16/10/2021
How do I know if a token is worth investing in?
When we consider the cryptocurrency space, there are more than 6,000 cryptocurrencies that are actively traded.
Each cryptocurrency is different, and often value of a cryptocurrency does not necessarily come from gold or from a central bank fiat currency, but comes from a variety of avenues like:
1. Type of Token
2. Founding Team
3. Design of Tokenomics/Supply
4. Community
5. Business/use case
Type of Tokens
Non-fungible tokens and fungible tokens have different supply and demand, which affects their value. Fungible tokens are tokens that can be used as currency or medium of exchange. These are the tokens that people trade on the open market, use for real-world transactions or to purchase digital goods on the web.
Non-fungible tokens or NFTs on the other hand are like collectibles pieces, digital art, or game collectibles. And because it is non-fungible, it is not divisible or replaced by another NFT. Every single piece of NFT is unique to itself.
Owning an NFT is like having the Mona Lisa in your living room. To the right buyer, one will be able to sell a NFT for a high price. To someone else who is not able to appreciate art, it is just another bunch of pixels.
Founding Team
The founding team is the brain of a crypto project. Like any company or business, having a strong founding team can point the project into the right direction and create value for its community. Strong founding teams usually have a clear shared vision, a mix of technical, marketing and management expertise, and years of experience in the crypto industry.
When a project has a weak founding team, or a team that is only thinking for themselves, chances are, it usually ends up in rugpulls or exit scams.
This is not only detrimental to the community that the project has built, but also the crypto community as a whole.
Design of Tokenomics
Tokenomics is the economics of a crypto token. This covers the Token use case, Token Supply, Fund Raising and most importantly, it affects the supply and demand of a token.
When investing in a new token, one of the most important things to look out for is the token use case, or in short, “What problem is this project solving for the world?”. To create value, the token should be able to solve a problem that is affecting a huge number of people and not only for a niche group of individuals
In essence, a project that can solve huge problems will have more potential of growing than projects that are solving smaller problems.
How many Tokens are there available?
The other important metric to look out for will be Token Supply. When a token has higher supply, it does not mean that it is a bad project, it simply means there are more people who can hold this token. For example, Ether (ETH) does not have a max supply: this means miners can continuously mine for new ETH, as compared to Bitcoin (BTC) which has a maximum of 21 Million Bitcoin.
In ETH’s case, to counter the oversupply in the market, a few measures were taken, like the introduction of a mechanic for burning ETH during the London Fork Upgrade and increasing the difficulty of mining ETH.
Community that the token has
If the founding is the brain of the project, the community that the project has is the backbone. Communities are the loyal fans of the project. They help evangelise the project and share input on making the project better.
When Ethereum had a hard fork into Ethereum and Ethereum Classic, this cause a split in the community as some believed that Ethereum Classic is the way to go, while others believed that Ethereum was the one to back.
Lively, engaging communities help to bring in more investors, increase adoption, and provide liquidity for the token in the market. Therefore, do not underestimate the power of community as they are an integral part of the cryptospace.
Business/use case
At the end of the day, every business and every token project exists to solve a problem. Does this project solve a problem? Is it a significant problem? Is it a good and elegant solution?
These areas of evaluation will give a clue as to whether a token is perhaps entering an already crowded marketplace, or which other projects it is competing with. Investors will need to decide if it can grab market share, or if it is trying to solve a prblem that does not exist or does not require blockchain technology to solve.
Which token is the best?
There is no best token in the world because everyone is different in terms of character, investment habits and financial situation. However, with these pointers, it can serve as a guide to help you spot potential projects that can go to the moon or filter projects that does not feel right for you.
Always do due diligence before investing into any investment!
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