7 steps to evaluating the value of a cryptocurrency
We provide a detailed formula for evaluating a variety of cryptocurrencies such as Bitcoin (BTC), Ethereum (ETH) and Ripple (XRP). By the end of this step-by-step guide, you will be able to evaluate and trade any cryptocurrency listed on the marketcap.
Let’s talk about how to evaluate the thousands of tradable cryptocurrencies.
We will give you the tools and skills needed to figure out what matters and help you find the right tokens. There are fundamentally 7 factors when evaluating a cryptocurrency, to find out what actually makes a crypto company a good business and in turn worth investing into.
Let’s dive into it.
1. The team behind the project
The first and most important business factor is the quality of the team behind the project. Whilst looking at the team what you want to see is a diverse mix of business and technical people, as crypto is the application of technology to business. What you also want to see is a good track record of somebody in the company, within the cryptocurrency or blockchain community. Preferably a highly technical individual who understands the blockchain. You can see if the team has previously built open source projects, for example, a site such as Github that can host open-sourced software.
Doing intensive research on the team behind the project is one of the main ways of determining if the crypto project is a scam. This is especially important when looking at a new/ promising Initial Coin Offering (ICO).
Many new cryptocurrency traders often make mistakes when assessing project teams, especially Hard and Soft Forks. For example, there is a lot of excitement around the forks of Ethereum and Bitcoin. It’s important to note that the fork isn’t necessarily the same team as the main/ core blockchain. The teams behind forked blockchains often lack the vision and technical skills of the founding teams behind the core blockchains, and as a result, are typically less attractive opportunities for cryptocurrency investors.
2. Product use case
The second most important factor is a product use case, does the digital asset have a strong use case to gain wide-scale adoption? Without adoption, a cryptocurrency is simply just a long string of code on the internet. Ask yourself if you would use this token in your daily life? Or can you see someone else using it? The main thing to remember when evaluating a cryptocurrency is whether or not the product behind the cryptocurrency solves or will solve an important problem for a vast amount of people. You want the cryptocurrency to solve a big problem for a broad number of people. Remember, the more a cryptocurrency is used, the higher the value.
When trading or investing in any asset, especially cryptocurrencies, it is essential to not let your emotions overcome your reasoning and judgement. For example, as a cryptocurrency trader, you don’t want to invest in a project that is aiming to create sustainable energy specifically in Capetown, South Africa. Instead, you want a project that is aiming to create sustainable energy from the entire African continent or perhaps the entire world!
You must ask yourself two questions. Does the target market have the potential to grow? And, are there people out there who WANT and NEED this product right now?
Currently, the cryptocurrency market is heavily focused on products that solve problems for the existing crypto community rather than products that solve problems beyond the crypto community. For the cryptocurrency market is going to grow rapidly it needs to become much more diversified, a cryptocurrency exchange ICO pops up near enough every day. This niche has become very saturated unless this ICO has a plan to revolutionise cryptocurrency exchanges, why bother? You want to find projects that have the potential for wide-scale of adoption outside of the crypto/ blockchain space, in booming industries such as Transport, Education, Agriculture and Healthcare.
The third factor is traction, how effective and efficient are the team delivering on their vision? In the best case, the team already would have a minimum viable product, at least some technology that they have put together. The company behind the cryptocurrency should have a roadmap that they are following strictly, which can usually be found on their website. A roadmap is similar to a business plan, outlining the business goals and deadlines for completion.
If for any reason the team is not following their roadmap or going, this is usually a red flag. Showing the team is not stable and has lost track of targets. This will cause FUD (Fear, Uncertainty and Doubt) for investors. Making them likely to sell their crypto holdings, driving the price down. As a trader, it is a great opportunity to either sell your holdings if the team is going of course on their goals or open a sell position to make a profit.
However, if the team is delayed on a deliverable in the roadmap, but has been transparent with the community. This is a good sign and giving investors a sense of trustworthiness towards the team.
The fourth factor is competition, did the team pick something new or are they entering an already crowded market? Since the cryptocurrency economy is still so new and in its infancy, there is a huge variety of opportunities for companies to build completely new and fresh ideas. However, you want to find an industry that the team is able to build a strong defensible position. Can the team be the best in their space? Is there some technology underlying the token that gives the token a long-term competitive advantage?
You will often find crypto companies creating alternatives for existing companies in the traditional economy. Since blockchain technology allows us to make transactions faster, more secure, more accessible and transparent.
5. Legal status
The sixth factor is one of the most important, the legal status of the company. Cryptocurrency regulation is somewhat confusing, to say the least, due to the decentralised nature of cryptocurrencies companies are often faced with challenges to get licenses to operate in certain countries. Some regulators such as the SEC have straight up banned ICOs int heir jurisdiction. I mean it can even be a headache for a cryptocurrency trader to work out how much tax to pay on their crypto.
Researching where a companies legal status is will help you understand if the token or project is a fraud or scam and built completely out of thin air. You may what to also work out if the token a utility token or a security token. Read our STO explanation to understand the importance and differences.
The seventh factor is other investors, who are invested in this company. Is the company only an Initial Coin Offering or has the team already been backed by a venture capital firm prior to the ICO? Typically a company that has already had a collection of legitimate and reputable investors will do better than one without. Clearly, the invested company has seen some value to this project and feel as though it will do well.
7. Market cap
The last factor is the size of the market cap, ideally, you want to see a $1 Billion market. A high cryptocurrency market cap enables the team to try a variety of different things and products, whilst still maintaining a profit.
These 7 steps are just a simple framework to evaluate the fundamentals of token-based projects, we’re not trying to create complex formulas that define what the exact value of something should be. Following the steps outlined here and you will know which projects have long term value and which coins are just based on hype.
Value is relative; we think that cryptocurrencies will continue to grow in value over the long-term and we also think there are tremendous misallocations right now between projects with in-the-moment value and projects with long-term fundamental value. By focusing on fundamentals, we think it’s possible to benefit in the long-run.
Of course, all of these factors can also be applied to traditional markets and companies such as Forex and Stocks.
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