How to Evaluate a Cryptocurrency
During this raging hot alt coin season that we’re in, it’s easy to say that every single crypto has “intrinsic value” and it worth billions. I see this everyday. I see thousands of people on reddit, discord and twitter jumping on crypto bandwagons, claiming x,y,z altcoin is “the next big thing” and has “revolutionary tech”. We are in a huge speculative bubble, and so how do you properly evaluate a crypto? (I talk more about the speculative bubble: https://futureoverload.com/2021/02/10/the-crypto-bubble-is-just-like-the-dotcom-bubble/
Unlike stocks, there aren’t easy metrics like a P/E ratios, cash flow, liability to asset ratio etc. I would argue though that a lot of the metrics used in evaluating companies in the 21st century are becoming outdated(I could be wrong about this) and so the way you evaluate cryptos can be applied to companies as well.
How Big is the Problem
One of the key metrics to ask yourself when determining the value of a coin is to analyze how big the problem is. Let’s take the coin STMX for example. This is an app that allows you to get crypto rewards through online purchases as well as specific tasks in mobile games. Therefore I wouldn’t say STMX is really solving any inherent issues in society but it providing individuals with the opportunity to make money through tasks they would normally do. This is a sound idea but nothing earth shattering and so we can almost certainly conclude from an early analysis that this isn’t going to be a top 10 crypto ever (unless they grow and transition into other spaces/issues.
Let’s contrast STMX with a crypto like Cardano. Cardano is looking to provide decentralized banking to billions of people, predominantly focusing on Africa in the short term but quickly expanding across with world with many more services to come. It’s evident that this a much harder problem to solve compared to what STMX is looking to do and therefore the rewards will be far greater if Cardano can pull it off. Do your research, analyze and think deeply about the crypto is looking to accomplish and if their plan to accomplish it makes sense.
Who is Leading the Charge
I’m finding that this is a key factor that a lot of individuals are missing out on. People aren’t treating these cryptos like companies but viewing them as they tech that exist in this imaginary bubble that will explode in value once everyone realizes the tech is good. This is not how it works. The best tech can be easily overshadowed by bad leadership, a disorganized team, a team not paying enough attention to regulations(Ripple being a prime case), or a better or more efficient team operating a different crypto. All of these factors need to be taken into account. Success at anything in life is the result of slow compound growth. Look to invest in cryptos who’s leader is thinking long-term, what is going to be successful 10, 20 years from now not what is going to generate hype or dominate the market for the next 3 years. Consistent 30% returns a year for 20 years is better than 100% returns for 3 years and then a collapse. Don’t get ahead of yourself and be weary of leadership that is getting ahead of itself.
Understand the Tech
This is a crucial aspect of evaluating cryptos and probably one of the harder parts for most of us, myself included. Crypto is complicated, it involves some many different fields of study from science, computer science, economics, politics, etc. There’s a lot to wrap your head around and the tech behind some of these inventions isn’t easy to grasp for mere mortals of the space. I recommend taking your time with it, use different sources like whitepapers, Youtube videos and discussion forums like Reddit. There’s a lot of concepts to learn and understand but with time, it all starts to click.
To understand the value in a crypto, you don’t necessarily need to understand the tech on a deep level. There’s a lot about Cardano’s tech I don’t understand, what I do understand is that I have immense respect for their leader, their approach to accomplishing what they’ve set out is one that I agree with, and from my shallow understanding of the tech, it’s better than a lot of their competitors. I don’t need to have a crazy detailed understanding to know that from my perspective and opinion, Cardano is a once in a lifetime investment. So, do your research, do your best to understand it but also look into the other factors. Not enough people are putting emphasis on business plans and the people behind their cryptos. At the end of the day, the individuals behind the projects are the ones who make it successful.
Obviously this video has some bias to it as its the Ceo of IOG discussing why his project is better but the lesson remains: evaluate your coins, compare and contrast them with their competitors and research what other people more knowledgeable than you in the field are saying. You’ll learn a lot.
At the end of the day, crypto is still a very new industry and there’s a ton of speculation and unknown regardless of who you are and what your research might tell you. The best you can do is most educated, informed decisions based on where you see the world progressing and who and what will be leading that charge. As of right now, I think Charles Hoskinson is that person, and Cardano is that crypto but there’s plenty of other incredible projects and people backing them to choose from. Take your time with, crypto is moving fast now, but its a long game and the financial gains are only just beginning. Let me know what you think and support the blog!