Get Our Updates in Your Inbox

Sign up for up-to-date and interesting information and news about bitcoin - delivered hot off the keyboard to your inbox.

Close
Back

How to Evaluate Cryptocurrency for Investment - Technical and Economic Foundation

Liz Louw
5 July 2018

Our newly launched ebook “How to Find the Best Cryptocurrency to Invest In - 2018 Edition” explores three categories of cryptocurrency fundamentals - coin utility, economic and technical foundation, company and community - and provides you with some subcategories by which you can assess the potential value of a cryptocoin or blockchain. Here’s the third excerpt from the eBook that is available for (free) download over here.

Coin Economics

If there is one thing we have learned from the fiat money system, it is that inflation will always erode the value of money, regardless of its utility. One of the revolutionary aspects of Bitcoin is that it is built on a deflationary economic model. While Bitcoin has a fixed supply of 21 million coins, and a predetermined coin emission that halves every 250,000 blocks (around 4 years) that gives it deflationary qualities, it would be a mistake to assume that all other cryptocoins follow suit.

  • What is the total supply?
  • What is the coin’s emission rate over time?
  • Is the coin’s inflation under control?
Assess: Consider the number of coins that were pre-mined (before launch and usually held by founding members), the number of coins currently in circulation, and the total supply of a coin. If the coin has utility that is in demand and there is a capped supply, the law of supply and demand should translate into growing price over time.

Product Strength

At Bitstocks we conclude our research into the value of a cryptocoin as early as possible, to ensure that we buy in at the lowest price. This means that there are times that we invest in cryptocurrency coins that are still in the development stage. While assessment of a coin’s strength as product is especially important in these early stages, it should be part of any assessment. Factors to consider include:

  • The product’s development status (stage) and development progress.
Assess: If the coin’s launch date is scheduled for a future time, has development been progressing according to schedule?  
  • Has the coin’s code been made available publically, or ‘open sourced’?

Assess: Open source code allows the entire blockchain community to review the algorithm that determines and executes the promised utility. If you are not technically savvy enough to review the code yourself, it is a good idea to look up reviews of the code on GitHub. GitHub is an online software developing platform and a web-based community of over 20 million developers working together to host and review code, manage projects, and build software together.

  • Have they published a Product Roadmap?
Assess: If there is a published roadmap, is it updated at regular intervals to introduce updates, fixes and improvements to the product?
  • Have they published a Whitepaper?

Assess: The introduction of a new coin to the public or, Initial Coin Offering (ICO) usually revolves around "the white paper." This is a document that lays out facts about the planned blockchain and its underlying protocol, or the distributed application (dApp) that is being built, and describes how the coin or tokens will work.

In cases where the finished product is still absent, a Whitepaper does not offer proof of viability or a guarantee that development will take place as promised.

While it is important to review a project’s Whitepaper (or search for reviews if the content is too technical for your own understanding) then, it is essential that you put on your sceptical goggles so you can see through promotional promises that lack technical collateral.

Coin Performance

Where a cryptocurrency or blockchain has already been launched and active for a reasonable period, the investor has the opportunity to evaluate its performance.

  • Where a cryptocurrency is concerned, the number of transactions per second compared to other coins can be an indicator of the coin’s potential to contend in the cash market. The global supply of the world’s coinage and bank notes was calculated at $5 trillion in 2015, which should be considered the market ceiling for all currencies in this sector.
  • Another important performance factor to consider for cryptocurrencies is the cost and ease of cross-border transactions, as this would put the coin in the position to compete for the global M1 money supply market. The M1 money supply includes all coins, banknotes and digital currency in circulation, especially foreign exchange, and adds up to a staggering $100 trillion (compared with the gold supply which tallies up to $9 trillion). 
  • Whatever a coin’s utility, a position among the top traded coins over the past 3 months in terms of transaction volumes and market capitalisation could be a positive indicator.
  • The coin’s performance compared with the rest of the market trend since it started trading is another factor that should be considered.
  • Does the coin’s founding members reserve an amount of coin for themselves? Where the founders stockpile their own currency, the investor can be relatively sure that they are committed to and convinced of the project’s success.

How to Evaluate Cryptocurrency for Investment - Ebook

This blog is part 3 of a 4 part series. To follow the series, you can subscribe to receive our blog updates by email or follow us on social media, or you can download the complete series in eBook form.

How to Find the Best Cryptocurrency to Invest In

Learn how to assess the investment potential of cryptocurrency coins and tokens.

Download
Market Advisory Desk
0203 743 2228
OTC Dealing Desk
0203 743 2229