Digital currency, 4 tips on how to choose the right one
Digital currency, we think they are all the same. Wrong! No, they are not. The basic concept of cryptocurrencies may be the same, but cryptos differ in the functions and roles they perform. This is because they each serve multiple purposes.
Bitcoin, for example, was built to be used and spent like a Digital currency, Ripple to speed up cross-border money transfers. Basic Attention Token meanwhile it facilitates online advertising. Before venturing into a deeper understanding of Crypto, learn about the Bitcoin Price.
Although Bitcoin was the first digital currency and is currently the most popular cryptocurrency, it’s not the only one out there. An ever-growing swarm of alternative currencies (altcoins) has come up. This is the result of the various use cases and niche solutions that the underlying technology behind Bitcoin can offer.
Presently, there are about 4,000 digital currencies listed on CoinMarketCap a cryptocurrency tracking website. And according to other crypto tracking sites like DeadCoins and Coinopsy, about 1,000 different cryptocurrency-related projects failed in 2018.
With so many options on the market to choose from, it can be difficult to identify a good digital currency to trade. Since no one likes to invest their hard-earned money in a dead coin or one that will later fail. We will guide you on what things you need to be looking at when choosing a cryptocurrency to invest in.
Understanding what digital currency you should invest in, is more important than investing it.
A car salesman for example, who makes a living buying and selling cars will have a higher chance of trading at a profit if he understands the underlying benefits each of his cars has. While we design some cars to provide convenience and others for comfort, some are designed for speed and others are simply for status.
This car salesman does not have to understand how a car’s engine works to be able to sell the car. Neither does the buyer he is selling it to.
What any car user is more interested in and paying to have, is the kind of experience they will get from that car when they start driving it. It is what every car buyer is after and once that value in that car ceases, the car is said to be worthless or useless.
In the same way, you don’t have to understand every single technical detail of all the cryptocurrencies to be able to trade them. What is more important is to understand its underlying value.
When trading crypto assets, it is the intrinsic value these digital cryptocurrencies possess that you should understand and not the technology per se. In other words, it makes more sense to use a value-investing strategy when trading cryptocurrencies.
Why you should approach digital currency investing as a value investor?
Value investing is a strategy of investing where you select assets that currently trade at a price less than their fair values. Investors using this strategy believe that if you know something’s worth, you can save money when you buy it at a price commensurate to its value.
In the car sale analogy above, one of the car brands could be selling at $30,000 during a holiday season, and sell different market price during other times of the year. However, these price changes do not alter the fundamental experience. Its comfort, safety, status, convenience or speed does not change.
A value investor, therefore, is one that would approach the car seller or wait for the right time. The Investor would wait to pay an amount or value for the car that is fair to him/her (buyer) without putting the seller on the losing end.
Value investing requires that you do some investigative work to identify good digital assets and cryptocurrencies. Buy them at a price equivalent or below their fair value, and hold onto them. Sell them off later when their market price reaches or exceeds their fair value.
To identify a cryptocurrency whose value is likely to grow 100x or more and earn you a good profit along the way, you shouldn’t focus on its price. The value of the digital currency does not have much to do with price. Instead, it has everything to do with market cap.
The price of a digital currency doesn’t matter. Supply, Volume, Market Cap, and Growth potential do.
When evaluating a cryptocurrency, you want to look into its growth potential, market cap and trading volume. This will give you an idea of the collective importance and significance all investors have vested in that asset. The demand for the asset compared to how many units of that asset (supply) are available. That is what gives an asset its worth and not the price tag reflected on a single unit of that asset.
So here are 4 useful factors you must consider when choosing a valuable digital currency to invest in?
1) A cryptocurrency with lower supply is more likely to give you a faster ROI:
There are several categories of supply but for simplicity, we will focus on the Circulating supply of digital currency. We define it as the units of cryptocurrency which have actually been mined and are currently distributed throughout the public.
We calculate it as Supply = Market Cap ÷(Price of the Coin). Data on CoinMarketCap shows that coins whose circulating supply is less or within the range of 50-100 million coins, experience faster price moves whenever demand increases, compared to those whose circulating supply is higher than that range.
Let’s imagine 2 scenarios of a Digital currency project- XYZ:
Scenario 1 (10 million coins):
Assuming this project has released a supply of 10 Million XYZ coins to investors. How much money (market capitalization) will this project have to raise from investors to reach a price of $10? Using the formula, Supply = Market Cap÷(Price of the Coin), the total investments in XYZ coin would have to be just $1 million for the price of XYZ to reach $10.
