Cryptocurrency has taken over. Despite some ups and downs from Bitcoin, the flagship cryptocurrency, consumers seem as excited about the new investing possibilities as ever. People are investing so heavily in crypto mining that the price of GPUs has skyrocketed, and it seems every day, there’s a bevy of new cryptocurrency types getting ready for an ICO (initial coin offering).

Each new cryptocurrency represents an enormous opportunity; if you get in at the ground level, and it happens to take off, you could turn a moderate investment into a million-dollar nest egg. But at the same time, there’s no guarantee that a given new cryptocurrency will develop beyond its initial launch.

So before you take your coworker’s hot tip on the new cryptocurrency to explore, you’ll need to do your research.

Specific Facts to Check on New Cryptocurrency

Cryptocurrency investing is still relatively new. That means there’s no significant historical data to work with nor is there a broad, established market of stable currencies to look at. Instead of running a technical analysis, or charting years of previous activity, these are the questions you’ll need to answer:

  1. Who’s offering the coin?

    First, take a look at the founding members of the new crypto project. A quick Google search should tell you everything you need to know about them. For example, what other projects have they overseen in the past? Are they experienced in the realm of economics, or in cryptocurrency? If the team leader has little professional experience, or worse, has a checkered past, you might want to pass on the ICO. However, if the point person has a decorated history and seems to have tight connections with major players in the industry, it’s a good sign for the future of the currency. You’ll also want to see how this person interacts with the community; for example, are they active on social media? Do they seem responsive to community questions?

  2. How active is the development team?

    Is this a development team trying to maximize its productivity and maintain strong communications? Or are they resting on their laurels? Active development is a sign that this team will be constantly working on the project to make it better, and will be patching bugs as soon as they arise. Check the code repository to see how many issues have arisen, how many of those issues have been closed, and how quickly the work was done. You may also want to look at the size and makeup of the development team. Numbers and experience are both important here, so a team of 15 highly experienced coders is going to be inherently better than a team of 5 newbies.

  3. How strong is the community?

    If the leadership and development team look good, it’s time to start looking at others’ opinions. Obviously, you’re entitled to your own perspective, but gauging the perspectives of others can illuminate issues or highlight strengths you hadn’t considered. Cryptocurrency forums, like Cryptorum and CryptoCompare, are good places to browse. There, you’ll be able to see what people are saying about your prospective new coin—and how many people are saying it. Public support is important, not only as a sanity check for your own evaluations but also as an indication of how the coin may grow in the future.

  4. How much funding is backing it, and how are tokens distributed?

    Lately, ICOs have been getting an exceptional amount of funding—thanks to the cryptocurrency hype. Filecoin, for example, recently received $257 million. At first glance, you might think that the more funding a coin has, the more stable it’s going to be. While that’s partially true, you should also be evaluating how its tokens are distributed. If a coin is distributing less than 50 percent of the circulating supply to the general public, it could be a red flag.

  5. What’s the trading volume, and liquidity?

    Trading volume is a good sign of liquidity in the market. Generally, the higher the trading volume, the easier it will be to exit your position—which is a marker of stability and low risk. If the trading volume is too low, you might not be able to sell when you want to, making it all but impossible to realize the gains you’ve made or stopping you from halting your losses. You can also use trading volume as a gauge to rationalize some of its pricing volatility; an aberration in trading volume will likely be associated with an aberration in price.

  6. How does the market cap look?

    The market cap is also an important indicator of the risk inherent in your investment. As with stocks, a larger market cap is generally an indication of more reliability and stability. Because there’s more value inherent in the investment, and more room for individual investors, a high market cap is less vulnerable to market manipulation and may be less volatile overall.

  7. What exchanges are hosting the currency?

    Finally, take a look at some of the biggest exchanges on the market. While these exchanges may be home to highly volatile, risky coins entering the market for the first time, they’re also quite good at avoiding scams. If your coin is present on all major exchanges, and there’s significant support for it there, it’s a good sign of its potential strength.

Personal Questions to Ask

Beyond these facts, you’ll still need to ask some personal questions before you get too involved:

  1. What is your risk tolerance?

    Cryptocurrency is an inherently riskier investment than traditional assets like stocks or bonds. If your risk tolerance is low (such as if you’re preparing for retirement), you should probably keep your investing budget for new coins low. If you have a higher risk tolerance, you may want to pursue more interesting—if more volatile—opportunities.

  2. How are you going to invest?

    Which methods will you use to invest in your currency? If you have a mining rig, you could try your hand at mining—despite the greatly increased competition. Otherwise, you’ll need to choose between a broker or an exchange.

  3. Are you short or long?

    There are multiple ways to invest in cryptocurrency. If you’re looking to nab some quick gains from some up-and-coming coins, you’ll need to consider more short-term strategies. But if you’re only investing in coins you think have significant staying power, you’ll need to adopt a longer-term approach.

  4. Which other currencies are in your portfolio?

    Finally, consider which other cryptocurrencies you already have in your portfolio. As with all other types of investments, the best approach is diversification. If you already have some strong, established coins, you might gravitate toward riskier up-and-comers or vice versa. Try to invest in types of coins you haven’t yet added.

These questions should give you a more thorough understanding of the coin you’re examining, and whether you’re in a good position to invest in it. There are no inherently “wrong” decisions, so long as your investment plays into your long-term strategy, but it still pays to get as much information as you can. If there’s not enough information for you to make a confident decision, it’s a sign that this isn’t the best coin to invest in—or at least, not the best time to invest in it.

Peter Daisyme is the co-founder of Palo Alto, California-based Hostt, specializing in helping businesses with hosting their website for free, for life. Previously he was the co-founder of Pixloo, a company that helped people sell their homes online, that was acquired in 2012.

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