Welcome to our Investor’s guide to cryptocurrency. In this sixth part, we will learn how to research a project when investing in cryptocurrencies. It is highly recommended to understand the underlying fundamentals before making an investment in the crypto market. Continue reading to find our way into cryptocurrency investing
Before investing in any cryptocurrency, it is highly recommended to understand the underlying fundamentals of each crypto project. At Hodl we have a strict approach when it comes to new investments: we research and score projects based on several critical elements. Even if all criteria are met, it isn’t guaranteed that the cryptocurrency will rise in value. When exploring investments in cryptocurrencies, we advise paying attention to the following core elements:
One of the first elements we focus on is the use-case of the cryptocurrency. In essence, we should ask what problem the project is trying to resolve and how they will do it.
Some use-cases focus on aiding in the scalability of a particular network to optimize supply chain strategies. It is important to dive deeper into the available documentation for this step. One critical document that is available for every project is the whitepaper. Make sure to read it.
Becoming an innovative blockchain project requires proper technology. This information is often acquired through the project’s whitepaper.
Our approach includes asking questions like the following: what is the underlying mechanism of the project? Has the technology been developed by the team or has it been obtained through a supplier? Learning about the technological mechanisms can be demanding but makes the project much more fascinating. It is also highly valuable to compare the technology with existing solutions or possible future competitors.
To reach its destination, the team should have the right skillset. A critical element when researching cryptocurrency projects is the core team.
Who is the team behind the development of the cryptocurrency? Most protocols have a transparent outlay of their team which makes the research easier. What is their experience within the field of cryptocurrency or traditional business? Be cautious if there is no information available.
In traditional finance, the value of an asset is often determined by its underlying value. Within cryptocurrency, a lot of its value is driven by the perception of investors. It is therefore highly recommended to take a closer look into its community, following and engagement.
Some tools support this research, but often it is enough to investigate the available social media channels. Channels often used by crypto projects are Twitter, Telegram, Discord and Medium. Good indicators are the number of followers, the rate of engagement on each post, and the sentiment within their community.
A project is not only backed and supported by its community but also by a broad range of partners. This ecosystem is what makes the project thrive.
It is worth keeping an eye on these partnerships. The first one is its investors: is the project backed by credible and well-known venture capitalists? These parties have done thorough research before investing and have they provided the tools and network to help the project grow? Another important category is the technological partners. Are there partnerships that aid in developing the technology of the project? Blockchain businesses often collaborate with other projects or partners to optimize their network, technology, adoption and availability. Think, for example, of a cryptocurrency project partnering with a bank to develop a Central Bank Digital Currency. Or a big data company partnering with a blockchain company to secure its data streams.
The last and possibly the most important element for an investor are tokenomics. It involves studying the factors that impact the demand and supply of the token to determine its possible value.
An essential component is a token utility: What is the token being used for? Fundamental components that we should consider are the maximum supply of tokens, the current tokens in circulation and the current market capitalization. Another key element is token allocation: How are the tokens distributed and for what purposes? Are these appropriately divided to reach the project’s goal? How and when are the tokens being released into circulation? Token releases can directly affect the price as supply and demand determine the price.
In this chapter, we explored the basic steps to follow before investing. As a starting point, investing in cryptocurrency requires careful assessment of different use-cases, tokenomics and ecosystems. It also implies specific knowledge of blockchain-based technology. In the next article, The investor's guide to cryptocurrency [part 7], we will explain the various available strategies when investing in cryptocurrency.
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