There is no other way to put it: the investment landscape is tense. In addition to distortions in the traditional markets, the crypto market is anything but stable. The fiasco surrounding the FTX exchange has once again shown how quickly prices can fluctuate. But the past has shown that those who sit out such market phases and have a good hand could profit in a few years.
In this sense, anyone who has some money for a crypto investment and follows the fundamentals of countercyclical investing can see good entry opportunities in the current situation. With the right investment strategy, you can significantly increase your chances of a return.
But where to start? The crypto market can seem confusing. Without the right knowledge, you risk making a mistake when you invest. The following pages are intended to show different ways to make a crypto investment.
Crypto Investing: What Factors Are Important When Choosing A Coin?
In order to put together a sophisticated crypto portfolio, an in-depth market analysis is essential. This requires a deep study of the market’s mechanisms and the individual projects. The following factors serve as a guide when composing portfolios:
A project’s use case is one of the most important (selling) buying arguments in blockchain projects. Is the solution to a real problem at the fore here? Or are phrases copied from other (successful) projects simply reproduced in the white paper? The better the use case, the greater the probability that the project has substance. However, the use case evaluation also includes the question of how realistic the implementation of the same is. There is also the question of how likely it is that the respective project will win over the competition. To answer that, you have to balance the use case against the other factors.
The competition analysis is closely linked to the use case. Are there other protocols on the market that serve the same purpose? If so: How likely is it that the chosen coin will win? Is it also possible for several projects to exist side by side? In order to assess this factor, the comparison of the individual market values provides a good first assessment. With a higher market value, the probability that one project can win over the other also increases. However, one must also compare the market value with the age of the protocol. A relatively younger protocol can certainly have a lower market cap and still have a higher implementation potential, for example due to the better token economy (see below) and a better developer community.
the age of the log
How long a protocol has been around can give a good indication of its risk profile. As a rough rule of thumb, the younger a protocol, the higher the risk of error. On the other hand, there are also greater growth opportunities. On the other hand, older protocols like Bitcoin (BTC) and Ethereum (ETH) are unlikely to fail.
Also, when analyzing the age of a protocol, consider the activity of the developer community. These can be read on GitHub in “Commits”. If something is regularly posted here, it’s a good sign the developers are active. Little or no action is a bad sign. So it may well be that older projects with low or non-existent activity are doomed to failure, and younger projects with high activity have great potential.
To evaluate the token economics behind a single project, analyze the white paper. Because there it is precisely defined how a project’s tokens are distributed. If the development team itself holds back a large portion of the tokens, or if a disproportionately large budget is spent on marketing, this is not a good sign. On the other hand, if a large part of the tokens is released to the community directly during the token sale and kept back for technical development, this can be seen positively.
When evaluating the token economy, the technical design of the respective crypto project is also analyzed. If, for example, coins are regularly burned, and the total supply is thus reduced, this can have a positive effect on price developments. However, it is also important here that the token economy fits the use case.
The volatility (price fluctuation) gives a good indication of the risk factor for a coin. If the volatility is very high and the market value is low, one can hardly speak of a safe (crypto) investment. On the other hand, the lower the volatility, the easier it is to put your money into a project without fear of a total loss.
The assessment of the risk factor requires a precise balance between the individual criteria. Factors such as high volatility and young age indicate an increased risk factor. Great (and strong) competition also entails risk. But if the token economy and use case is solid, you can accept it if you have the appropriate risk affinity. If, on the other hand, one of the two latter factors is assessed negatively, the risk factor increases accordingly.
In the second part of our article series on the subject crypto investment we show you different portfolio ideas for 1,000, 10,000 or 100,000 euros.
Disclaimer: Cryptocurrencies are highly volatile. This text does not constitute investment advice and is for educational purposes only. Any investments are made at your own risk. Only invest money that you won’t need in the next few years and never put all your eggs in one basket! This article previously appeared in the December issue of BTC-ECHO Magazine. Go to the store here.
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