coins to fund development, how big that portion is, and the conditions under which they could be released or sold.
- Liquidity: How easy is it to buy and sell a coin? How many exchanges is it on? Are they reputable? You want as much liquidity as possible because it will help prices rise but also because when you want to sell to take your profits, you'll be able to do so.
- Utility: Why was the coin created? What will it be used for? What will create demand? What's the roadmap for future features/upgrades? For instance, Ethereum has become the backbone of DeFi (decentralized finance) – a purpose that gives ETH value. A good place to look for these answers is the project's white paper. If the sole purpose is to send the coin's price "to the moon" you know this is probably not a project with staying power.
- Advantages: Are there other cryptos like it? How does the crypto you're considering compare to it? A solid project with strong rivals may struggle. Ideally a coin will have at least one feature that sets it apart (or that it does better) such as higher security, scalability, faster transaction speed, upgradability/adaptability, anonymity, ease of use, or lower fees.
- Team: Who are the developers working on the coin's code? Are they reputable? Are they known and respected in the crypto community? One good sign is if a developer on the team has experience pioneering projects. One of the founders of Polkadot (DOT), for instance, is Gavin Wood, who also co-founded Ethereum. Check the coin's website for team member bios to get a sense of their qualifications.
- Adoption: Are people using it? Are other crypto projects linking to it? Are businesses outside of the crypto universe using it? The XRP token is a component of Ripple's cross-border payment service for banks. You can also look at different key stats to measure wider adoption, such as active addresses, and the hash rate (for mined coins) or percent of total coins staked (for proof-of-stake coins). The market cap measures how much value in dollars has been invested in the coin (calculated as the coin's price times the circulating supply). Adoption matters because the more people who use the coin, the greater the network effects will be – which in turn makes the coin more useful.
- Community: Related to adoption, but this is more a measure of the enthusiasm of the user base. This can be a very powerful metric. If a coin has a large and vocal community, it can drive prices regardless of whether the coin's structure is sound or not. Dogecoin is the prime example. A celebrity talking about a coin amps up this effect (e.g., Elon Musk). You should check social media (especially Twitter and Reddit) to see how many people are talking about a coin – and what they're saying. Is it empty hype or meaningful discussion about the potential of coin?
- Backers: In some cases, a cryptocurrency will have attracted venture capital to help fund its development. The Solana (SOL) project already has attracted $21.8 million in VC funding. If you do happen to find a crypto that has VC backing, count it as a bullish sign, as venture capitalists only risk their money in the projects they deem the most promising.
Once you've found a coin that scores well on these criteria, then you have to decide how much you want to buy. That will depend on your overall crypto investing strategy and how many different cryptos you want to own.
If the coin's price is a bit higher than you'd like, consider starting with a small position and adding on pullbacks. Crypto is volatile enough that pullbacks are almost inevitable.
Finally, don't let your enthusiasm for a coin get the better of you. Invest an amount appropriate for your financial position. Putting half of your investable assets in one cryptocurrency, no matter how much you like it, is a bad idea.
My rule of thumb is that for the typical retail investor, crypto should make up less than 5% of their portfolio. Remember, crypto investing carries substantially more risk than investing in stocks.
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About the Author
David Zeiler, Associate Editor for Money Morning at Money Map Press, has been a journalist for more than 35 years, including 18 spent at The Baltimore Sun. He has worked as a writer, editor, and page designer at different times in his career. He's interviewed a number of well-known personalities - ranging from punk rock icon Joey Ramone to Apple Inc. co-founder Steve Wozniak.
Over the course of his journalistic career, Dave has covered many diverse subjects. Since arriving at Money Morning in 2011, he has focused primarily on technology. He's an expert on both Apple and cryptocurrencies. He started writing about Apple for The Sun in the mid-1990s, and had an Apple blog on The Sun's web site from 2007-2009. Dave's been writing about Bitcoin since 2011 - long before most people had even heard of it. He even mined it for a short time.
Dave has a BA in English and Mass Communications from Loyola University Maryland.