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By Matteo Pecar.
When someone new wants to approach the world of cryptocurrencies, maybe try to buy and use them, how to proceed is all but obvious.
After the first challenging steps, which I will probably dive into another time, and once having bought some Bitcoin or other few mainstream cryptos, the second step is start wondering about the thousands of different tokens that exist.
What are they? are they all a scam? (Most of them, likely yes!); but at the same time some of these projects have a good idea with a good team behind it, and they represent an opportunity.
Many insist that Bitcoin (and maybe few other coins) are the only real valid technological application for open blockchain; while on one hand, I share several of their arguments; on the other hand I think it is necessary to keep a very open mind to what may be possible in an industry that is newborn, full of smart people (many are moving from Wall Street, and Silicon Valley into the crypto industry), and with a lot of undiscovered potential.
It all starts from you, and what type of investor you are.
This world offers crazy returns; which are obviously directly correlated to great risks.
Risks much greater than investing in Bitcoin because these other projects are younger, less tested, often in an experimental phase, with a much smaller community of developers and supporters; in other words, if you see a potential prosperous future for cryptocurrencies, Bitcoin is your gold.
Whatever your strategy may be, I suggest you keep the majority of the funds dedicated to Crytpo in BTC, and some ETH for the long term; and then if you really want to venture the world of small cap cryptocurrencies, you do it prepared, aware of the risks, and with a minor part of your funds, for a very risky speculative approach.
Depending on the project and the momentum you may have a longer, or shorter-term strategy. What is important are the risk and money management. This is a world of high risk (a project can completely disappear); but very high reward (the right projects can provide a 30, 50, or even 100x return). It is important not to be greedy, and after a good bull run take profits (or at least the initial investment back) because these tokens are highly volatile; and seeing a good profit turning into an avoidable loss happens a lot. Even better would be to have your entry and exit price thought before a trade.
Timing is another key factor, with understanding the market cycles. For a longer-term investment on a project that seems solid, Dollar-cost averaging is the safest option. A shorter-term approach is much more challenging, and enter at right time makes a huge difference. A general rule good to apply is: don’t chase the price pumping, be the smart money. In a scenario of a bull market, every price dump is an opportunity.
How to analyze Crypto projects
Some of the main aspects to consider are exactly the ones in every other type of investment, with the right due diligence behind it; others are more peculiar to this industry. A first fundamental analysis allows to understand if a project may be a good longer-term investment, or not.
Who’s behind the project – the team, who are they? what have they achieved before? Very often you bet more on the people than on the idea.
The idea – obviously it matters a lot, and you have to be able to understand it, analyze the market and the competitors.
The token issued by the project is an asset with demand and supply that make the price; therefore, it is essential to understand its mechanics to try and predict the price action; with the so-called Tokenomics
Market Cap – how “big or small” a project is in comparison to the market and its direct competitors; how many tokens there are in circulation; is the supply fix, or more will be issued? These are the questions to answer, while in an environment of constant price discovery.
Distribution – Where are the tokens allocated? Who controls them? Usually the founders, early partners and advisors have bags of it. It is important to check if they are locked, and for how long, or if they can dump on the market at the first price rise.
Utility – What is the token good for? What is the purpose? Often, it is just a vehicle to raise money with a story backing it up, but some of them have a purpose: governance, zero-fee service, staking for passive income, etc…
To conclude, two more general aspects that must be of interest are:
Narrative – there has to be a story that is trending in the crypto space: before it was ICO, then it has been De-Fi, next maybe Insurances, or Non-Fungible Tokens (unique tokenized assets, backed by something real, or just digital). Smaller projects in particular live of short cycles, and “hype” of the market for something new.
Community – That is effectively one of the most important things. There are several projects that even with mediocre ideas, incredibly go high in price, and survive long because of their engaged community. The community provides a project with support (financial and non), criticism, feedbacks,…and all the ingredients to grow.
The smaller the market cap of a project, the riskier the investment; with more unknown variables, a bit like for shares. One must be selective, critical, and emotionally detached from a project; everyone has his/her favorites; but do not fall in love and hold things forever. Study the fundamentals, look at the market and try to understands its cycles and dynamics, while you keep yourself informed. Opportunities are always behind the corner.
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