Cryptocurrencies are digital money created using cryptography and operating independently from any central authority. Digital currencies are based on blockchain, which functions like a distributed ledger that records all transactions and delivers a high degree of transparency.
Bitcoin and Ethereum are the most well-known digital currencies. Bitcoin was the first cryptocurrency introduced in 2019, and Ethereum is the second-largest cryptocurrency by market cap and the most popular altcoin. It’s easy to see this if you have a look at Bitcoin or Ethereum price.
Most blockchains allow users to complete pseudonymous transactions so they don’t have to reveal their identities. However, they need to provide their wallet addresses, which are visible and public.
Investors consider cryptocurrencies worthy additions to portfolios because they offer numerous advantages over traditional commodities. Digital currencies enable rapid and low-cost cross-border transactions because they don’t imply the involvement of third parties in the process. They also offer hedges against inflation because their values aren’t influenced by the same factors as fiat currencies.
Suppose you just discovered the numerous benefits diversifying your portfolio with crypto brings; you should research the steps you must follow before investing in a project.
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Research the crypto project
You can pick from thousands of crypto projects, and it’s challenging to choose between them, especially if you’re new to the crypto space. So, you need to research and compare them to determine which suits your investing strategies better.
Luckily, you find all the information online these days, so you can research the projects from the comfort of your house. When you compare projects, keep in mind your investment goals, as they’re decisive in your choice. Understanding your long-term objectives helps you narrow down the list and guides your decision.
What’s the vision of the project?
One of the first aspects to check when you evaluate a crypto project is the developer’s vision for the cryptocurrency. Ensure they have an achievable vision because even if they dream big, the technology has its limits. In the crypto sector, there is the idea of vaporware, which refers to the times when projects are launched with bells and whistles, but they fail to get off the ground. Therefore, when you document a project’s vision, make sure to identify the cryptocurrencies that sound too good to be true and promise to do great things but lack a foundation.
Each crypto project has a different purpose and unique use case, and you should consider this factor when investing. Bitcoin, for example, was developed to serve as a peer-to-peer tool for online transactions.
Who backs the project?
Another factor to consider when evaluating crypto projects is the team behind the digital currency. It’s crucial to find out more about the developers who created the cryptocurrency because they have a huge role in its success. Do they have experience in the crypto landscape? Find more about their history and level of expertise in the cryptocurrency sector.
Besides researching the developers’ team, find who supports the project and if the funds invested are coming from reputable sources. Double-check the information about the developers and partners supporting the project.
Read the White Paper
The White Paper is the document that outlines the features and goals of the project, and it’s paramount to read it to learn everything about the cryptocurrency, developers’ vision, problems it should solve, solutions it provides, and tokenomics. Considering that you research the market and try to compare different projects, it’s advisable to read the White Paper for all of them to figure out which one suits your investment needs.
A well-developed crypto project has a good White Paper that is easy to understand and contains all information without being too technical. The first thing you should look for when reading the White Paper is the problem it’s promising to solve. If the document is too vague about how the cryptocurrency addresses the presented problem, it might not be worth your money. Look for other projects that have White Papers easy to understand and offer detailed information about their solutions.
Check the project on social media
The next step is to search the project on social media and see how big the community supports it. You don’t want to spend money on something that has no supporters. Go through the list of followers and try to figure out if they’re influential personalities because the more buzz is created in the sector around a project, the higher its success.
Look for the project on all social media networks, from LinkedIn to Twitter and Instagram. Make sure to check the project’s team on Medium to see how involved and experienced they are. Keep an eye on the project’s profiles for a while to see if its community grows and if the developers offer any updates on its progress.
Figure out what potential use cases the project has
When considering a couple of projects to add to your portfolio, it’s essential to consider what purposes they serve on the market and if they fit a particular niche. It’s best not to invest in something that promises to solve a problem that doesn’t exist or a problem several other renowned projects address.
Don’t forget to look at the project’s potential use cases in the real world. You want to invest in a digital currency that has a large market.
Verify the tokenomics
The tokenomics provides information about the economic model of the cryptocurrency and how the tokens are used within the system. For example, up until this year, Bitcoin was mostly used as a means of payment, and therefore, its value fluctuates according to demand. Ethereum, on the other hand, is used to power decentralized applications, so it has more complex tokenomics. It would help if you looked for a crypto project that has complex tokenomics because it has greater potential to grow.
Risk management
If you want to assign part of your portfolio to cryptocurrencies, pick a project that comes with some risk management strategies. Dedicating a small portion of a portfolio to a crypto project is recommended because the sector is highly volatile, and all digital currencies, regardless of their popularity, are risky.