Many long-term cryptocurrency investors who invested in cryptocurrencies years ago have profited immensely. It’s wild to imagine, but in 2010, the price of one Bitcoin hovered at around ONE DOLLAR. In November of 2021 the price of Bitcoin exceeded $68,000. Ethereum (ETH) was worth 34 cents during its ICO (initial coin offering), but it in May of 2021 surged past $4,000. Earlier this year it passed $4,000 again and is presently valued around $2,900, still far beyond it’s ICO price. There are now people that have become billionaires thanks to the cryptocurrency sector.
How do novice investors figure out what token to buy or determine when they should sell? How do you figure out crypto projects’ legitimacy, the right time to take your profits, and whether there’s real market interest in a cryptocurrency or just social media buzz around it that may not last more than a week? What should you even be looking for when investing in an ICO?
There are all sorts of different ways to invest in and trade cryptocurrencies. This is not intended to be financial advice, but rather a guide will to help you analyze cryptocurrency projects more effectively.
Crypto market sentiment
The markets are always susceptible to sentiment, and the cryptocurrency market is no exception. Many projects have benefited from having a buzz around them, whether due to their team, technology, partnerships, or otherwise. If there is a generally positive sentiment about a cryptocurrency, analysts and experts may even begin declaring that the project is a smart potential investment.
We all know and understand that sentiment is very real and constantly affects stock markets worldwide. There are various ways in which market sentiment plays a vital role in the cryptocurrency trading sector. First of all, regulation and crackdowns can affect the markets. Bitcoin has fluctuated in the past depending on regulation from countries like China and Russia. These major headlines can often affect public sentiment about cryptocurrency, even if the effect only lasts several days or weeks.
Sentiment can change thanks to social media hype as well. This was largely the case with Dogecoin, a cryptocurrency that was originally created as a joke. Many of the individuals who purchased Dogecoin did not know or care about the tokenomics or team of Dogecoin but believed that it was an opportunity for a quick profit.
In May 2021, the project reached a market capitalization of $85 billion. It was supported by massive influencers such as Tesla CEO Elon Musk and various other celebrities. After Musk joked about the cryptocurrency on Saturday Night Live, however, the value of Dogecoin fell sharply.
In another example, Litecoin’s price rose significantly after a fake press release mentioned a partnership between Litecoin and giant retail chain Walmart. However, if you entered a trade as Litecoin was breaking $200, there’s a good chance that you lost some money. When it came out that the press release was a hoax, Litecoin tumbled. The market sentiment shifted quickly from positive to negative in this situation.
Sentiment can go in either direction, but it can help investors decide what makes sense for their particular investment strategy or style. If there is widespread doubt about the project or its ability to accomplish what it claims, then there’s a good chance that the token’s value will reflect that sentiment.
Crypto investor trend trading
Some investors choose to “trade the trend,” meaning they hope to profit from a quick move. Trend trading may involve purchasing a cryptocurrency at a support level and selling when there is resistance. Other trend traders may focus more on volume as a buy signal with a particular token.
Many investors rely on technical analysis of a specific timeframe (hourly, daily, or weekly) to determine whether a cryptocurrency is “oversold,” and decide to trade based on the relative strength index, a widely used momentum indicator for stocks.
Other traders prefer to focus on “moving averages” that help chart out a cryptocurrency’s price action over time. More technical traders may turn to candlestick analysis for profitable cryptocurrency trend trading.
The “trend” may even rely more on what other altcoins or projects are rallying or what “themes” seem to be experiencing more money flow and investing quickly to capture potential profits. Trend trading requires knowledge of the proper position sizing of a trade and figuring out when you are willing to cut your losses if the trade doesn’t trend in your favor.
However, smart trend traders also recognize that Bitcoin can be considered a leader in cryptocurrency markets and that even the most promising cryptocurrencies can take a hit if there is a major Bitcoin dip on any given day. Trend traders also recognize patterns, such as the fact that crypto markets tend to experience a lull during the weekends.
Crypto company leadership
It’s easy to see why there would be more interest in a cryptocurrency project with established and seasoned team members. If they have a track record of developing or marketing successful cryptocurrencies, it adds more value and credibility to the project. If you are interested in investing in a cryptocurrency, it may be worthwhile to research past cryptocurrencies that the team was affiliated with.
If you find that a team member previously worked with a cryptocurrency that crashed rapidly, then you should question whether it’s a smart investment. A team member that was previously involved in a scam is an obvious red flag. However, suppose three team members were involved in a successful cryptocurrency (Litecoin, for example). In that case, you may assume that they would only attach their names and reputations to a project with immense potential.
