3 things I wish I knew when I started investing in Cryptocurrencies

Disclaimer: This is not an investment advice. Please do your own research before investing into cryptocurrencies.

The first time I came to know about Bitcoin was in 2014 where one of my friends was trying to mine it using the power of cloud computing. I was too reluctant to invest at that time. But in late 2017, with all the action in the cryptocurrency space, my Fear of Missing out (FOMO) kicked in. That’s when I started reading about existing coins and new ICOs. After that, I invested in different coins and I have materialized both profits and losses.

Below are the list of things that I learnt over the short period of my investing experience in the crypto space.

1. Invest in cryptocurrency products that are dependent on Blockchain technology

Blockchain is a revolutionary technology that can solve many problems beyond cryptocurrencies. Blockchain is like a distributed notebook that can record transactions between two people permanently. Transactions are public, can be verified and cannot be modified.

Bitcoin is the first decentralized digital currency based on Blockchain technology. Most of the cryptocurrencies that exists today are built using Blockchain technology. But I asked myself, why do we need so many coins? Why not just Bitcoin is enough?

In fact, most of the advantages that other coins quote over Bitcoin can be implemented in Bitcoin itself. For instance, Bitcoin developers are trying to leverage Lightning Network to solve the slow and expensive Bitcoin transactions.

If that’s true, should we need other coins? The answer is that there are still cryptocurrency based products that uses Blockchain technology to solve other problems. For instance, Ethereum offers smart contracts which can be used to build apps on top of it. In fact, many other cryptocurrencies and ICOs are building their products on top of Ethereum. But interesting enough, even Bitcoin can support smart contracts.

In my opinion, think if the product that an ICO offers is “completely dependent” on Blockchain technology. When I say “completely dependent”, it means that the product cannot be built without Blockchain. When I say Blockchain, it does not mean that the product has its own cryptocurrency. It means that the product is using the distributed ledger of transactions to a solve a real-world problem. A good test is to see if the product can exist without cryptocurrency or blockchain. If it cannot exist without these, then it may be a good investment. Many start-ups are adding the Blockchain technology to their product just to attract investors to enough money to prolong their survival.

2. Value proposition of the product

When I invest in an existing cryptocurrency or ICO, I look at the following three things:

• The team — Look at the team members of the product. Study them. There should be software developers in the team. I have seen ICOs with a team having CEO, CTOs, consultants, UX designers, etc but not a single developer. If there is no developer, who is going to build the product?
• Timeline and working app — Look at the timelines offered by the ICO. If they already have a working product with many customers, give more value to it.
• Platform potential — Is the product offered can become a platform? Can it be used solve more problems? Will there be a demand and supply?

3. Coin supply, private ownership and lock-down period

Every cryptocurrency and ICO has 3 information:

• Total supply — Total supply refers to the total number of coins available for public to trade. Many ICOs uses the strategy of having more than 100 billion coins to attract investors to their coins which will be priced in pennies. Please do the math for potential market cap before buying. If there are 100 billion coins in total, it is very unlikely the price per coin will exceed $2. At $2, the market cap will be 200 billion which will be higher than the market cap of Bitcoin at the time of writing this. Hence, it is likely not possible for that coin to reach a price more than $1.
• Private ownership — Check how much percentage of an ICO is owned by the company. Typically, it should be less than 20%.
• Lock-down period — The coins owned by the company should have years of lock-down period. If there is no lock-down period, what is the motivation for the team to build a good product?

These are the basic things that I would do a research before investing in a cryptocurrency. But this is not enough and spend lot of time researching before investing in any cryptocurrency. If you want high returns, you have to think different from others and buy when everyone sells and sell when everyone buys.