The risks in trading cryptocurrencies are so many and so grim, and they apply to all cryptocurrencies, so why take them for a year, waiting for Bitcoin to double in price, when I can take the same risks and invest in a cryptocurrency with potential to multiply in value.
Here is a list of things that I check when evaluating the possibility of investing in certain cryptocurrency.
- What new does this cryptocurrency bring to the world, what problem does it solve, what does it stand for – Is the cryptocurrency aimed at a certain niche, does it solve a concrete problem like decentralized file storage, smart contracts, public polls or is it just another copy of Bitcoin and Ethereum with nothing going on about it that would attract buyers and facilitate adoption in the future.
- How does the cryptocurrency name sound (does it sound legit and like a good brand name) – It is obvious that coins like TittieCoin and AnalCoin (yes they exist) are just people taking a piss. That doesn’t mean that there aren’t opportunities there in chasing a spike caused by a pump-and-dump action, but that is too much of a gamble and speculation, rather than an investment.
- Is it a PoW, PoS or PoW/PoS coin, what is the mining difficulty or APR, does it suffer from inflation – If a Proof-of-Work coin is very easy to mine (in an attempt of its creators to attract more users) or a Proof-of-Stake reward is huge (tens of percents APR), the market will be flooded by vast amounts of this token which could create inflation and keep the price down for prolonged periods of time or even forever.
- Who is behind the cryptocurrency – are they shady figures, or have they placed their names and pictures on the website; what is their track record and reputation; do a quick google/github research on them – There is no better sign of the legitimacy of a coin than a list of real people and their faces on the website. But if that is the case, this has already been factored in the price and there is no buying opportunity there – but there is increased odds of a long-term legitimacy and stability. If the coin is shady or obscure, people are afraid of it, so the price might be low. If you can prove that even though the people behind it have hidden their faces, are actually good people and devoted to the project, you can buy at a bargain.
- What is the limit on supply of coins in circulation – some coins have predefined limit (Bitcoins will be 21 million in year 2100 and there will be no more), and some don’t. Those that don’t have an upper limit or whose upper limit is huge, are more likely to suffer inflation and low prices per coin.
- Does it look good/presentable – Increases the chances of people trusting the coin – the website is its face and creates a long-lasting impression.
- Does it have a roadmap for the cryptocurrency development – If you didn’t know this yet, the presence of a development roadmap that outlines the pipeline of features and projects for the coin, is one of the main things that cryptocurrency investors look for, before investing in a cryptocurrency. Usually the delivery of a new feature from the roadmap is a bullish event down the road that more often than not, affects the price.
- Does it have a whitepaper – The whitepaper is the fancy scientific text that explains what the purpose of the coin is, what problems does it solve, and how is it implemented. Bitcoin started this way. Many investors look for a whitepaper to justify the legitimacy of the coin, although they rarely read it. It just has to look impressive.
- Is the domain name and TLC good – A good domain with a classic TLC, like fancycoin.com is a much better sign for reliability and legitimacy, rather than a cheap, scammy domain like fancy-coin.wix.com or fancy-coin.eu.
- Is it a quick wordpress template, a 2-hour html job or a custom design with lots of work, money and thought thrown at it – Again, a quick and cheap website can be a tell-tale sign for a scam.
Code and Development Activity
- Is there a link to the source code – The source code, if you are a software developer, is a great way to find out how good the coin is, what it does, how it does it, is it a copy of Bitcoin or does it run on the Ethereum network, etc.
- When was the last commit made, and how frequent are commits – This is very important and if you aren’t a software developer, ask one to help you out. A commit means a piece of source code that has been created at a point of time and contributed to the codebase. New features and bugfixes are implemented and added to the coin’s functionality that way. If there are frequent and recent commits, this means that the coin is in active development. If the last commit was 8 months ago, you can rest assured that the project has been abandoned, which is a red flag. Make sure to check all the branches.
- How many developers participate in the coding – It is very risky to invest in a coin that is being developed by a single developer, because if anything happens to them, and no one else has access credentials, the project will die. Also, the single developer can only handle a certain amount of work, so the project will progress slowly. There is also a buying opportunity there, because if the project is good and has interesting/useful prospects ahead, it is currently underdeveloped and moving slowly and the price can be a bargain. Multiple developers are a good factor for stability and quick development. New features will come in sooner and will give the market reasons to buy the coin and increase the price.