Some investors may require more transparency than others. However, many projects have used fake names and photographs to describe their team, which has led to actual exit scams and rug pulls, resulting in massive investor loss. Recently, for example, a Turkey-based cryptocurrency exchange was able to pull off a $2 billion exit scam.
If a website lists someone as an advisor, see if you can find actual evidence or interviews discussing their involvement with the project. Check if their team profiles are available to examine on other social media networks. If you can’t find social media profiles for anyone on the team, this is a glaring red flag. Many legitimate projects will list full names and information for both their leadership team and their advisors.
Tokenomics
If you are interested in purchasing specific cryptocurrency tokens, you will want to know how those tokens are allocated and distributed. The value of Bitcoin may change, but the fact remains that only 21 million Bitcoin will ever be in existence.
This may sound like a massive number, but there is a world population of somewhere around 8 billion people. The cryptocurrency markets are already worth trillions of dollars. Blockchain is already disrupting finance, so it’s now easy to see why Bitcoin’s value has risen so much over the past decade.
Other cryptocurrencies have token supplies in the trillions or even quadrillions. These kinds of token supplies make it much more difficult for the value of an individual token to rise, similar to how a stock cannot increase in value quickly if there is a massive float. The downside of a token with a low token supply is that its value can decrease quickly because less liquidity is absorbed in the markets.
The tokenomics of a project also explain how that blockchain is governed.
Remember that transactions have to be validated and confirmed on a blockchain network. Tokenomics helps determine how the ecosystem will grow, how the network will be secured/maintained, and how tokens will be created or minted. This will also give you insight into how the actual blockchain works, which may affect your investing decision.
In many projects, tokens represent staking or voting rights, which can be used to help token holders profit or contribute to the overall blockchain somehow. Tokens can also be used for yield farming, and investors should figure out the yield rates for specific tokens. Miners may be interested in determining how much power is required to mine cryptocurrencies, but investors should also remain aware of how the tokens are distributed and minted.
Will there be a “pre-mine” for the cryptocurrency? Will there be a private sale to investors, or will there be an ICO where the tokens are sold? What percentage of the tokens will go to the leadership team or towards marketing initiatives to spread the word about the project and attract more investors? If the project already had an ICO, was it successful, and how much money did it raise? These are common tokenomics questions that potential investors consider.
Lastly, it should be noted that some projects are more involved with regulating the coin’s value than others. The Binance token, or the BNB token, for example, has quarterly burns. After creating the BNB token, Binance pledged to buy back and burn BNB tokens equal to 20% of its quarterly profits. This helps to regulate the BNB token supply more than many other cryptocurrencies that may only feature an “initial burn” for liquidity purposes.
Crypto research due diligence
It’s important to do your own research and due diligence when investing in cryptocurrency projects. Every investor has their own approach to determining whether a crypto investment is legitimate, which might include researching the project’s business model, partnerships, team, whitepaper, and more.
Here are some due diligence steps to consider:
- Examine the website
- See if the project sounds professional in how they present themselves
- Make sure that the leadership isn’t completely anonymous
- Verify if the whitepapers they publish are original
- See whether the token is being discussed on social media or by the cryptocurrency community as a whole
Find out what major cryptocurrency exchanges allow the token to be traded, because there may be liquidity issues if you can only buy or sell the token on one or two exchanges.
Investors should always examine the whitepaper. A cryptocurrency whitepaper should explain the many use cases of its cryptocurrency tokens. For example, there may be a coin that relates to a particular industry. The whitepaper will explain how the cryptocurrency helps address common pain points within that industry and how it will solve them.
Many influencers and celebrities may be associated with cryptocurrencies, but it does not mean that they are legitimate. One of the most infamous scams in recent crypto history was the BitConnect Ponzi scheme, which involved several high-profile YouTubers. Investors lost billions of dollars, and it was partially successful because ambassadors were able to convince their audience that the project was legitimate.
Will the revolution be tokenized?
The cryptocurrency sector moves very quickly, and it can be difficult to tell what trends will prevail next. However, there is no doubt that blockchain technology will be crucial to shaping the overall future of the cybersecurity industry.
The blockchain has already been used to tokenize real-world assets, and that trend is likely to continue, though the questions remain:
- How will those tokenized real-world assets be regulated in the future?
- Will credit card tokenization eventually fade away and be replaced with the blockchain?
The goal is similar, since both deal with the issue of making data simultaneously usable but secure. Blockchain is not a temporary solution for the data security industry: it’s a complete game changer.
About the Author
Michael Hearne
About Decentral Publishing
Decentral Publishing is dedicated to producing content through our blog, eBooks, and docu-series to help our readers deepen their knowledge of cryptocurrency and related topics. Do you have a fresh perspective or any other topics worth discussing? Keep the conversation going with us online at: Facebook, Twitter, Instagram, and LinkedIn.
