Invest in Cryptocurrencies with Due Diligence

Invest in Cryptocurrencies with Due Diligence

From time and time again I see people making the same mistakes when they buy into a cryptocurrency.

People often buy into a coin when it’s being hyped up (chances are, you’re buying into an overpriced coin). If you’re always buying into another person’s hype, you’ll never make a good investment.

I’m writing this so you know the basics of investing in cryptocurrencies. I’ll be covering a range of basic tips that you should keep in mind before investing.

Tip 1: Think for Yourself

Don’t be gullible to everything you read online. There are thousands of other suckers reading the same things you’re reading. Most of those people end up losing money. Don’t be one of them.

You need to learn how to criticize what you read.

Let’s recall your first college writing class and ask ourselves these basic questions:

Does the information make sense?
If someone claims that a coin will go up 5X, and its market cap is already at 200M, it’s probably not going to happen.

What proof is there for the information?
Anyone can write anything on the internet. Unless the source is from founders/developers of the coin, then you might be reading into false information.

Buying into another person’s idea is meant to make them a profit, not you.

That’s why you need to trust yourself. The only person that wants you to make a profit, is yourself.

Do your own research. Use your own judgment. And be smart about your investments.

Tip 2: Learn the Team

If you’ve worked at a company before, you should know that the success of the company is driven by its quality of the employees.

Many successful companies hire people with:

  • Work experience at elite firms.
  • Strong educational backgrounds.

Because the qualities that regularly come from these people are:

  • Superb work ethic.
  • Strong network of connections.
  • Vast domain of knowledge.

Before investing into an cryptocurrency, do a thorough background search into the team. Here are a few questions you should ask yourself.

How large is the team?
A larger team means a stronger backing. Progress is minimal if there are only a few people working on a project.

What companies did the members come from?
Members from well known software companies and finance companies indicate a strong coin. This is because these companies provide employees with an ample network, relevant knowledge, and the ability to drive a project forward.

What kind of education did the members have?
PhD and Masters are usually a positive indicator that the team members have some clue of what they’re doing.

Do the members have working knowledge of the industry of their coin?
If the members have NO background on the industry of their coin, and have experience that offers little value towards progressing claims on the white paper, then the project is likely to fail.

Domain knowledge is necessary to understand the feasibility of the project. A board with a “grand vision” is not enough to drive a project.

Does the team consistently post updates? Are they responsive?
Cryptocurrencies are based on a delivery of what is promised. Updates and responsiveness from the team is critical in fueling coin price.

You’ve probably noticed that rumors and updates from the team drive up the price of their token. It also results in volatile markets so you aren’t stuck holding your bags.

It’s generally a good idea to find a cryptocurrency with a team that consistently posts updates and responds to people interested in the currency.

Tip 3: Do the Math

Math is your reliable source of truth. Because amidst all the false content you read on the web, math never lies. Two plus two will always equal four.

People often speculate price trajectories for different currencies. And most of them are nonsense because the math doesn’t work out. We’ll cover some basic cryptocurrency math that can go a long way.

Feasible Market Caps

These are basic factors you should look for in an ICO:

supply = number of coins in circulation.
price = current price of the coin.
market cap = supply * price

Here’s how you can use it:

1. NoobCoin offers 600 AltCoin for 1 ETH (price).
2. NoobCoin indicates 1B NoobCoins will circulate (supply).
3. ETH Price = 300 USD (supplementary variable).

Now we know:
supply = 1B
price = 0.5 USD = 300 USD/600
market cap = 500M USD = 1B * 0.5

At the time of writing this, the market cap of the coin would place it to be within the top 20 coins on CMC. Doesn’t sound very realistic, does it?

Most cryptocurrencies never go beyond 200M in market cap. In most cases, it will be overpriced.

Feasible Investment Returns
You often hear about a coin “going to 10x” in price. This formula helps verify if it’s possible.

expected market cap = current market cap * implied rate of return

Let’s say we hear someone say BTC will go up 10x:

Bitcoin market cap = 100B
expected market cap = current market cap * multiplier
1T = 100B * 10

Net Market Cap = 1T

For 1 BTC to reach 100,000$, BTC as a currency would be valued at 1 trillion. A valuation jump of $900,000,000,000 can’t happen so quickly.

Doing the simple math on any coin will give you a better idea of how reasonable it is for a coin to go up by 10X or 5X. And if the ICO is already priced at a large market cap, you’re less likely to make a profit.

Tip 4: Read the Whitepaper

The white paper is ironically the last thing we should look at. There isn’t much for us to say here other than to use your best judgment to verify the potential demand of a coin.

Blockchain technology can be applied to a wide range of industries, so the content of the white paper will vary widely

A few questions to ask yourself is:

Does the token solve a need that is in demand?
Cryptocurrencies are not so different from traditional companies. The success of a business comes from the demand of the product. If you don’t see a use case for the token, it probably doesn’t have much value.

Is the idea realistic?
The world has a lot of dreamers. In reality, you can say anything, but you can’t do everything. You should be wary of unrealistic promises.

What are the terms of the ICO?
Every ICO has different terms and conditions. Read between the lines and make sure you aren’t missing key details about how the ICO will work. For instance, there have been cases where there was no supply cap on a token. Your investment could easily become worth less if more coins can be minted. Read carefully!

Tip 5: Embrace Unpredictability

These tips are only meant to equip you with knowledge to prevent a bad investment. Making money in the wild west is dangerous and difficult. The market does not care what you think is right; the market moves however it wants to.

So be accustomed to any market change even if it defies all logic. The markets will always be unpredictable, but that’s exactly what makes the returns so much higher than traditional investments.

At the end of the day, the only thing you should be really careful about is making sure your bank account doesn’t go lower.

Do your due diligence and invest safely.

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