Over the years, the digital economy has become closely intertwined with the traditional one. It was encouraging that, back in 2013, the term “bitcoin” was added to the Oxford Dictionary. Later, the words “altcoin”, “blockchain” and many others related to cryptocurrencies were written in. This turned into a crucial moment, which defined digital assets as an integral and very important part of our life.
Electronic money has spread all over the world, but attitudes towards cryptocurrencies remain controversial. This can in part be determined by the huge number of scam projects that emerged during the 2017 crypto startup boom when people bought assets even without the idea behind them.
Today we will tell you how to choose a truly reliable cryptocurrency and not fall for dummy projects.
Reliability of cryptocurrencies: what should you pay the most attention to?
Cryptocurrencies are a fairly fresh investment solution, so not everyone decides to own them. Some skeptics insist that digital assets are a part of well-hidden pyramid schemes. This statement is fundamentally wrong because the principle of cryptocurrencies is completely different.
Traditional Ponzi schemes or pyramids usually involve a central operator, which acts as the governing body and bears responsibility for raising funds. A collapse occurs when capital payments exceed the investment amount, which a fraudster simply cannot ensure.
As a rule, cryptocurrencies are based on a decentralized system, the main feature of which is the absence of an anonymous leader. Blockchain consensus allows digital asset holders to coordinate their actions and manage money avoiding contacts with a central operator.
In addition, pyramid schemes often require the transfer of funds to a specific person suggesting further return with interest.
Although almost all digital assets are not backed by precious metals, securities or hard currency, this doesn’t prevent them from successfully developing and having sufficiently high rates. Let's consider the most important factors that affect the success, and most importantly, the security of the cryptocurrency.
If your choice fell on a particular coin, it would be nice to check what place it occupies in the most popular ratings. To do this, you can use the well-known analytical service CoinMarketCap. The presence of cryptocurrency in this rating and the stable growth of positions in it speaks of good assessments by crypto professionals in the community and the successful development of the project behind the asset.
In addition, you can turn to the tools that simultaneously take into account a combination of technical and financial indicators. For example, the Fundamental Crypto Asset Score (FCAS) from Flipside Crypto.
Programmers and project analysts examine information about a digital asset and assign it a rating from S to F, based on developers’ activity, user engagement, and market factors such as cryptocurrency risk and liquidity.
The FCAS rating is formed by assigning points from 0 to 1000, where the value from 650 points and more is considered to be the best investment indicator. The S rating is defined as “Superb”, A – “attractive”, B – “basic”, F – “fragile”.
The FCAS rating.
Services like FCAS are more suitable for analyzing those coins that are presented on the market for a long time, such as bitcoin. However, this doesn’t mean that there is no need to pay attention to new assets. There have been many cases when a coin turned from a no-name into a real juggernaut.
At the stage of gathering the necessary data about an asset, it is worth finding answers to a number of important questions ...
You should always check developers behind the project. It can be a team of professionals, or one person, or even a state. Usually, developer verification removes risks and reduces the scam or illegal actions on the part of the creators. Sometimes even the business plan is less important compared to the team. A simple example: if Elon Musk starts growing champignons today, investors will automatically believe in his farming project. If there is no information about the team on the official website and it is impossible to get it, this is already a red flag.
However, even when the data is fully presented, one should not let his guard down. Nobody rules out the possibility that the team's photos can be taken from the Internet. Download pictures and upload them to Google search. If there are coincidences with images of people with other names, this is certainly suspicious.
Obviously, the constant development of the coin can contribute to its growth in value. Implementation of technologies that were used 20 years ago is already irrational. Today, assets that are not only said to use advanced innovations but also integrate them into real business processes can become mature projects.
A bright example is the Ethereum project. Having achieved widespread popularity, developers could stop and simply make money on a successfully working network. However, they made a decision in favor of development and are now working on creating a new version of the blockchain that will take security and scalability to a new level.
The scheme shows the mechanism of the Proof-of-Stake algorithm.
Thanks to the transition to the Proof-of-Stake algorithm, users will be able to conduct tens of thousands of transactions per second. The emphasis in the new network will shift to staking, and mining will become a thing of the past. Of course, in addition to prospects, the new technology also carries certain risks, but the desire of Vitalik Buterin, the project co-founder, to go forward, bringing something new to the network's work, is extremely inspiring.
If a cryptocurrency is an exact copy of an already existing successful coin and doesn’t offer useful improvements, then most likely there will be no interest in it. Some developers believe that the next bitcoin stamping will bring unprecedented profits. But in reality, a coin is not of interest to investors if it is not backed by innovative solutions and a strong project team.
It is important that the project has a unique tool that will bring the desired investment profit to the process of its development. Otherwise, the prototype cryptocurrency will be able to grow only due to the scam activity of developers and other persons interested in it.
Take Stellar, the brainchild of the Ripple hard fork, as an example. Its main advantage over other coins is the extra high transaction processing speed – only 5 seconds after the payment is created.