Exchanges and Trading
- Which exchanges (and how reputable they are) is the coin traded on – If the coin is traded on the most popular exchanges, that means higher chance for stability, legitimacy and liquidity. Big exchanges make a team/developer jump through a lot of hoops and pay a certain amount of money in order for the coin to be listed there. There are also bigger trading volumes at those exchanges which means smaller spreads, smaller slippage, quicker sell/buy at the price you want. Smaller exchanges are more shady and they can basically do whatever they want – they can disappear (run away with your coins), stake your coins (yobit) or manipulate the market. They will list shittier coins more easily, they will list scam coins without making the effort to investigate and evaluate them. There are buying opportunities there because of the many risks involved with buying obscure coins on shady exchanges.
- What is the daily trading volume – Very important for the popularity and liquidity. Small trading volume makes it possible with people with a few bitcoins on their hands to manipulate the price. It also decreases the chances for the coin to be listed on more/bigger exchanges.
- Are there buy (support) or sell (resistance) walls – If there are very thin sell orders for each satoshi price from here upward, this means that a person with a small amount of bitcoins can buy up the order book and increase the price. It means that an influx of people with interest to buy can dramatically increase the price with ease. On the contrary, if there are vast amounts of the coin being sold at the market price and above, this means that it will take incredible effort for the price to go up. Same for buy orders. A very thick buy order at the market price will protect the price from going down. A thin wall of buy orders leading up to a thick order at a much lower price can indicate where the resistance is, and where the price can easily drop to.
- How does the chart look – You can see what heights has the coin been up to. You can be aware of spikes caused by a bullish event euphoria or market manipulation such as a pump-and-dump scheme. You can see where the price is currently at (an all time high, a dip, a correction) and according to some technical analysis and pattern behavior, you can make a decision whether it is a good time to buy – but this should be only one of the buying indicators.
- Does the chart contain patterns that look like pump and dump actions or trading by bots
- Has the coin spiked on one exchange after being added on another exchange – If so, you know that it might happen again, and if you are active in the slack community for the coin, you might know in advance if a listing on a new exchange is underway and be prepared.
- Is the coin listed on coinmarketcap.com – if not, this is a huge red flag, but can also be a great buying opportunity if the coin is new and you have proven that it is legit and will be listed there.
- Is there a Bitcointalk forum Announcement thread – The bitcointalk forum is like a home for alternative cryptocurrencies (altcoins) and most of the time, a cryptocurrency’s public life starts as an announcement there – https://bitcointalk.org/index.php?board=159.0 There is a lot of information there, interactions between users, the entire history of everything that happened and the public reaction to it for every coin that has such a thread, is logged there. Lots to be learned.
- How many pages is it – The more pages the thread in Bitcointalk is, the better, that means there is an active community of users/traders that are discussing it. However, I’ve seen long threads even for scam coins, so this indicator is not very good. 120 pages are still better than 3 pages for a year-old coin.
- What is the impression of the general topic of discussion there (are there constructive conversations about the use of the crypto or trading it on one hand, or shouts about scam or pump and dump or other worrying stuff) – If people are discussing stuff as “What happened to our application to get listed on Bittrex”, “Who won the new logo contest”, “How do I sync my wallet with the bootstrap file” rather than “This coin is a scam”, “The developer is a scumbag”, “This is a pump and dump scheme” – then we know that the coin is legit, and the other way around. If the people are complaining about problems with the coin’s functionality, and others are telling them to wait, because bugs are being worked on as we speak, then we may just have found a coin at a good price.
- Is there a slack channel – An official slack channel run by the coin developers is an indication that the coin might not be a scam.
- How many members in the slack channel – again, the more – the better. You can also follow the speed at which the members count increases with time and judge the adoption rate by that.
- What is the public sentiment in the slack channel – If people are fighting and FUDing, but the coin is legit – that means its problematic and the price is currently lower than it could be. I see this all the time – some jumpy “investors” complaining and whining, “Where is this and that feature”, “Why doesn’t the wallet still work” – as soon as there are people working on the features, the time is right to buy.