Scenario 2 (10 billion coins):
Assuming the XYZ digital currency project has, instead, issued a supply of 10 billion XYZ coins to the market. How much money (market capitalization) will this project have to be worth, for each token to reach a price of $10? Computing with the same formula above, Market Cap= 10 billion÷($10), this project will have to receive $1 billion in total investments. $1 billion for the price of XYZ to reach just $10. Unless this XYZ coin is extremely attractive to investors (has growth potential), it is going to take a lot of effort and time. A long time for this crypto project to raise $1 billion from the public. And the longer it takes for the project to raise $1 billion market cap, the slower it is for the price to go up too.
From this observation, we can see that the more limited the digital currency coin-supply, the faster it is for the coin price to go.
In the second scenario above, if you the investor have, for example, got in early and put your $1000 in XYZ coin when the price is still at $0.05 each, it may initially look exciting when you receive 50,000 XYZ coins in exchange for your money.
In fact, you might even start imagining yourself becoming a Crypto millionaire soon when the price of XYZ hits $10 and you sell off just 1000 of your XYZ coins. However, with such a huge circulating supply of XYZ coin on the market, the price of XYZ could take forever to climb up to $10. This will be forcing you to either hold your 50,000 XYZ coins for much longer or opt to sell them off earlier at a lower price.
As a value investor in this crypto space, therefore, what you should be focusing more on, is a coin’s supply. Because the supply directly influences the coin’s price and it will affect the Return on your Cryptocurrencies’ Investment (ROI).
2) A digital currency with higher trading Volume is a safer investment.
24-hour Trading volume is the total number of units of a cryptocurrency that have been traded or have exchanged hands, in the last 24 hours. It is important because it tells you how fast and easily you can buy or sell that cryptocurrency. The higher the volume, the quicker it is for you to trade off your coin. This is because a buyer or seller will always be present in the market to fill up whatever amount of market order you initiate.
For example, let’s say you have just bought some cryptocurrency XYZ and those XYZ coins are worth $20,000. You may be excited to have a hold of $20,000 worth of your favourite coin XYZ in your wallet, but if the daily trading volume of XYZ cryptocurrency happens to be $500 only, you are going to have a hard time selling off all of it off later. If you do sell, you will only manage to sell off just $500 worth of XYZ immediately and not the entire $20,000 worth of XYZ coin.
In other words, when you execute a $20,000-XYZ coin sell order, there won’t be a corresponding volume (buyers) on the market to eat up that entire chunk of XYZ coins. There is no volume on the other side of the order book that can match the sale offer. It might, therefore, take you about 40 days ( $20,000/$500 per day) for your $20,000 sell offer to get filled, assuming you sell-off only $500 worth of XYZ every day.
Low volume means low liquidity and low liquidity means delays in getting your cashback. What you should be looking for is a digital currency that is much easier to liquidate. This ability to easily cash in and out generally makes a cryptocurrency with a high trading volume much safer and more valuable to invest in.
3) A cryptocurrency whose Market capitalization increases, is a much more valuable investment, even if its price looks low.
The market cap of a cryptocurrency is the total value of all units of that currency that are currently circulating.
We can also define Market Cap as the collective amount of Fiat currency (USD, EUR, or GBP) invested in digital cryptocurrencies. It is an indicator of how popular a cryptocurrency is. A measure of how much the public values a cryptocurrency. It is a sign of how much people have bought into that company or its vision.
When a cryptocurrency’s market cap increases. the value of that digital currency increases too and vice versa. For example, currently, Bitcoin-cash’s price is at $206.57 and Ethereum at $141.87 but the latter is currently more valuable. This is because its market cap is $11,713,496,128 higher than that of Bitcoin-Cash. Even if the price of one cryptocurrency is less than $0.05 for example, it could be as valuable or even more valuable than another cryptocurrency with a price of say, $500.
For clarity let us make a comparison between two cryptocurrencies’ ranking No.31 and 32 respectively on Coinmarketcap:
- Dogecoin currently has a market cap of $263,266,877, Price of $0.002150 per coin, and Circulating Supply 122,465,637,766
- Zcash currently has a market cap $258,946,786, Price of $32.00 per coin, and a Circulating Supply of 8,091,406.
