This guide is for those who are interested in investing in cryptocurrencies or ICO tokens, understand that it is high risk, but have no idea what to look for in the 1500 coins and tokens available. It is not intended as financial or investment advice, and does not make any specific recommendations. Its purpose is to give you an idea on what information you need to find, where to find it, what it may mean, and potential questions you need to get answers for. It is not a set of rigid rules, and there are always exceptions, but if a coin you are researching has too many red flags, you may want to look elsewhere.
This guide isn’t based on proven investment theory, rather it is an observation based compilation of what we have witnessed within the industry over the last 4+ years. Think of this as some of the missing parts to the standard advice of “do your own research”. Never accept a buy recommendation from anyone at face value – educate yourself, and always make your own decisions.
First of all, are you investing or gambling? If all you are looking for is to actively trade the wild volatility, or to gamble that there will be a greater fool than you willing to buy a bag of hot air off of you, this guide doesn’t apply. If you are worried about being that ‘greater fool’ yourself, then you should definitely read this guide.
Investing in cryptocurrency is different than investing in the shares of a company. Honest cryptocurrencies have a different distribution method and philosophy. They should have been both fairly and widely distributed at launch and beyond, through mining, giveaways, bounties, contests, etc. They have been built by a community of people that believe in the project, with the door open to anyone wanting to join and help with the success of the project.
For Your Information...
Due Diligence is taking reasonable measures to educate yourself on what you are investing in or recommending to others, including gathering all pertinent information required to determine the level of risk – in other words, doing your homework.
How much do you know about cryptocurrencies such as Bitcoin? Do you understand the difference between them and Initial Coin Offerings (ICO)? You don’t have to be an expert, but the more you know about cryptocurrency, specifically what it can and can’t do, the greater your chances of success are, and the less likely you will be a victim of fraud.
If Cryptocurrency Confuses You… Start Here – it’s free.
You can’t get an accurate cryptocurrency education from the mainstream media, nor do you need to pay for one. Steer clear of paid education packages or recruitment schemes of any kind – they have been linked to numerous scams. Spend some time learning about cryptocurrency for free on DNotesEDU. If you want to pursue further education, we have links to free courses from beginner to university level – See Cryptocurrency Education
Step one is to pare down the overwhelming list of 1500 coins and tokens. Whether you are a day trader or a long term investor, BitScreener is by far the best place to start screening cryptocurrencies and tokens. It allows you to narrow down coins using your choice of filters including marketcap, exchanges, price, performance (1 hour to 1 month), 24 hour volume, age (3 days to 5 years), type (currency or token), gainers, losers, and more.
The example below is not a guideline to follow on what filters to use or what parameters to set, it simply shows how the filters can pare down your selections.
As a new investor Jessie may be worried about scams, the project flopping, or too much competition from copycats. Like everyone else, she wants to find ones that are undervalued and have the best chance of long term success.
- The first filter she decides to set is the “age”, figuring that if they have been around for 2 or 3 years, they must be legit.
- She can tolerate risk, but not the extreme risk of ICOs, so she selects “coins” only from the “Type” selection.
- Using these two filters only (age = 3 and type = coins), narrows the the number of choices from 1500 to 260.
- She is worried about project abandonment or that it may have already happened, so decides to screen out those with a really low marketcap. The lowest choice is “over $1 million”, and when that filter is selected, it lowers the choices to 176.
- Some of them have little or no volume, so worried about a severe lack of demand, she selects the volume filter for “over $1k”. There are now 142 left.
- She uses the price filter to choose a currency where she can get a lot of coins, not just a tiny fraction of one, even though she realizes it may have nothing to do with the value. This brings the count down to 108.
- She doesn’t want anything that has already exploded in value, so excludes those with a marketcap over 50 million (there isn’t a choice for this range so she has to look through the 108 manually). With them gone, she is down to 88.
- She goes through the remaining coins and leaves out those that have had astronomical gains in the last 6 months, and those with too many coins (are 100 billion coins making the marketcap huge for no reason?). She’s not sure, so leaves them out. She can always add them back later. There is no filter for number of coins or 6 month performance, so the checking starts here. When done, she is down to 30.