- Is there a Twitter profile for the cryptocurrency and does it post regular updates, how many followers
- Is there a Facebook page for the cryptocurrency and does it post regular updates, how many likes
- Are there any known problems with the source code, the wallet or something else regarding the coin (transactions, mining, efficiency) – Like already mentioned, imagine that along with the price chart there is also a value chart. When people underestimate the value because of a problem, imagine that you draw a line on the price chart that goes above the price line – this is the value line. Value is higher than the current price which has been brought down by the problems with the crypto. But if you know for certain that the problems are being worked on, and fixes are on the way, you can buy something of a greater value than the price you pay for it.
- Is there an active development for fixes on the way
- Has the wallet been under maintenance for prolonged periods of time on some/all of the exchanges – Go on slack, on the forums and find out what the reason for that is.
- Is any government planning on banning the coin (or similar coins) or putting heavy restrictions towards its use – This could lead to a huge dump in the future, and possibly a small dump now. When that happens, if there is still time until the official decision is made, and acted on, there is a window of opportunity to buy the dip and sell when the price recovers from the first big shock.
Popularity and Perception
- What does a quick google search tell us about the coin – This is how the public, the internet, views the coin – they aren’t on slack and they haven’t read the forums, so this way you know what the outside thinks of it – the news there (good or bad) can tell you what to expect, or why the price/adoption is what it is currently.
- Filter google search by recency or for “news”- what are the latest news on the coin?
- Are there Youtube videos about the coin – Youtube videos, especially made by independent agents (people who aren’t on the team) are usually a positive sign (if they are praising the coin, that is).
- What is the general sentiment in the comment section below the videos (constructive, fud/hype, calling out scam etc) – On numerous occasions I’ve been able to detect the vibe that the trader community has, when it comes to the coin, by reading the comments below the Youtube videos about it.
- Is the coin associated with illegal/criminal activity or the dark web – Personally, I stay away from such coins, no matter if the opportunity is good or not. Monero has a very bad reputation because of being associated with such activities and I couldn’t care less if it is a good time to buy it. Better be safe than sorry. You can’t prove if you bought it to speculate with it, or do bad stuff.
If you go through the entire list, you will increase the odds to identify whether the coin is legit and has good fundamental value, good prospects, a good team and an active community about it; whether the coin is a scam, a copy, a me-too, a pump and dump scheme. You will increase the odds to identify whether the current market price has factored in the current state and future prospects of the coin or not. You will increase the odds to be able to tell whether the current price is realistic or out of whack, and whether the underlying value is underestimated or overestimated.
The coin doesn’t have to score great on every point. Actually it is quite the opposite – the buying opportunities and cheap prices are hidden in the flaws. Website in development, wallet issues, not enough developers, still unpopular, traded on only one exchange – that doesn’t make the coin bad, if the rest of the parameters have turned out fine. It makes it flawed, it gives a good explanation of the currently low price and it means that it is traded for less than it’s worth – which means that there is potential for the coin’s price to go up.
I look for good coins with active development and a good community, that currently have flaws which permit the price from being as high as it could be. I look for coins that have a known list of issues that have made “weak hands” sell or abstain from buying, which has resulted in a price lower than the intrinsic value of the project – this is a great time to buy – when you know why the price is low, and when you know if the solution is being worked on.
An example is the low price of ECC throughout July and August because there was a heavy refactoring of the wallet which resulted in the wallet being in maintenance for about a month on the only exchange the coin is traded on. Many people got frustrated, scared, called the coin a scam and dumped it or didn’t buy. The price tanked, and that’s when I bought more, because I had done my research, and I knew that the project had great prospects, and that the wallet is being worked on, and fixes were on the way.
Problems that are unforgivable, and should stop you from buying a coin even at a seemingly bargain price, are listed here:
- the project has been abandoned
- the coin has been a victim of price manipulation and/or pump and dump schemes
- the coin or people behind it has almost no presence on the internet and is shady
- bad reputation, reputation of scam
- easy to hack, many counts of people lost their tokens