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Better crypto investment? It depends on these factors

4 min read

There is no other way to put it: the investment landscape is tense. In addition to distortions in the traditional markets, the crypto market is anything but stable. The fiasco surrounding the FTX exchange has once again shown how quickly prices can falter. However, the past has shown that those who sit out such market phases and have a good hand could benefit in a few years.

In this sense, anyone who has some money for a crypto investment and follows the basics of countercyclical investing could see good entry opportunities in the current situation. With the right investment strategy, you can significantly increase your chances of returns.

But where to start? The crypto market can seem confusing. Without the right knowledge, you then run the risk of making a mistake when investing. The following pages are intended to show different ways of making a crypto investment.

Crypto investment: Which factors are important when choosing a coin?

In order to put together a sophisticated crypto portfolio, an in-depth market analysis is essential. This requires a deep study of the mechanisms of the market and the individual projects. The following factors serve as a guide when composing portfolios:

Use-case

The use case of a project is one of the most important (sales) purchase (s) arguments in blockchain projects. Is the solution of a real problem in the foreground here? Or are phrases copied from other (successful) projects simply reproduced in the white paper? The better the use case, the higher the probability that the project has substance. However, the use case evaluation also includes the question of how realistic the implementation of the same is. There is also the question of how likely it is that the respective project will prevail over the competition. To answer that, you have to balance the use case against the other factors.

Competition

The competition analysis is closely linked to the use case. Are there other protocols on the market that have the same objective? If so: How likely is it that the selected coin will prevail? Is it also possible for several projects to exist side by side? In order to be able to assess this factor, the comparison of the individual market capitalizations gives a good first assessment. With a higher market capitalization, the probability that one project can prevail over the other also increases. However, one must also compare the market capitalization with the age of the protocol. A comparably younger protocol can certainly have a lower market capitalization and still have higher implementation potential, for example due to the better token economy (see below) and a better developer community.

Age of the log

The length of time a protocol has existed can give a good indication of its risk profile. As a rough rule of thumb, the younger a protocol is, the higher the risk of failure. On the other hand, there are also greater growth opportunities. On the other hand, older protocols like Bitcoin (BTC) and Ethereum (ETH) are unlikely to fail.

Also, when analyzing the age of a protocol, one must consider the activity of the developer community. These can be read on GitHub in the “Commits”. If something is regularly submitted here, that’s a good sign, the developers are active. Little or no action is a bad sign. So it may well be that older projects with low or non-existent activity are doomed to failure and younger projects with high activity have great potential.

Token economy

To evaluate the token economy behind a single project, analyze the white paper. Because there it is precisely defined how the tokens of a project are distributed. If the development team is holding back a large part of the tokens themselves or if a disproportionately large budget is used up for marketing, this is not a good sign. On the other hand, if a large part of the tokens are released to the community directly during the token sales and are held back for technical development, this can be viewed positively.

When evaluating the token economy, the technical design of the respective crypto project is also analyzed. If, for example, coins are burned regularly and the total supply is thus reduced, this can have a positive effect on the price development. However, it is also important here that the token economy fits the use case.

Volatility

The volatility (price fluctuation) gives a good indication of the risk factor of a coin. If the volatility is very high and the market capitalization is low, one can hardly speak of a safe (crypto) investment. On the other hand, the lower the volatility, the easier it is to put your money into a project without fear of a total loss.

Risk factor

The assessment of the risk factor requires a precise balance between the individual criteria. Factors such as high volatility and young age indicate an increased risk factor. Large (and strong) competition also brings risk. However, if the token economy and use case are solid, you can accept that if you have the appropriate risk affinity. If, on the other hand, one of the latter two factors is rated negatively, the risk factor increases accordingly.

All content in this article is for informational purposes only and in no way serves as investment advice. Investing in cryptocurrencies, commodities and stocks is very risky and can lead to capital losses.

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