- Hoping for a bargain, she can check out those that went down recently, change some of the filters if desired, or go with her pared down list of 30 and start gathering intel.
Market cap is an easier way to determine the size of a company, rather than assigning an ever-changing value representation of its assets and sales figures. It is calculated by multiplying the number of outstanding shares of a company by the market price of a single share. In the stock market it is an important metric used in investing in order to determine risk, among other things.
“Large-cap companies typically have a market capitalization of $10 billion or more. These large companies have usually been around for a long time, and they are major players in well-established industries. Investing in large-cap companies does not necessarily bring in huge returns in a short period of time, but over the long run, these companies generally reward investors with a consistent increase in share value and dividend payments.” Investopedia
This criteria of well established companies with assets, revenue, and a long history of consistent returns for shareholders, does not extend to the marketcaps given to cryptocurrencies or ICO’s. There is a good reason the stock market doesn’t use assets and sales figures to determine market cap, but that doesn’t mean they don’t have any.
In cryptocurrency, marketcap is just a number, and a poor gauge of success or underlying value. It has been adopted by the industry using the outstanding coin supply X current market price per coin only, neglecting to take into account the almost total lack of assets and revenue they have. Sketchy projects sold on unregulated exchanges around the world, make it easy to have the appearance of a high marketcap. Even though bitcoin, with the highest marketcap of all, has no asset or direct revenue backing, it is so widely dispersed, beginning to appear in traditional financial products, and acts as the reserve cryptocurrency, it may retain its top spot for the foreseeable future. What the price will end up at is anyone’s guess.
The ability to manipulate the marketcap of a coin or token, makes “buy the top 10 or 20” perhaps the worst investment advice given in cryptocurrency. We have a long way to go, before any potential blue-chip cryptos turn blue.
To narrow things down, and find the projects with potential, it may be a good idea to reverse engineer a coin’s marketcap to see what was used to build it. Does it have the foundation to support such a high valuation? Remember, a whitepaper is just a plan, tech can be copied and improved on, securities regulators are taking aim at ICO’s, and there are a lot of bad actors taking advantage of people. If the project doesn’t have any assets, revenue, a working product or platform, partnerships, etc, the valuation may represent nothing more than pure speculation, or worse – nothing at all.
- Is the high market cap realistic and legitimate? Does it look like this:
- High market cap = high volume = high number of exchanges listing it = some (or most) of the exchanges are from the U.S. or other country with customer protection regulations
- Have they built their way up in value over time (check the chart), or did they explode onto the scene with an overinflated marketcap. There is VERY little upside potential if they are already priced at the level of a profitable established business.
- If you are looking at ICOs – unless the token is a utility token and has a specific purpose of which the project can’t function without, it may have no value at all. Proceed very cautiously and read the ICO module.
- Make a comparative list of the marketcaps of the coins you are checking, and what each of them has done to earn that market cap.
Watch out for fake volume in large marketcap coins that record very high daily volume:
- If most of the volume is coming from a single exchange in a country that has loose securities laws, it is questionable.
- Is most of the daily volume coming from only one or two exchanges?
- Are these exchanges located outside of countries like the U.S. and Canada that have strict regulations protecting investors?
- If the coin or token reports a high daily trading volume, is legitimate and operating legally, wouldn’t all exchanges want a piece of the action?
- If you are an active trader, you will want to stick with high volume coins. Make sure there is high volume on exchanges that you plan on using.
If the volume and marketcap are low:
- There may be more to it than a case of low demand or lack of support for the project.
- Are they keeping a low profile for a reason?
- Are they working behind the scenes or not interested in over-hyping their coin?
- Most importantly, are they doing something different that the ‘tech is everything’ crowd? The volume may be low because the heavy-trading ‘tech crowd’ doesn’t get the significance of what they are doing. You may not understand the technology, but does their business logic and plans make sense to you? Is there mainstream appeal ? Are they working on something the average person will understand, use, and/or benefit from? If they already have accomplished some of their goals and have working models, assets, or incoming revenue, it is a good candidate for further study.