Assuming you had $1000 to invest in any one of these two coins which one would you invest in? Dogecoin that costs less ($0.002150) or Zcash that costs more ($32.00)? If you bought Dogecoin for $1000, you would get 465,116 Dogecoins. If you buy Zcash instead, you’d get 3 Zcash coins.
Now if investor awareness and perception about these two digital currencies increase, it would result in higher adoption and usage of Dogecoin and Zcash. This would then cause their ecosystems and consequently market caps to grow.
Example of Market Capitalisation as a leading force.
As an illustration, let’s say that both these cryptocurrencies´ market cap increase by $600,000,000 each, as a result of the increased demand. If this happens:
- Dogecoin’s market cap would grow from the current $263.4 million to about $863.2 million. And the price of Dogecoin would then become $0.007049 (Price= Market cap÷Circulating supply). An increase in Dogecoin price from $0.002150 to $0.007049 is a 230% gain.
- Zcash’s market cap would grow from the current $258.9 million to about $858.9 million. And the price of Zcash would become $106.1 (Price= Market cap÷Circulating supply). An increase in Zcash price from $32.0 to $106.1 is also a 230% gain.
The gains from both cryptocurrencies are identical. Therefore, as a value investor, it doesn’t matter whether you invest your $1000 in a low priced coin like Dogecoin or a higher-priced coin like Zcash or Bitcoin or Ethereum. What matters is whether the market cap of that cryptocurrency you are about to choose will, or will not increase.
Don’t fall in the deception most inexperienced cryptocurrency traders fall in. They associate the behaviour of the price of one cryptocurrency to the price of Bitcoin. For example, some newbies think like this, “Bitcoin moved from $50 to 15,000$ in 4 years so if invest in this XYZ coin now, while it is still at $0.05, I will be very rich when XYZ coin goes up like Bitcoin.” This line of reasoning is very wrong and will cost you your investment.
Instead, what you need to be asking yourself when choosing a cryptocurrency to invest in, is “Is XYZ Coin’s Marketcap likely to increase?”
4) A digital currency with the highest growth potential attracts public adoption.
For a cryptocurrency to grow, there has to be a reason why people would want to use it. And they also have to trust it. By analyzing some fundamental qualities about the cryptocurrency, we can gauge if cryptocurrency has the potential to grow.
Good growth prospects enhance public perception and confidence in the cryptocurrency and encourage people to adopt it. This consequently boosts its market cap, making the cryptocurrency even more valuable. As a value investor, you need to take some time to vet the project behind the cryptocurrency. You must make sure you know if it has substance and potential or not.
Ask yourself these 5 questions before investing in Cryptocurrencies
By asking the following questions, you will begin to separate the wheat from the chaff. It will help you filter out the valuable cryptocurrencies from the worthless:
What is the cryptocurrency’s value proposition?
Cryptocurrencies that are worth trading are the ones that have a clear and compelling use case.
What is the competitive advantage of the cryptocurrency?
A compelling use case is not enough if there are other competing solutions with the same use-case. A good digital currency project provides a solution like no other.
How robust is the infrastructure?
If the cryptocurrency is already functioning, try it out. Visit the official project website and download the cryptocurrency’s wallet. You can also buy and sell, deposit, withdraw or send some coins to get a feel of it. Test the technology and the entire ecosystem of that cryptocurrency if possible. If the user experience is flawless and if there are minor or no incidents of whistleblowers reporting technical failures, then that cryptocurrency stands a high chance of getting accepted.
Who is part of the team?
Analyze each team member’s profile. Focus on the quality of the team members and how committed they were on previous projects. If a crypto project is going to attain long-term widespread adoption, it needs a committed team. We measure commitment by how well a past crypto project assignment performed and not by how many past crypto projects someone worked on. So vet the team members carefully to judge if they are dedicated to the project.
How active is the community?
If a cryptocurrency’s community is active, it increases investor interest in the cryptocurrency.
Last words, Choosing wisely
We shouldn´t take lightly the decision to purchase cryptocurrencies. There is a variety of Digital currencies each having a unique use-case and growth potential. However, you will be able to identify the right digital currencies to trade if you:
- Analyse the cryptocurrencies with a low/high market cap
- Their potential to grow
- Its trading volume
- The coin´s controlled supply