Headline: Methods to Research the right kind of Crypto to Invest in
Date: 3/26/2022
Body:
Investing guru Peter Drucker is quoted often. One of his most famous quotes is, “You should be able to illustrate their business model with a crayon.” Cryptocurrency is simply a different type of investment, so it stands to reason that you should be able to illustrate the value proposition “with a crayon.” To be able to simplify such a complex decision to such a level, requires significant research. When researching stocks of companies, you can go to the corporate website and peruse the 10-Q and 10-K statements (paying extra attention to the actual financial statements) and then scan the commercial press to find articles indicating a good future is probable, or the reverse. With a cryptocurrency, this process is not possible because the same statements are not required by the Federal Government. But, be of good cheer, there are things that you can do to ensure that you are making the best investment possible, for yourself. Recognizing that nobody has a perfectly functioning crystal ball, these research ideas cannot and will not provide guaranteed wins. But, they will significantly increase your odds.
First, understand what it does and how it functions.
To do this, please be sure to download the whitepaper that is behind the currency you are thinking of investing in. Before a cryptocurrency is launched, the team behind it will create a whitepaper that introduces the currency to potential investors. It will outline the purposes of the currency, introduce the management team and brief you on some of the major policies that the currency follows. I know that this can be tiresome, but, reading and digesting this document is part and parcel of your investment. But, if you don’t, what could happen? I mean, nobody has had a disastrous blind date before, did they? But, this potential partner has some of your money, so, it’s a bit more serious.
Please pay serious attention to the market capitalization of the currency you’re considering. If it is too small, it could be a very illiquid investment that is hard to exit. Also, pay some attention to how much currency will be held by the founders.
Second, scan the press (i.e. Google) and see if it is active
Currency isn’t worth the metal it’s minted with if you can’t turn it into something else of value, and crypto has no metal to it. So, look to see if it seems to be actively spoken of in the internet. Look to see if the website works well. Look to see if there is an active community. Look to see if people are actively developing apps to add functionalities to the currency. Be sure to stop at CoinGecko or some similar site to get general information on price fluctuations and how your currency compares to others.
Third, check out the competition
OK, so you want to invest in Bitcoin. But then you look at Ethereum and realize that the functionality might be better, and there are several metaverses that you might like that run on its infrastructure. Be aware of how good or bad the competition is.
Fourth, do some research on your own situation
Do you have an emergency fund set up? Are you currently contributing to a retirement account? Do you have enough money to cover normal expenditures absent this money you’re about to invest? Be very frank and honest with yourself, and if you said “no” to any of the foregoing questions, perhaps you should consider it a red flag.
Are there common scams to avoid?
There are some common scams to avoid. Fortunately, if you use good research practices, they can be identified.
First, if something seems too good to be true, it probably is. This is true in the realm of cryptocurrency as well. If somebody is promising to make you 10X your money within a quarter, be very skeptical. Sliding away from them is probably a good move too.
More specific to the internet, shilling and sybil attacks are quite common. If watching a video or reading a website, the line between “educational material” and “promotional material” can be razor thin or less. (Trust me, I have taken a very large variety of workshops where they explain techniques and tricks to make this work. That’s why I never charge for these blogs or have advertising on my site.) Sybil attacks are related, only instead of one “voice” giving you “educational material”, a user with an agenda will open several websites and try to appeal to multiple audiences, and make it appear that there are several people with this point of view. This chorus can be quite convincing: your only option is to put plenty of wax in your ears, strap yourself tight to the mast, and ride it out. (Sorry for the long-winded Odyssey reference.)
The Verdict
Wait a minute… this is all supposed to be fun, right? Well, no. This is supposed to be a way for you to hopefully make some good money, and that requires work. If you were hoping to make money and have fun risking it, you’re probably better off to go to a real casino. On the other hand, if you’re truly of the stripe to do this investing, you will find this researching to be enjoyable. Just be sure to remember to keep things in perspective.
REFERENCES
https://www.fool.com/the-ascent/cryptocurrency/articles/your-7-point-checklist-to-crypto-research/
https://academy.binance.com/en/glossary/do-your-own-research
https://www.thebalance.com/how-to-invest-in-cryptocurrency-5078408
https://www.cpacanada.ca/en/news/canada/2021-11-30-crypto-investing
Editor’s Note: Please note that the information contained herein is meant only for general education: This should not be construed as Tax Advice. Personal attributes could make a material difference in the advice given, so, before taking action, please consult your tax advisor or CPA.