You can find volume and exchange information on CoinMarketcap.
- Select the “Name” of coin or token you want to check
- Select “Markets” (beside charts)
- This will show you all the markets (coin pairings) and exchanges for a particular coin or token. It also shows what % of that coin’s daily trading volume is conducted on that exchange.
- “Markets” page for Bitcoin – https://coinmarketcap.com/currencies/bitcoin/#markets
- Volume by exchange – https://coinmarketcap.com/exchanges/volume/24-hour/
- Both BitScreener and CoinMarketcap list the exchanges that a particular cryptocurrency or ICO token is sold on.
- Check the origin of the exchanges that the coin or token trades on. Exchanges from countries that enforce consumer protection and securities regulations such as the U.S., won’t list suspect cryptocurrencies or unregistered ICO tokens that will get them into legal hot water.
- For example Poloniex, an American exchange, will not list any ICO tokens that are securities. Prior to listing, they conduct their own “Howey Test” to see if the ICO token meets the definition of a security. They will also delist any tokens if at any point, they meet the criteria for a security. https://poloniex.com/press-releases/2017.08.17-Token-Listing-Policy-Reminder/
- If you are looking at ICOs, check whether or not they are listed on Poloniex. If Poloniex considers them to be a security, there is a good chance the SEC will as well.
- Note: Smaller marketcap coins may not trade on large American exchanges simply because they don’t have sufficient daily volume.
- Information on 130 exchanges listed on CryptoCoinCharts – https://cryptocoincharts.info/markets/info
- Information on 181 exchanges listed on CoinMarketcap – https://coinmarketcap.com/exchanges/volume/24-hour/all/
- See Exchanges module for more information.
- This may be one of the most important criteria in an industry where a lot of new projects are created to get pumped, dumped, and abandoned.
- If you are looking for a long term project backed by a team that genuinely wants to make a difference in the world, you may want to look into ones that have been around a while.
- After a few years of operation, they should have a track record of carrying through on promises, and have built something that contributes to the value of the coin.
- In one year (ending January 28, 2018) the number of listings on CoinMarketcap exploded from 682 to 1474. New releases can be very risky.
With government regulators scrutinizing the industry, it is a good idea to make sure the currencies or tokens you are considering, are following the rules. This is especially true of any Initial Coin Offerings (ICO), which most regulators agree, meet all the criteria of a security. Without registration with the securities regulators in certain countries (U.S., Canada…), these unregistered security tokens cannot be sold to citizens living there, regardless of where the issuing ICO business is located.
- Were the terms, rights (or lack of), expectations of profit, and the purpose of the token (it’s necessity in project functionality) clearly articulated with no grey areas?
- Where are the project developers located? Is the country cracking down on scams, and do they have consumer protection rules?
- Have they consulted with a reputable lawyer on this project? Is there proof? A quality project that is aiming for global mainstream adoption will have researched every potential legal issue.
- Are they in full compliance of security regulations in the country you reside in?
- Are they operating as an unregistered security?
- See Regulation and ICO
- To date there are no accurate valuation models, and if market cap isn’t an indicator of cryptocurrency value, what is?
- The currencies that will best withstand the wild volatility and the inevitable culling of the herd, will be those that have intrinsic value.
- What is the business is really worth? If it does not function as more than just a speculative coin or fundraising token, or targets a niche market only, it will inevitably fall out of favor and be replaced by any one of a thousand copycats.
- Value can come from income producing properties, assets, unique blockchain applications and systems that will be difficult to replicate, a viable business model, and good leadership.
- If a particular cryptocurrency is aiming for mainstream adoption, what steps have been taken to make things easy for beginners? Is there a TRUSTED & secure web wallet? Better yet, is there a vault? If the only option is to download a wallet (onto a phone or computer) that requires updating and maintenance, the chance of mass adoption may be greatly reduced. Does what they are working on make sense to you, even if you don’t understand the technology?
- Do they have a solid PR and marketing plan?
