Cryptocurrency selection guide for beginners
You probably started your interest in cryptocurrencies by hearing about Bitcoin or Ethereum. However, when you go to CoinGecko, you see thousands of coins and this confuses you when investing, this guide is for you.
This guide explains in detail the metrics you should look for when investing in any Cryptocurrency.
1. Where do we first look for a cryptocurrency to invest in?
The first place to look for a cryptocurrency you’ve heard about or want to buy before you hit BUY should be CoinGecko, CoinMarketCap. These are sites that list the major cryptocurrencies. This is the first place to get basic information about the available cryptocurrencies.
Although these sites contain detailed information about the available cryptocurrency, it takes time to update the information for a specific coin. Therefore, don’t buy based on these metrics alone. I will go deeper into this data one by one later in the article.
2. So which data should I look at first and why is it important?
a. Total Coin Amount
One of the most important features of Bitcoin is that it is a limited asset. Today, governments print money freely and unlimitedly. Bitcoin’s power comes from its scarcity. Since the basic rule of economics is that increasing demand for a limited asset drives up the price, the higher the demand for Bitcoin, the higher its price.
Therefore, perhaps the first data to look at is whether the money we buy is limited. By restricted we do not mean “HardCap”. HardCap means that, for example, there will be only and only 21 million Bitcoins. There will not be 21,000,001 Bitcoins. The 21 million limit is the HardCap for Bitcoin.
But coins like Ethereum or Monero don’t have this HardCap, so should this mean that existing coins are bad, no. Constrained does not mean “HardCap”. Ethereum and Monero are also limited coins, the only difference from Bitcoin is that these coins decrease over time and limit their supply to an unknown point.
So, the important thing is not that there is a hard cap, but that the supply will eventually limit itself. So, this is the first metric to look at. Will the cryptocurrency we buy limit itself in the future? If yes, we are on the right track.
(For example, Tether is a crypto Dollar, and Tether can print unlimited USDT for as many Dollars as the company has).
b. Amount of Coins in Circulation and its Ratio to Total Amount
So, we know that a cryptocurrency has a limited “HardCap”, so what is the amount in circulation? The answer to this question is very easy. For example, 89% of the mined Bitcoin has been mined, as shown in the example above. This means that only a small amount of 11% is left. Approximately 2 million Bitcoins will be mined, and the extraction will be over.
Then comes the second place to look, the Circulating rate of a cryptocurrency. If the circulating rate of a cryptocurrency is low compared to the amount to be mined, this will cause the value of this currency to decrease with the coins that will join the circulation in the future.
For example, the example below is for Ravencoin (RVN). As can be seen, there will be 21 billion total RVN. It will not exceed this limit. However, the total amount of RVN in circulation is 8 billion. This means that another 12 billion (60% of the total amount) RVN will be added to circulation.
In short, the more the total amount of a coin in circulation compared to its total amount, the more stable its price will be, that is, less volatile. Because the new coins that will enter circulation will be less than the existing coins and will not pull the price down.
So, shouldn’t we invest in these coins? Should we stay away from these coins? The answer is a big fat NO. Why is that?
c. The rate of increase in the amount of coins in circulation and inflation
The speed at which a coin enters circulation is very important. For example, based on the Ravencoin example above, 12 billion RVNs are currently waiting in line to enter circulation. The important thing is the speed at which these 12 billion units enter circulation. For example, if all 12 billion units will enter in 1 year, Ravencoin circulation will increase by 120% in almost 1 year, so the price that cannot withstand the supply shock will drop significantly.
Let’s say these 12 billion units will be released in 120 years, it means that 100 million RVN will enter circulation every year, and this amount is very small compared to the current 4 billion RVN. This means that the price is not affected much by the coins that will enter circulation.
This is where the concept of “inflation” comes into play. Inflation in crypto is the ratio of the amount of a coin that will enter circulation in a year to the amount of coins in circulation. Let’s say Acoin has 100 coins in circulation, if there are 200 coins in circulation at the end of a year, the inflation of this coin is 100%.
Inflation is not always something to be afraid of, you can also use it to your advantage. If the inflation of a coin is high, the price is severely depressed. These types of coins are among the coins that can be evaluated for the long term (5 years and beyond). Especially updates such as Halving — Difficulty Bombs seriously suppress inflation. (This is the reason why the halving in Bitcoin has pushed the price up.) Buying and waiting while inflation is high will cause a serious price increase with the fall. Inflation calculation and halving etc. methods will be explained later in the article.
d. Coin Market Size
We’ve learned about the total amount of coins, the amount of coins in circulation, the rate and inflation. Now we come to another metric. The market capitalization of a coin.
The market capitalization of a cryptocurrency is calculated with a very easy process.
(Number of coins in circulation) x (Current price of a coin) = Market capitalization of a coin
So, what is Market Capitalization good for? What data does the price of a coin multiplied by the amount in circulation give us? Then comes the key phrase:
“THERE IS AN INVERSE RELATIONSHIP BETWEEN THE MARKET CAPITALIZATION OF A CRYPTOCURRENCY AND ITS RISK APPETITE.”
This means that if a cryptocurrency has a high market capitalization, it is well-known, is likely to be listed on many exchanges, and is a safer haven than lower-ranked coins.
Bitcoin is the biggest coin in the cryptocurrency market. Bitcoin is therefore the cryptocurrency with the least risk and the least volatility in the cryptocurrency markets. As the market size decreases, cryptocurrency becomes much riskier.
So, should we run away from high-risk cryptocurrencies? No, we shouldn’t. If the risk of a cryptocurrency is high, the return is high and so is the return. For example, it’s common for a cryptocurrency ranked 600th to double in value or lose 90% of its value, but it’s more difficult for Bitcoin.
e. Exchanges where the coin is available
Although it is a metric close to Market Capitalization, the more exchanges a coin is listed on and how large and prestigious these exchanges are, the more insight it gives about this coin.
If a coin is listed on many exchanges, it will be easy to access this coin. This will be very important for the pricing of a coin. Because in an exit wave, everyone will want to buy this coin, if it is on unknown and not famous exchanges, which we call “under the stairs”, access to this coin will be difficult and the coin price will be manipulated by the few people on that exchange.
It is true that if a coin has a high market capitalization, it is usually listed on many exchanges, but there are many exceptions. For example, Bitcoin SV
BitcoinSV is not listed on many well-known cryptocurrency exchanges (such as Binance, Kraken, Bitstamp, OKex, etc.), despite having a HardCap of 21 million, 89% mined, low inflation, and ranking 22nd in market capitalization.
The logic is wrong, “If a coin is listed on few exchanges, it’s bad.” No, exchanges are looking after their own pockets. If a coin has a lot of trades, they’re happy to add it and earn a commission. However, despite BitcoinSV’s high volume and market capitalization, many exchanges don’t list it. This is an important metric.
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