The Fundamentals: How to Analyze Cryptocurrency
- Investing in cryptocurrency requires an understanding of its pros and cons due to its volatile nature.
- When choosing a crypto, investors should understand who is building the project and what its vision is.
- Knowing the basics of investment and how cryptocurrencies work can give a better idea.
1. Review the White Paper
Most crypto projects provide a white paper, which helps define the objectives and technical details of the cryptocurrency. While some white papers may contain technical jargon not understood by casual investors, it is important to read through the paper to learn about the vision of a project.
The white paper should clearly define the goals of the project, how their technology will achieve those goals, and how the cryptocurrency will function. Most white papers define a problem that is being solved with the advent of the currency itself, and this problem and solution should be crystal clear to investors.1
A red flag on any crypto project would be a white paper full of generic promises with no details.
2. Research the Team
Cryptocurrencies are typically created by a team of founders and software developers that help create the solution to a problem. To better understand how a project could perform, you should research the professional experience of the team running the project.
This may include reviewing the LinkedIn profile to learn about the professional background of any of the technical or leadership staff, as well as learning about the previous projects that the team members have launched. Also, the “About” page on any cryptocurrency’s website should clearly articulate who is helping build the project and what their expertise entails.
A red flag would be a team of anonymous founders or developers who don’t reveal their identity publicly, or an inexperienced team that has not built or scaled any projects in the past. An exception to this rule would be Bitcoin’s anonymous founder, Satoshi Nakamoto.2
3. Learn About the Leadership
Most crypto projects have a clearly defined executive team that handles the vision, execution, financials, and marketing of the company. Learning more about who is leading a cryptocurrency team can give insight into the probability of success for a project.
Here are a few questions to ask when researching a crypto company’s leadership:
- Do they have a history of successful leadership positions?
- Are they reputable/well-known leaders?
- Do they have a history in the crypto industry? Is it good or bad?
- Are they public-facing or anonymous?
While there are some projects with anonymous founders that have had success, such as Bored Ape Yacht Club, there are others that have committed fraud and destroyed a project, such as Wonderland.34 Learn about the leadership team before investing in any cryptocurrency.
4. Get to Know the Community
Cryptocurrency is a community-driven technology that typically requires a strong, supportive community to grow. Learning about the community for a given cryptocurrency can help you gauge whether a project will succeed, or if it is pure hype and speculation.
Joining the community Discord or Telegram channel can help you learn more about the community of a given cryptocurrency, as well as get your questions answered about the project itself. If there is a large community base that is well-organized and frequently promotes the project, this could be a sign of a growing cryptocurrency. If there is sparse engagement and no substantive discussion on any community platforms, this is a red flag.
5. Understand the Technology
Cryptocurrencies are a new type of technology that are designed to improve financial services, as well as solve financial problems. Crypto projects are built on blockchain technology, but there are many innovations and variances to how they function.5
Understanding how the technology is being used to solve customer problems, as well as how innovation will help grow adoption, will give insight into the potential growth of a cryptocurrency. While some of the technical aspects may be too complicated to grasp, the cryptocurrency white paper or website should be able to explain the solution in plain language that is easy to understand.
6. Understand the Vision
Cryptocurrencies should have a clear vision of what goals they are setting out to accomplish, with an established road map of how they will get there. This should be readily available in the crypto white paper, as well as on the company website. The vision of a crypt project should give enough details for investors to understand what problems they are solving, as well as the potential user base for their solution.
If a company website states simple axioms such as “cryptocurrency is the future” but cannot define or articulate a clear vision for how the cryptocurrency solves a specific user problem, this is a red flag.
7. Review the Road Map
The company road map of a cryptocurrency is a time line of events that shows the expected progress of the project. Typically shown on a line graph, the road map should have clear and concise milestones broken down on a quarterly basis, all moving the project toward a predefined set of goals.
The road map may be available in the white paper, though most crypto project time lines are ever-changing and are listed on the company website. If there is no defined road map, or if the milestones are too generic, this is a red flag.
8. Research Reputation
There are tens of thousands of cryptocurrencies, and unfortunately, some of them are scams designed to get the founders (and early investors) rich. Researching the reputation of the team and leadership of a cryptocurrency can help investors understand if the crypto project is reputable or not.
There are several places to learn about the reputation of a cryptocurrency project, from Reddit forums to Discord channels and social media accounts. Ask around these online communities to get a feel for the industry reputation of key leaders on the project, as well as the perception of that project. If there are lots of negative responses to questions about a key leadership member or the project as a whole, this could be a red flag.
Reputation is also established by researching who is supporting a project. If there are reputable investors already on board, as well as institutional backing, the project may have a greater chance at success.
9. Learn the Tokenomics
The term “tokenomics” refers to the distribution, circulation, and total supply of a given cryptocurrency. This is important, as it affects the overall price of a cryptocurrency over time. Similar to shares of stock in a publicly traded company, the price of a given cryptocurrency is a reflection of supply and demand.6 The more shares there are, the more demand there needs to be to increase the price.
Here are three important data points to review before investing in any cryptocurrency:
- Circulating supply. This is the supply of a cryptocurrency that is currently in the market, and what current prices are based on.
- Total supply. This is the total supply of a given cryptocurrency after all tokens are unlocked and distributed.
- Maximum supply. Many cryptocurrencies allow the minting of new tokens, and the maximum supply is the maximum amount of tokens that will ever be minted.7
All three of these statistics can greatly affect the price of a given cryptocurrency, so understanding supply is very important for cryptocurrency investors.
Crypto projects are also notorious for an uneven distribution of tokens, meaning that the token supply is low at launch and then increases substantially over time. This can cause a significant drop in price as the new tokens to flood the market. Reviewing the token unlock schedule can help investors understand how the tokens will be distributed, and to whom.8
10. Review the Price Data
Crypto prices are known to swing up and down wildly, but there are many factors that cause this. Token supply, marketing efforts, project milestones, and many other factors can greatly influence the price of a given cryptocurrency.
Reviewing the price history of a cryptocurrency can help investors see how interest in the project has evolved over time. It can also indicate whether a given crypto project is growing or dying. If a cryptocurrency had a huge spike in price but never recovered over the coming months and years, this can be a red flag for investors. The same goes for market capitalization and trading volume. If the market cap continues to decline the longer that the crypto has been around, and if there is no trading volume, then the project may be a poor investment.
What Are Cryptocurrencies?
Cryptocurrencies are digital currencies that are not controlled or supported by any central authority like banks. Instead, transactions and ownership data are stored through distributed ledger technology, such as a blockchain.
Is Investing in Crypto Safe?
Investing in cryptocurrency is a speculative investment, and while investing in crypto would not necessarily be considered a “safe investment,” it can be a viable option for portfolio diversification. Cryptocurrency can be a smaller part of a larger investment portfolio, characterized as a risky asset with more volatility than most investments.
What Are the Popular Cryptocurrencies?
There are many popular cryptocurrencies on the market, but the simplest way to gauge the popularity of a given cryptocurrency is market capitalization. This is the measurement of the total value of cryptocurrency based on the current price and total outstanding tokens in circulation. Here are some popular cryptocurrencies ranked by market cap (as of March 2023):
- Bitcoin (BTC)
- Ethereum (ETH)
- Tether (USDT)
- BNB (BNB)
- USD Coin (USDC)
- XRP (XRP)
- Cardano (ADA)
- Polygon (MATIC)
- Dogecoin (DOGE)
- Binance USD (BUSD)
The Bottom Line
A cryptocurrency analysis involves examining all the available information about a digital asset. Understanding and researching the topic helps an investor to determine its trends better.
