(Photo by Jordan Mansfield)
There is a decision tree when thinking about investing in crypto.
Step 1. Is crypto the future or just a hula-hoop of a passing craze?
If you think it is ‘”the future” you want some and go to Step 2.
Step 2. Do you want to buy the best or go coin picking? If you want to buy the best, buy bitcoin and hold, if not go to Step 3.
Step 3. Do you want to buy coins or tokens? Coins are currency and tokens, such as ERC20 etc, tend to be securities based around groups of people doing stuff. I’m not going into tokens here, so if you want to buy cryptocurrencies then go to Step 4 . If you like tokens then you have to dig into the people behind them.
Step 4. Do you want to buy coins that are centralized and dependent on groups of people that look rather like owners or a decentralized coin like bitcoin? BTC is more like a genie out of its bottle, but a coin like ripple is more like a casino chip that you have to use under the roof of some organization. If you like decentralized coins then go to Step 5. If you like centralized coins then you have to dig into the people behind them.
Step 5. Understand the coin fundaments. The bigger the community, the tighter the issuance and money supply, the better the investment.
Things to look out for:
Market cap
Small can go to large. Large is harder to multiply. This is the penny stock argument that has a dangerous logic, but many highly valuable cryptocoins have had this history. No one knows the destiny of cryptocurrencies but many believe it is huge. If you are in that camp the solution is to build up a diversified portfolio of coins based on selection criteria and have that spread from the giants to the minnows. The importance of diversification is as important in crypto as in all investment genre.
Max supply
If max supply is limited to a sensible number then the upside on adoption is much higher than otherwise. As a coin has 100,000,000 subfractions there is no problem with 1 coin being worth thousands, so long as demand for usage is high. If the coin is nearing its maximum supply it is easier for that coin to run up in value because new money supply of that coin is likely to be both diminishing and coining to its end. Less is more.
Issuance
A coin that burps out 5,000 new coins a minute of new supply is going to be worth less than a similarly demanded coin creating 50. It is best to multiply out the daily dollar value of the issuance of a coin to see how much new demand has to enter to keep the price from falling. Obviously the higher the dollar number the higher the hurdle. The issuance will have a decay curve as issuance of many coins halve every so often and this issuance curve decays, if there is one it will help or hinder a coin rising in value. Most Bitcoins are already issued and the 12.5 every 10 minutes of new Bitcoin is about to drop to 6.25 next year. Most people think that implies a consequential doubling in value. I see this point of view as highly plausible. As such, issuance is a big deal, less is more.
The community
The value of all coins and tokens comes down to their use case. What does the coin do and for who? BTC and ether have a purpose. BTC is great for transactions and is the gold standard brand-holder for the whole sector, Ethereum is great for security issuance and payments, etc. A use case equals a community. It’s the community that adds value to a coin by adopting its use case. If a coin has a good community it is a strong contender. That community can be developers supporting it, miners mining it, folks using it, people cheering it on. The stronger and bigger the community the better the chances for the coin to appreciate. More is more.
Check the past
It will give you a good view of the coin’s dynamic.
Good: It’s bitcoin, others that track are not so interesting.
The history of Bitcoin
Interesting: Not performing like BTC and strangely stable.
A stable altcoin
Bad: It just goes down.
An altcoin that is not performing well
All exchange traded crypto is bitcoin because they are all exchange fungible, as such they will always have value. Which ones fall from grace or explode in value is a matter of speculation and that in the end is what investors and traders do, speculate. The difference between winning and losing is simply technique and work, and combined they offer exciting opportunities in crypto because in a nutshell ‘nobody knows nothing’ which leaves the way clear to those that are prepared to take the time and risk to beat a trail through this financial jungle.
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Clem Chambers is the CEO of private investors website ADVFN.com and author of Be Rich, The Game in Wall Street and Trading Cryptocurrencies: A Beginner’s Guide. He won Journalist of the Year in the Business Market Commentary category in the State Street U.K. in 2018.