Crypto Series #1 | How to pick & analyze altcoins?
Before investing in altcoins, you should look into the project's whitepaper, demand-supply elements, team and stakeholders behind the project
Welcome to the first edition of the Crypto Series.
As Web 3.0 and cryptocurrencies are becoming increasingly mainstream. I thought it would be fitting to introduce my subscribers to the space’s core concepts, ideas, constituents and principles as I try to navigate, understand and invest in the space myself.
At this point in time, rare are those among us who have not heard of Bitcoin, but what about altcoins (alternative coins)? Luna? Solana? and the likes?
The first issue of the Crypto Series introduces the concept of altcoins and what are the steps I take to assess the potential of these as I look to generate alpha in my crypto fund. Enjoy!
What are altcoins?
The word “altcoin” is derived from “alternative” and “coin.” Altcoins refer to all alternatives to Bitcoin. Altcoins are cryptocurrencies that share characteristics with Bitcoin (BTC). For example, Bitcoin and altcoins have a similar basic framework. Altcoins also function like peer-to-peer (P2P) systems and share code, much like Bitcoin.
Of course, there are also marked differences between Bitcoin and altcoins. One such difference is the consensus mechanism used by these altcoins to validate transactions or produce blocks. While Bitcoin uses the proof-of-work (PoW) consensus mechanism, altcoins typically use proof-of-stake (PoS). There are different altcoin categories, and they can best be defined by their consensus mechanisms and unique functionalities.
Here are the most common types of altcoins:
Mining-based
Mining-based altcoins use the proof-of-work method, most commonly known as PoW, which allows systems to generate new coins by way of mining. Mining entails solving complex problems to create blocks. Monero (XMR), Litecoin (LTC) and ZCash (ZEC) are all examples of mining-based altcoins.
Stablecoins
Stablecoins aim to reduce the volatility that has marked crypto trading and use since the beginning. The value of stablecoins is, therefore, pegged to the value of a basket of goods, like precious metals, fiat currencies or other cryptocurrencies. The basket serves as a reserve in case the cryptocurrency encounters problems. Dai (DAI), USD Coin (USDC) and Tether (USDT) are all examples of stablecoins.
Security tokens
True to its name, a security token is similar to traditional securities traded in stock markets. They resemble traditional stocks and represent equity, either in the form of ownership or dividends. Security tokens attract investors because of the high probability that their price will appreciate quickly.
Memecoins
Memecoins are called such because they represent a silly take on well-known cryptocurrencies. They are typically hyped by celebrities and popular influencers in the crypto space. Popular meme coins Dogecoin (DOGE) and Shiba Inu (SHIB), for example, often have their prices driven up by Elon Musk, Tesla’s CEO and well-known crypto enthusiast.
Utility tokens
Utility tokens are used to provide services like rewards, network fees and purchases within a given network. Utility tokens do not offer equity, unlike security tokens. Filecoin (FIL), for example, is a utility token used to purchase storage on a decentralized storage network.
How do you evaluate altcoins?
Altcoin fundamental analysis involves looking at and evaluating all available information on an altcoin. It involves looking at the cryptocurrency’s use cases and its network, as well as the team behind the project, to fully understand and evaluate the best altcoins to buy.
When analyzing altcoins, or any cryptocurrency for that matter, the goal is to understand whether the asset in question is overvalued or undervalued. Overvalued assets should be avoided, whereas undervalued assets are more ideal. This is because overvalued assets will likely underperform and dip back to their real value. Undervalued assets, on the other hand, have more potential for growth and are consistently profitable.
A thorough analysis will help you make the best decision concerning your investment decisions.
Here are some helpful guidelines on how to analyze cryptocurrency before investing:
Step 1: Analyze the whitepaper and find the value proposition
Scrutinizing a token’s whitepaper will provide a lot of relevant information such as its use cases, goals and the team’s vision for the project. The white paper must give you a good picture of how the altcoin will provide value for its users.
The value proposition for Bitcoin, for example, is as follows: “a decentralized digital currency, without a central bank or single administrator, that can be sent from user to user on a peer-to-peer network without the need for intermediaries.”
An altcoin’s value proposition can guide you as you continue to analyze other information about it.
Step 2: Look for increasing demand and stable (or decreasing) supply
Looking at supply and demand is one of the best ways to assess your next crypto investment. Now that you’ve gotten a clear picture of how the altcoin adds value to its users, it’s time to look at how it navigates supply and demand.
