How do you know for sure that a token is something you want to invest in?
Does any of the following sound like they should be considered?
- FOMO (Fear of missing out)
- The quality of their memes on Twitter.
- Speculation on whether your favorite influencer will shill the project
If these even enter your mind, stop right there. Unless you like living on the edge with your investments (like a proper degen), these don’t even scratch the surface of what you should be considering while formulating an investment strategy.
And even if you are a degen — some portion of your portfolio should be allocated to safer coins with fundamentals. You know, just in case your favorite shitcoins take a nosedive.
While there is no one-size-fits-all answer to the question of what to look for in a cryptocurrency before investing in it, there are patterns you can look out for. And they are not that difficult to look out for! Let’s look at some of the top ones.
Things to consider before your next YOLO
Utility/mission—what is it good for, absolutely nothing?!
Ah, utility. Something that the crypto world talks about way too often. And no, it’s not about staking your coins to produce more coins — we’re way past the stage of calling it that an utility.
A good project that can weather bear markets and come back during bull markets will have a solid product. Something like a game that people actually want to play, or a product that makes blockchain onboarding easier.
So, while investing in a project, ensure you know what that project stands for. Especially for long term holds.
Team—who's building it?
The team behind a crypto project is a very important thing to consider when deciding whether or not to invest in it. Good projects will often include a team made up of experienced industry veterans.
Now, of course, you might think — How can I determine whether or not a team is promising, especially when anonymity is all the rage in the industry? Well, just take a look at their track record and work history! Even anonymous developers have a track record sometimes.
In the absence of a verifiable track record, however, you can rely on your understanding of the project and its approach (which you can read all about in their whitepaper)—and of course, your good ol' gut! If something feels off about the guys behind a project (or you just don't have faith in them), it very well might be.
One other thing to seriously consider is the founding team and early investors' holdings of the native token. Projects where the team and early investors control too much of the supply often turn out to be rug pulls and should be approached with extreme caution.
Tokenomics— what affects its tokens' supply and demand?
A crypto's tokenomics simply refers to all the factors that affect its supply and demand. How many tokens are there and how are they distributed across early investors? Is the demand enough to justify the supply? Do they just issue new cryptocurrency mindlessly like the FED prints money?
Supply and demand are one of the biggest factors that affect a cryptocurrency's market price. It can mean the difference between a token that survives and one who goes into a death spiral.
Too many crypto projects have hurt themselves with bad tokenomics while others have weaponized it to build hype out of nothing and stir up demand for their native token. For example, the ones who issue a ton of tokens, and then “burn” them to emulate scarcity in the market. It’s surprising how well that works initially.
So, while choosing a cryptocurrency, ensure it has good tokenomics. Ensure that it has enough utility to justify its market cap.
Competition—what's it up against?
The amount of competition that a project faces is another good factor for determining whether or not it's a good candidate for your portfolio. A project that has little to no competition is far more likely to succeed than one that is fighting for market share in an ultra-competitive market.
Be careful though! As little competition can also be indicative of a project in an unlucrative market.
And if you’re choosing something that’s a bit competitive, treat it as you’d evaluate a stock. What do you think is different about that specific cryptocurrency that it can outshine its competition? One example is Solana vs ETH. Solana’s fast transactions could potentially be an USP for it to capture a ton of ETH’s market share.
Risk tolerance—how risky is this?
Just how much of a degen are you? Better yet, cos we're all big degens here, how much of a degen can you afford to be right now, based on what your portfolio is looking like?
The answer to this question determines your how much risk you should be willing to take on, or your "risk tolerance". Risk tolerance is highly subjective, since only you can truly determine just how much risk is comfortable for you. While we all love a good YOLO, we must be careful not to take on too much risk, as this could be disastrous!
Intrinsic value—what's a fair price to buy this?
One often overlooked but critical metric to look at before buying a cryptocurrency, especially when there are several other promising projects in the same space, is its price, or more specifically, its intrinsic value.
People often make the mistake of believing that it makes sense to buy into a promising project at any price—this, however, isn't the case.
This is common wisdom in the world of stock investing, where metrics like the price-to-earnings (PE) ratio and discounted cash flow (DCF) are used to compare company stocks and determine what a fair price to purchase one would be. To quote legendary investor Warren Buffet, you should "buy stocks like you buy groceries, not like you buy perfumes."
The key takeaway here is you should never overpay for a cryptocurrency. While, unlike in the stock markets, there is a general lack of standard metrics for determining a fair price to buy a cryptocurrency, there's nothing stopping you from making up some of your own.
You could, for instance, calculate a Price-to-transactions (Price vs the number of transactions the project has facilitated) ratio or a Price-to-Total-value-locked (Price vs the number of funds locked in a project) ratio to try to determine a reasonable price to buy a cryptocurrency.
Hedgehog and picking your next winner
We understand that the task of finding good crypto projects and weighing them against each another can be quite daunting and even confusing. That's why we built Hedgehog to assist us (and you too—it's okay, we'll share) in figuring out what cryptocurrencies to add to our portfolio.
Hedgehog is the first crypto-first robo-advisor to be licensed to give personalized crypto advice in the United States. Hedgehog is SEC-certified and supports pretty much every crypto, wallet, and exchange you could ever want to use. Hedgehog has a bunch of features you can use to greatly simplify the process of picking your next big winner. What are these features? Let's explore them.
First and foremost, Hedgehog can make personalized buy and sell recommendations based on your portfolio settings. Yes, you read that right—just inform Hedgehog of your investment goals via the intuitive portfolio settings and it will let you know what it thinks you should buy or sell based on that! Sweet, right?! No more spending countless hours searching for the next crypto that might be a good fit for your portfolio.
Hedgehog offers even more features to help you with picking your portfolio's next star and managing your portfolio, such as Stacks, which let you organize assets in your portfolio into groups and apply custom strategies and allocations to them. We also have upcoming Rebalancing feature in V2, that automatically adjusts the amounts of the different assets in your portfolio to help you stay in line with your investment strategy.
Now, you should note that while Hedgehog can ease the research and due diligence processes, it is not meant to replace them. You must always remember to never invest in projects you don't have faith in or understand.
That said, you definitely should take Hedgehog for a spin right now! Let us know what features you’d like us to add so that we can help you choose your next winner even faster!