The project team has taken a new approach to the process of confirming transactions in the network: each Stellar user can independently launch an operation verification node and select trusted nodes with which he is ready to cooperate. Together they form a “faction” that becomes the validator. This makes the system safer and requires less energy. This is the main difference between Stellar and other coins.
Perhaps this is the main question you should answer before buying a coin. It is important to understand that there are a huge variety of assets on the market that don’t solve any real issue. Often, the developers of such coins are speaking "easy", "guaranteed" or "nothing to do". Their growth is driven by speculation and high-quality marketing, but at its core, an asset is a dummy. Of course, the value of bitcoin has changed more than once under the influence of speculative demand, but even it may someday lose the trust of traders, its stability and burst like another bubble.
Investors shouldn’t ignore the White Paper and Roadmap of the project, which contains the detailed plans for the development of the ecosystem and reflect the current progress of the company.
If the project doesn’t publish a development roadmap and cannot boast of its achievements, or, on the contrary, publishes deliberately false results, then this is most likely a potentially fraudulent project.
Often, official project documentation reflects the dizzying ambitions of the creators. However, not everyone follows the plans. If the cryptocurrency is actively developed and promoted by a strong team, and there are advanced developments behind the asset, then it is definitely worth adding to the portfolio.
Some investors rely solely on the popularity factor when choosing an asset. Indeed, if the ticker of a coin can be found in the large exchange’s listings, and the news of reputable blockchain publications is actively mentioning it, then this is probably a promising cryptocurrency, and the investment risks are minor. However, the popularity of the coin must be considered in conjunction with other important factors, because even not the most famous altcoin can turn out to be the profitable one in the long run.
Why is the direction and scope of product development important? Because some markets may never grow in the long term.
In 2020, private medicine, e-commerce, cloud solutions and online entertainment are becoming profitable investment areas. In the near future, projects working in the field of SaaS, Big Data, as well as developers of AI/ML products, with the help of which you can digitize offline solutions and transfer them to online, will hold the top positions, thus replacing traditional tools with virtual reality.
Data provided by Fidelity (11.11.20).
Based on current trends, it can be assumed that cryptocurrencies developed as tools in potentially successful areas can for sure bring profit. This means that it is reasonable to invest not in “high-tech” products, but in long-term high-quality projects with a 3-5 years perspective, that are capable of steadily increasing profits.
A promising project must be well protected from hackers. The best PoW cryptocurrencies usually have a truly strong network that minimizes the risk of any kind of attack. If developers use an alternative consensus mechanism, then it should have a well-planned protection scheme against unscrupulous validators.
Again, let's remember the Ethereum 2.0 blockchain. Its developers focused on the transition from PoW to PoS, where staking will become the basis. Validators will be responsible for the formation of new blocks in the network: to participate in the process, they will have to make a kind of collateral – at least 32 ETH, which are placed in the depository agreement and form the pool.
In the case of a validator’s fraud, the deposit can be completely lost – this approach ensures the security of the network.
An important indicator of asset’s reliability is its listing on highly trusted exchanges. If an asset is traded only on platforms that don’t support the principles of KYC and AML, or the exchanges which are unknown, or, even worse, have been detected in fraud, in this case, the creators of the asset are likely to have problems with the law or are aimed at money laundering.
The best option is listing on platforms of such corporations as Binance, Coinbase, Huobi, Kraken or Bithumb. As a rule, in order not to have reputational costs, exchanges with a dominant name conduct a strict selection of digital assets, but it is extremely difficult and expensive for new projects to fulfill all the requirements of the top crypto exchanges for listing an asset. Many projects choose to list an asset on exchanges with a high level of trust, but with a lower rank: they offer acceptable listing conditions. In the meantime, the project team will be able to invest more money in the development of their own products and services.
If the coin is traded on unnamed trading floors, it means that it has not passed any “casting” in terms of quality.
The exchanges where Stellar is listed.
It is also worth checking the liquidity of the exchange for the supported trading asset pairs – it must be high enough. If this indicator is low, it can be difficult to sell the asset and withdraw funds from the exchange. Separately, it is worth paying attention to the cryptocurrency spread, which reflects the difference between the purchase price and the selling price on the exchange. If the spread is large, then there’s no demand.
If cryptocurrency creators regularly post news on Facebook, Telegram, Twitter, CoinGecko or other specialized news apps, this is definitely a good sign. There should be noticeable active communication between the developers and the community in the official project channels, because this is a signal that they don’t mean to hide something, and the deadlines of product development are not privy. The relationship with the audience and its support is an important factor in the project development process.
Investing in cryptocurrencies in 2020 remains popular. The main task for an investor is to choose the promising digital asset and the right moment to enter the market. When choosing a cryptocurrency for your portfolio, count the number of its “hits” in the above-described reliability indicators. The larger the number, the higher the chance of avoiding investment mistakes. However, in the medium term, assets backed by quality projects may show significant increases in value.
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