This is the golden question for a lot of investors. Coinmarketcap lists thousands of cryptocurrencies. In this vast and complicated market, how to choose projects that have a future and could represent a good investment? First, you must ask yourself the right questions, and don’t do the classic mistakes. This article aims to give you with some ideas to navigate in this ocean of often paradoxal information.
The good tips to invest in cryptocurrencies
Cryptocurrencies are very volatile. It can offer extraordinary performances, but also abyssal losses. The market saw Bitcoin lose 85% of its value between January and November 2018 and some altcoins lost up to 99% of their value over the same period of time.
At Coinhouse, we believe that some cryptocurrencies provide good value and have a high probability of becoming a global success and being omnipresent in our daily lives.
But the number one rule of investment is not to invest more than what you are willing to lose. Imagine the amount of money you want to invest in cash. Throw it out the window. If it is too painful, then the amount is too high.
”The number one rule is not to invest more than you are willing to lose”
Knowing your investor profile
There are different ways to invest in cryptocurrencies, for different purposes.
The first and simplest way is to have a long-term vision. This involves identifying the project(s) you like, finding an entry point that suits you, buying the amount you want, and waiting. This step is the most psychologically difficult because the market will test your limits with strong bearish phases. For this reason, it is important to understand the assets in which you invest as much as possible, so that you can assess their fundamental value propositions. This knowledge will give you confidence in your positions and allow you to be less likely to be manipulated by the market.
The second solution is pure market speculation, which consists in seeking to make a lot of profits with trading. We’re here on a shorter-term perspective. It is not uncommon to make several transactions a day and to have to constantly monitor prices. You will need very strong knowledge in technical analysis, the seriousness of the underlying project being not the most essential in this perspective.
Giving their place to Bitcoin and Ethereum
The basic mistake is to think that we have missed the opportunity with cryptocurrencies, that Bitcoin or Ethereum are already too expensive, and that we would do better to position ourselves on “small values” that could capture as much value as Bitcoin in the years to come. This is not an impossible scenario, but it is unlikely. We must therefore invest accordingly.
Bitcoin and Ethereum, being the first to come, have a considerable advantage and have the best potential to generate profits in this market. They have the largest communities, a very large number of developers, and actors who have considerable funds and knowledge to best develop the projects and their ecosystems.
”Bitcoin and Ethereum have a considerable advantage and have the best potential to generate profits in this market”
The vast majority of decentralised applications are nowadays built on Ethereum. Bitcoin, for its part, has the most secure network ever built, with considerable computing power dedicated to its security. It is therefore likely that they will maintain their leadership.
For these reasons, from a long-term perspective, we advise to dedicate a high percentage of a portfolio to Bitcoin, which, due to its digital value, still has the potential to capture a lot of value against traditional financial assets. If the world of decentralised applications speaks to you, then Ethereum should not be completely forgotten despite its current limitations and what its “competitors” EOS and Tron can deliver.
Focus on asset value propositions
It is important to be aware that you are investing in one or more assets and not in the network itself. Unlike a company share that will reward you based on the company’s performance, it is essential here to understand that it is not because the project is successful that the token will necessarily increase in value.
An interesting example is Aragon. It is an excellent project led by a very competent team that develops tools with high added value on Ethereum, which allow to easily create and manage decentralised organizations. However, the ANT token affiliated to this project is a governance token that has very little added value and does not have economic mechanisms that give it the potential to be a good investment.
”It is not because the project is successful that the token will necessarily increase in value”
Other examples of low value-added tokens are payment tokens. The token of the Decentraland system, MANA, falls into this category because it aims to become the platform’s currency. Other cryptoassets are intended to be forward currency. If the token can easily be replaced by bitcoin, ether or even a stablecoin like DAI, then its value proposition is rather weak because Bitcoin or Ethereum are much better positioned to fulfil the role of money.
The potential as an investment of a governance token such as the MKR in the MakerDAO system can be understood quite quickly. With a project with high potential and a number of MKRs in circulation that decreases over time and tends towards zero, the token economy is interesting from a long-term investment point of view, although the project itself remains a challenge.
”MakerDAO is a high potential project with a number of MKRs in circulation that decreases over time and tends towards zero”
Another example of a useful token is the PNK token in the decentralised arbitration system of Kleros. Tokens are used to be drawn by lot to judge contentious cases on the Ethereum blockchain, and to be rewarded with ethers and PNKs to do the work of a judge. The acquisition of the token gives you a kind of “job” in the decentralised economy. You can find more information about Kleros in our dedicated article.
Or Tezos, which applies governance by the revenue chain, focuses on the security of autonomous contracts, and pays XTZ holders via a specific system of proof of stake.
Another alternative for value proposition is to offer confidential or anonymous currencies, Bitcoin being limited today on these subjects. Monero and Zcash are the most advanced projects in this field. Grin is trying to do the same while solving problems related to blockchain size and network scaling.
All these projects create value for their assets through the operation of the project itself, and this value is ultimately redistributed to investors who have trusted them. Of course, the project still needs to be a success.
Understand the underlying technology
While we have come back several times to the way Bitcoin or Ethereum works, it is less obvious to understand how more complex projects such as Cosmos work. If a project stands out by offering a radically different operation from most other cryptomonnages, then it becomes essential to determine if the underlying technology is solid, as this is a significant risk.
On the other hand, projects that clone existing ones generally have very little added value, as typically all Bitcoin derivatives. Unless there are impressive innovations compared to the original project, they only cause confusion and do not add value.
”Bitcoin clones generally have very little added value”
Finally, even if the technology of a project may seem interesting, the team in charge of it will not necessarily succeed to deliver, the difficulty being of course proportional to the initial ambition of the project. A strong team and a strong development community is an essential point to consider when investing in a cryptoasset.
As you will have understood, investing in cryptocurrencies is not a thing to take lightly. You have to be able to evaluate and understand what you are buying. It is an exciting process in the dynamic and innovative environment of crypto-economics, but it takes a long time.