Bitcoin, Cardano, PolkaDot? DeFi, Gaming, NFTs? How do you know where to invest when everything in crypto seems to go up?
If you’re new to this, you might have looked around for recommendations. No matter who you follow, the advice is always the same. “Do your own research before investing.”
What does it mean? And how can you analyze cryptocurrencies when you don’t have as much knowledge? The answer is simpler than you think.
How To Analyze Cryptocurrencies?
Anybody can research crypto projects by following the right steps. If you don’t have experience, that only means it may take longer to find opportunities. The good news is they are everywhere, and you don’t need technical knowledge to find them.
CoinMarketCap is a good place to start looking. But how do you know a project is worth the investment? Three ways to find out:
a. Fundamental Research: What does the project do? Does it have user demand, or are there other projects doing it better? How does it work? What’s the team behind it?
b. Market Analysis: How active is the project’s community? Are there update announcements to keep users engaged? What will people buy next? What’s the overall perception of the market (greed/fear)? What global-economy news may affect cryptocurrencies?
c. Technical/Price Analysis: What’s the lowest and highest price recorded? How different is this year’s chart from last year? What’s the market size?
While all this data helps, you do not need all these answers. Essentially, each analysis type tries to answer one question.
- Should I even consider the coin or find something else? Look at the fundamentals.
- Should I just wait and watch or invest now? Look at the market.
- Should I buy it right now? Look at the price.
Let’s get into detail.
Fundamental analysis reviews the long-term potential of the project. Its intrinsic value as a product/service.
E.g., Ethereum has utility value while DogeCoin doesn’t.
First, what’s the coin used for, and do people need it?
You can find the answer either on the website, social media, or white paper. It might be a currency for traders (like Bitcoin). Or a platform for business developers (EOS).
Next, find and compare with similar projects. Which one looks more promising?
E.g., Ravencoin is a Bitcoin-variant platform that simplifies token creation. But Polymath and Swarm offer that too.
E.g., Ethereum offers smart contract technology. But so do Solana, Cardano, Avalanche, Polygon, and PolkaDot.
When you don’t know the winner, it’s better to invest in multiple coins.
Assuming the coin will gain adoption, the next question is about infrastructure. If the price goes parabolic overnight, is the network ready for the trading volume?
E.g., Ethereum is slow and expensive ($50 fees), which limits its value. LoopRing is fast and scalable (it pumped this October). So its price will likely keep surging.
Just because a coin is valuable, that doesn’t make it profitable. External factors can get it the way before it reaches the expected price.
E.g., In March 2020, the pandemic led to a crypto market crash. Ethereum fell to $110, even though it’s fundamentally worth $10,000+.
How to buy low and sell high? These are some signs to look for:
- Global Economy: The pandemic, China crypto-ban, SECs regulations, Bitcoin ETFs approval, San Salvador mass adoption. These events influence +90% of cryptocurrencies.
- Market Cycles: Unless it’s a bear market, money first goes into Bitcoin and Ethereum. When traders take profits here, their next target is usually the Top 50 Coins List, then it’s micro-projects, and maybe NFT/meme-coins. Then, it either leads to a correction or flows back to BTC and ETH.
- Project Events: Whenever the team announces upcoming updates, it can cause a price spike. Weeks before the event, it will reach its highest valuation, and traders take profits right before that date. It then either moves down or sideways.
- Community: How many people are using the coin? If it’s like Ethereum, how many developers build apps on it? If it’s an NFT/fan token, how active is the following?
To succeed, the coin needs to reach its target price before the market cycle changes. For example, ETH may go from $5K to $10K, but it takes time to grow from its 500B market cap. By the time it hits a trillion, the bull run might end.
Price analysis isn’t that relevant when you invest to hold long-term. But if you want to swing-trade for a few months, it will give you the best chance to buy low and sell high.
E.g., Since 2019, Binance Coin averaged $30 (and was in the Top 10 by trading volume). If you bought near $30, there would barely be any downside. Also, BNB is worth $630 now.
Without knowing technical analysis, you can learn a lot from the price history:
- Correlations: 100%-correlated pairs follow the same patterns and proportion. So you can predict your coin by studying another one (Bitcoin). You then invest in whichever has more upside.
- All-Time High/Low (ATH/ATL): If a coin goes down, it’s still “safe” to buy near the ATL. And if it’s rallying, the all-time high tells you if you’re still early and how high it may go. It’s only reliable with enough history.
- Market Capitalization: Market Cap = Total Supply * Price. The bigger the cap, the more buyers you need to raise the price. Micro-caps (<$20M) are volatile, while macro-caps (>$100M) are “stable.”
- Price Trends: The best time to buy is when the price moves sideways or near the ATL (Otherwise, you risk buying the top). Also, compare the price activity to the previous year (e.g., Binance Coin was inactive until February 2021).
Fun fact: Technical analysts might not even know what the coin does. It’s a risk-management skill that puts the odds in your favor.
Your First Steps To Crypto Investing
The first time you analyze crypto can feel overwhelming. The good news is, you don’t need all the data. There’s not one single way of learning crypto.
Before following these strategies, explore the crypto space: coins, utility tokens, gaming altcoins, DeFi, NFTs. And to know which one is right, you need to set your investment goals. Do you want to day trade altcoins or find the next Bitcoin to hold?