By If you want to know how to analyze and evaluate a cryptocurrency based on these factors, you likely are looking to get started investing in the sector. Here is a quick run of what you need to know:
To start with, though these are great factors to use in developing an investment strategy, they should definitely not be the only ones used when choosing what is the best cryptocurrency to invest in. However, they are a good start and we will attempt to cover them and a few other keys to look for.
Market Cap
The market cap of a coin is the total value of all coins in circulation and is one metric used to determine value. The general way the market cap is calculated is the last traded price, or the average traded price of a coin, multiplied by its total circulating coin supply. For example, in the case of Bitcoin, when a Bitcoin is traded at $10,000, we multiply that by its total circulating supply, 16.4 million coins, to generate an approximate market cap of $164 billion USD. This doesn’t, however, take into consideration on-chain trades or direct person-to-person transactions.
On sites like CoinMarketCap, the average price is determined by the average price of multiple exchanges or marketplaces where trading is taking place. Another major issue is that while market cap can give you a general idea of the current value of a Bitcoin, it can easily be manipulated by a trick called “Wash Trading”.
Wash trading is when two parties trade amongst themselves to create what looks like price movement but really isn’t. For example, let’s say we have a coin with a 1-million-coin supply and we sell you one for $5. That would make the market cap $5 million USD. You then sell me back 0.5 of that coin for $5. The market cap now doubles to $10 million. If we were to sell you back 0.25 of that coin for $5, then the market cap is now calculated at $20 million. So, in 3 transactions, through collusion, we would be able to increase the perceived market cap by 400%. Now, although this is illegal in other markets and known as price manipulation, in the cryptocurrency markets it is actually becoming a much more common practice. This matters, because if we could create enough hype and market movement, a newbie would likely buy in thinking the price is about to skyrocket and we would sell at that 400% increase. They would be left holding the bag and in a position that was far higher than the actual market rate. So, when analyzing market cap as a metric, professional traders look for telltale signs that wash trading isn’t being used as a factor in calculating the market cap of a cryptocurrency.
Volume
Volume is the amount of active trading that is happening of a specific coin. For example, if Bitcoin was to have $100 million in trading volume, and its current price was $10,000 USD, that means about 10,000 Bitcoins are being actively traded. Generally speaking, the more volume, the better for a cryptocurrency, as that means it will be easy to buy and easy to sell. If a coin has low volume, it means that you may need to wait longer to sell it and finding a buyer at the current market price may be difficult. That means that you would either need to keep it for a longer period on the market to get the price you want or reduce your price in order to sell it faster.
Volume as a metric is a great way to tell if a coin is healthy, as it shows the general interest in the coin and liquidity of the market around the coin. If, for example, you see volumes increasing steadily, that means the coin is growing in both popularity and liquidity and could potentially be a good investment.
As mentioned above, however, strategies like wash trading also can create false volume and is very difficult to see, unless you have a strong understanding of market history and statistics. Professional traders can likely see these types of manipulations and even they can find it difficult in coins where bots (similar to A.I., “automated” technology) or whales (big investors) are actively manipulating markets. This is true especially for bigger coins, where volume manipulation can be hidden in normal volume. So, for a coin like Bitcoin, it would be a lot easier to hide volume manipulation than a small coin that has comparatively very little volume historically.
Total Supply Vs. Circulating Supply
This is another commonly used metric in establishing coin value. Circulating supply means the coins that are actually mined or distributed and available for trading. Total supply or maximum supply refers to the total number of coins that the coins script or code will ever allow it to have. For example, in the case of Bitcoin, Bitcoin has a circulating supply of 16.4 million coins as of February 2018. In terms of total supply, Bitcoin has a maximum supply of 21 million coins. By dividing the circulating supply by the maximum supply, you can find out how much of the coin has already been mined or distributed.
In the case of Bitcoin, it’s 16.4 / 21 = 0.78 or 78%. That means that Bitcoin has a very limited amount of coins that are yet to be mined and that the coins in circulation should become more valuable as the supply of new coins dwindle.
Also, as Bitcoins are rewarded in blocks and those rewards are halved every 4 years, the value of coins could potentially increase around these time periods. 2013 and 2017 were both years where Bitcoin mining rewards halved and both years saw substantial increases to Bitcoin value. The next time Bitcoin will half is in 2021 and we should see the value increase further as the creation of new coins becomes harder and less new coins enter the market. This is, of course, highly speculative on BTC remaining dominant in the sector and no other coin becoming more in demand between now and then. This is actually part of the internal building blocks made to increase the value of BTC and help maintain demand growth for the coin.
These are both important factors in determining other currencies’ value as well. For coins that are not minable, for example, based on circulating supply to maximum supply ratio you can determine how much coins can potentially be dumped on the market by the development team of that coin. If the number is too high, that means they could potentially drop the price through oversupply. Additionally, if it is too little, that means a coin growing in popularity will likely see a price increase as demand grows and the supply is inadequate to keep up. This is actually a better metric, in our opinion, to determine the potential of a cryptocurrency than some of the others, as it can’t be manipulated.
Other Factors
While these are some very basic analysis tools that can help evaluate and assess a cryptocurrency, they are actually just the tip of the iceberg in what you should be looking at. Other factors like the potential market of the tech, the credibility of the management and development team, marketability and competition are a few others. Additionally, market variables like regulations or accountability should also be taken into account.
Investing in cryptocurrency is risky and, unlike other markets, is not yet regulated. Though many people have made considerable capital gains in the marketplace, others have also lost capital. Cryptocurrency, like other markets including the stock and forex markets, are investment vehicles that should be invested in only once you have an education and understanding of how they work. Unfortunately, in the cryptocurrency sector, 99% of people enter the sector thinking profits are guaranteed and that is far from the truth.
Most people also opt to not solicit professional advice. In the conventional markets, 99% of investors use a broker or professional trader to manage their portfolios and risk profiles. In the cryptocurrency sector, 99% of individuals attempt to manage their own portfolios. While this can work well in an up trending market, in a down trending market the results can be disastrous. Trading is a profession, just like a doctor or an electrician. While many people can do it on their own, a professional with an education and experience will likely be worth their fees.
Getting the Help of a Professional
One of the main problems with cryptocurrency investing is that finding a broker/trader is hard and most so-called pundits are simply posers looking to swindle newbies to the sector. This has caused a huge divide between those that want to invest and balancing the security of ensuring a professional is actually a pro. CoinBeat looks to bridge that divide and bring professional level support to the cryptocurrency marketplace. Here at CoinBeat, we connect cryptocurrency investors with world-class cryptocurrency traders, who publish daily and weekly market recaps and professional analyses constantly.
While we do our due diligence to vet and ensure only the top-quality writers, analysts and projects get on our site, we also believe that no one should invest without first consulting a professional. Additionally, no one should ever invest what they are not willing to lose, as the cryptomarket is still young and developing.
CoinBeat is also a great way to learn first-hand how to manage and balance your portfolio. For those looking to invest in the cryptocurrency sector, CoinBeat staff traders stay informed and up to date on market conditions and know the tricks in evaluating and analyzing a cryptocurrency.
Getting back to the question, these signals are a great starting point, however, they are not the most important factors in choosing which cryptocurrency to invest in. While they do give you a basic idea about the mathematical fundamentals behind a coin, they fail to take into account many of the more important factors that will affect its performance. Subscribing to CoinBeat may unlock some key analysis to those other factors and give you the edge you need to make profits in crypto.
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