- Are they blazing their own trail, or following the herd and competing with hundreds of other coins for the same and/or limited market?
WHERE TO GO FOR INFORMATION
- Almost all cryptocurrencies use the announcement board on BitcoinTalk – https://bitcointalk.org/index.php?board=159.0
- Check out the most recent posts of any coin you may be interested in.
- Is the forum still active? If not, have they moved the conversation somewhere else? Or has the project been abandoned?
- If the forum is still active, check out the opening post on page one.
- There you will find the coin’s purpose, specifications, wallets, what they are working on, roadmaps, website and social media links, associated properties, press releases, exchanges it trades on, etc…
- Read as many recent pages of the forum as possible. You may feel you don’t have the time, but neither does a busy development team when the same questions get asked over and over. Be considerate of their time – check to see if the question has been asked or if they have a link to “frequently asked questions” regarding their currency.
- Is there intelligent conversation going on regarding ideas, projects, what’s going on in the industry, etc?
- Is the original developer(s) still there? Check their posts & those of other team members. It makes finding important information much faster when you don’t have to wade through all the “to the moon” posts.
- Ask questions on the forum.
- What specifically gives their coin value? Is there anything of tangible value (something that provides a revenue stream such as a business or platform, or signed contracts for its use by a large company, etc) that will act as a floor price should the market crash.
- Since ICO tokens generally have no stake in the company or any other rights, it is especially important to find out if there is any benefit to you in buying one at all.
- Take everything you read with a grain of salt, as there are a lot of self-promoters and grandiose plans that never get carried out.
- Their website should give you specific details on the project, roadmaps, verifiable team members and advisors, where they are located, and contact information.
- Since all cryptocurrency news ends up on Twitter, it is a good place to keep up to date on what is going on. Use it as a starting point only, because where cryptocurrency is concerned, most “hot Twitter tips” fall into the ‘fake news’ category. Don’t assume anything is fact until you have proof.
- Follow the reputable news sites that focus on cryptocurrency. This gives you an overall industry snapshot, but be cautious, there can still be self promotion of any coin the author has a vested interest in.
- Follow their progress on social media, and sign up for investor/community notifications if they offer it.
The Buck Stops Here – The Team, the Project, & the Vision
Great ideas don’t turn into success on their own, you need to look deeper….
The greatest success in a new venture comes when there is a visionary at the helm – someone that can see around corners, anticipates problems, and can see exactly how their products will both merge with, and improve on current systems. They seem to know more about the competition than the competitor knows about themselves. A visionary would have done extensive research on the cryptocurrency industry before launching.
Since most of the technology in cryptocurrency is open-source and easily duplicated, a visionary will not settle on running a coin project that has nothing more to offer than the latest upgrades in flashy tech. To achieve success, they will look to build a complex ecosystem capable of merging seamlessly into the business and financial world. Building blockchain technology into the components of the ecosystem, will make their business model extremely difficult to replicate.
Research the team:
A list of team members and advisors should be on their website. It is common to see numerous names listed in various positions, sometimes with impressive (or obscure) sounding titles. Before you ask questions on their forum or by contacting the team, gather as much information as you can through your own research. You should be able to search the key players on Google, LinkedIn, social media, etc, and find information on their history.
Tips & questions that need answering:
- Advisors – Find out if they actually do anything, or are they just a paid figurehead?
- In what way and how often are they are contributing?
- Are they there for the long haul, or did they agree to have their name associated with the project launch only?
- Did they receive any compensation? How much? Were there any stipulations attached?
- Get to know the team – What is their pre-cryptocurrency background? Have they worked together in the past?
- Do they have business experience (this is very important)? Have they taken on any large scale projects before?
- How long has the developer and team members been with this project?
- If it is less than a year, ask what cryptocurrencies they worked on before. Do they have a record of not sticking around, and jumping from one project to another?
- If the same team has been together for years, it a good sign of their level of dedication and belief in the project.
- If you haven’t found the answer to something, ask the question on their forum. Are they helpful?
- If you like what you see, you can join the community and contribute to its success even if you don’t have a technology background.