Simply put, the altcoin should have incentives that will facilitate the increase of demand in such a way that supply is continually decreasing or stable. When demand outpaces supply, prices go up, thereby fueling even more demand.
To do this, you can access resources like Cointelegraph’s Price Indexes and Market News, as well as Coin 360’s Heatmap and CoinMarketCap.
Step 3: Assess the team and stakeholders behind the project
Now that you have a good understanding of what the project can offer, it’s also important to thoroughly assess the team behind the project. You can find information about the team on the project’s white paper, but try to do independent research on them as well. You can check out the official project site’s team page as well as their LinkedIn profiles which they should have made public and accessible to all.
Ask the following questions when looking into each member’s background:
Have they worked on other reputable and successful projects in the past?
What are their credentials?
Are they reputable members of the crypto community and blockchain ecosystem?
The goal is to find if the team behind the project is experienced and composed of experts who know what they are doing. You can look at on-chain analytics platforms and blockchain explorers to supplement your research regarding this. You can also sniff around their social media profiles or check out Twitter for conversations they engage in.
Ethereum, for instance, has such a strong investment community because every individual working on Ethereum creates value for Ethereum holders. Despite issues such as high fees and slow transactions, developers, community builders and other top talents still want to go onboard with Ethereum-related projects.
Platforms like AAVE and OpenSea, for example, are built on Ethereum. The logic behind ensuring a strong core team backing the project is because it creates a ripple effect. A project with a strong talented team attracts even more credible forward-thinkers, thereby allowing even more projects and improvements to be built upon the platform, much like Ethereum. These people strive to continually improve on available platforms and initiatives related to the project, thus creating even more value for currency holders.
Which altcoin platforms have the most potential?
When it comes to altcoin investing, there are a variety of options you can choose from. However, it’s always prudent to know which ones have the most potential to ensure you will be making a smart investment.
Terra (LUNA) - Terra is a blockchain protocol that uses fiat-pegged stablecoins to power price-stable global payments systems. Terra offers fast and affordable settlements. Development on Terra began in January 2018, and its mainnet officially launched in April 2019. As of September 2021, it offers stablecoins pegged to the U.S. dollar, South Korean won, Mongolian tugrik and the IMF’s Special Drawing Rights basket of currencies. Its largest apps are Anchor, Astroport, and Terraport.
Avalanche (AVAX) - Avalanche is the fastest smart contracts platform in the blockchain industry, as measured by time-to-finality. Avalanche is fast, low cost, and eco-friendly. Any smart contract-enabled application can outperform its competition by deploying on Avalanche. Avalanche launched on mainnet, September 21, 2020. Its largest apps are Aave, Benqi, and Trader Joe.
Fantom (FTM) - Fantom is a directed acyclic graph (DAG) smart contract platform providing decentralized finance (DeFi) services to developers using its own bespoke consensus algorithm. Together with its in-house token FTM, Fantom aims to solve problems associated with smart-contract platforms, specifically transaction speed, which developers say they have reduced to under two seconds. Its largest apps are Multichain, Yearn, and SpookySwap.
Polkadot (DOT) - Polkadot is an open-source sharded multichain protocol that connects and secures a network of specialized blockchains, facilitating cross-chain transfer of any data or asset types, not just tokens, thereby allowing blockchains to be interoperable with each other. Polkadot was designed to provide a foundation for a decentralized internet of blockchains, also known as Web3. Polkadot is known as a layer-0 metaprotocol because it underlies and describes a format for a network of layer 1 blockchains known as parachains (parallel chains).
Solana (SOL) - The Solana protocol is designed to facilitate decentralized app (DApp) creation. It aims to improve scalability by introducing a proof-of-history (PoH) consensus combined with the underlying proof-of-stake (PoS) consensus of the blockchain. While the idea and initial work on the project began in 2017, Solana was officially launched in March 2020 by the Solana Foundation with headquarters in Geneva, Switzerland. Its top apps are Serum, Quarry, and Raydium.
Binance Smart Chain (BNB) - Binance Smart Chain launched in September 2020, about a year and a half after the launch of its older sibling Binance Chain. It is a smart contract platform mimicking the functionality of Ethereum. Its top apps are Pancake Swap, Tranchess, and Venus.
Thank you for reading the first issue of the crypto series, don’t forget to subscribe to get notified about the next issue. Paid subscribers will also receive the breakdown of my own portfolio and the projects I’m betting big on for future price appreciation. See you next time!