How do you choose or analyze altcoins?
What are alternative currencies?
The word “altcoin” is derived from “alt” and “currency”. Altcoins refer to all alternatives to Bitcoin. Altcoins are cryptocurrencies that share characteristics with Bitcoin (BTC). For example, Bitcoin and altcoins have a similar underlying framework. Altcoins also work like peer-to-peer (P2P) and token sharing systems, much like Bitcoin.
Of course, there are also notable differences between Bitcoin and altcoins. One such difference is the consensus mechanism these digital currencies use to verify transactions or produce blocks. While Bitcoin uses a Proof of Work (PoW) consensus mechanism, altcoins typically use Proof of Stake (PoS). There are different classes of altcoins, and they can be best identified by their consensus mechanisms and unique functions.
Here are the most popular types of altcoins:
Mining based
Mining-based alternative coins use a proof-of-work method, known as PoW, which allows systems to generate new coins by mining. Mining entails solving complex problems to create blocks. Monero (XMR), Litecoin (LTC), and ZCash (ZEC) are examples of mining-based altcoins.
stablecoins
Stable coins aim to reduce the volatility that has characterized the trading and use of cryptocurrencies since the beginning. Thus, the value of stablecoins is tied to the value of a basket of commodities, such as precious metals, fiat currencies, or other cryptocurrencies. The basket is used as a reserve in case you encounter cryptocurrency issues. Dai (DAI), USD Coin (USDC), and Tether (USDT) are all examples of stablecoins.
Security Codes
True to its name, the security token is similar to traditional securities traded on stock markets. They are similar to traditional stocks and represent equity, either in the form of ownership or dividends. Security tokens attract investors due to the high probability that their price will rise rapidly.
Memecoins
Memecoins are so called because they represent a ridiculous bargain on popular cryptocurrencies. It is usually promoted by famous celebrities and influencers in the crypto field. Popular meme coins Dogecoin (DOGE) and Shiba Inu (SHIB), for example, are often hiked in price by Elon Musk, CEO of Tesla and a well-known crypto enthusiast.
Utility Codes
Utility tokens are used to provide services such as rewards, network fees, and purchases within a particular network. Utility tokens do not offer stocks, unlike security tokens. Filecoin (FIL), for example, is a utility token used to purchase storage on a decentralized storage network.
How do you rate altcoins?
Altcoin fundamental analysis involves looking at and evaluating all available information on the altcoin. It includes looking at the use cases of cryptocurrency and its network, as well as the team responsible for the project, to fully understand and evaluate the best digital currencies to buy.
When analyzing digital currencies or any cryptocurrency for that matter, the goal is to understand whether the asset in question is overvalued or undervalued. Undervalued assets should be avoided, while undervalued assets are the most ideal. This is because the overvalued assets are likely to underperform and will fall back to their true value. Undervalued assets, on the other hand, have a higher potential for growth and are consistently profitable.
Comprehensive analysis will help you make the best decision on your investment decisions.
Here are some helpful tips on how to analyze cryptocurrency before investing:
Step 1: Analyze the white paper and find the value proposition
An audit of the token white paper will provide a lot of relevant information such as use cases, goals, and the team’s vision for the project. The white paper should give you a good picture of how the altcoin provides value to its users.
The value proposition for bitcoin, for example, is as follows: “A decentralized digital currency, without a single central bank or administrator, that can be sent from user to user on a peer-to-peer network without the need for intermediaries.”
An altcoin value proposition can guide you as you continue to analyze other information about it.
Step 2: Find the increasing demand and the stable (or decreasing) supply
Looking at supply and demand is one of the best ways to evaluate your next crypto investment. Now that you’ve got a clear picture of how the altcoin can add value to its users, it’s time to look at how it navigates between supply and demand.
Simply put, an alternative currency must have incentives that facilitate increased demand in such a way that supply is constantly decreasing or stabilizing. When demand exceeds supply, prices rise, resulting in increased demand.
To do this, you can access resources such as Cointelegraph price indicators and market news, as well as a heatmap from Coin 360 and CoinMarketCap.
Step 3: Evaluate the team and stakeholders behind the project
Now that you have a good understanding of what the project can offer, it is also important to make a thorough evaluation of the team behind the project. You can find information about the team in the project’s white paper, but try doing independent research on it as well. You can check the project’s official website team page as well as their LinkedIn profiles which they should have made public and accessible to everyone.
Ask the following questions when considering each member’s background:
- Have they worked on other prestigious and successful projects in the past?
- What are their credentials?
- Are they reputable members of the crypto community and blockchain ecosystem?
The goal is to see if the team behind the project is experienced and consists of experts who know what they are doing. You can take a look at on-chain analytics platforms and blockchain explorers to complete your research on this. You can also learn about their social media profiles or check Twitter for the conversations they are participating in.
Ethereum, for example, has such a strong investment community because everyone working on Ethereum creates value for Ethereum owners. Despite issues such as high fees and slow transactions, developers, community builders and other top talents still want to move forward with projects related to Ethereum.
Platforms like AAVE and OpenSea, for example, are built on Ethereum. The logic behind ensuring a strong core team supports the project is that it creates a multiplier effect. A project with a strong talented team is attracting more future thinkers, allowing more projects to be built and improvements to a platform, such as Ethereum. These people strive to continually improve the available platforms and initiatives related to the project, thus creating more value for coin holders.
What are the most likely altcoin platforms?
When it comes to investing in altcoins, there are a variety of options that you can choose from. However, it is always wise to know which one has the greatest potential to ensure that you make a smart investment.
- Ethereum: There is a reason why Ethereum is called the “King of Altcoins.” Created in 2013 by Vitalik Buterin and co-founders, Ethereum is a smart contract platform used to create decentralized applications (DApps). The founders designed Solidity, Ethereum’s very own programming language for smart contracts. The majority of the current decentralized finance space is based on the Ethereum blockchain, while the Ether (ETH) token continues to evolve in its usefulness day by day.
- chain link: Chainlink takes smart contracts to another level by integrating real world data. Thanks to Chainlink, Ethereum smart contracts can now make calls to other APIs, as well as handle global events and other asset prices. Chainlink’s value continues to rise as it brings prominent stakeholders on board, including former Google CEO Eric Schmidt, as one of its advisors.
- Excellent lumenStellar aims to unify global banking systems through its decentralized platform. As such, it uses offline payment methods such as Alchemy Pay and Single Euro Payments Area. The Stellar network then connects these systems via a decentralized ledger. Competing with Stellar is Ripple, whose encounters with the SEC have made it vulnerable. This puts Stellar in a prime position to take the lead in becoming the best global payment network.
- Eve: Aave is already one of the best lending protocols today and continues to provide security and anonymity to borrowers. Due to its popularity, borrowers are required to provide greater collateral than the amount they borrow. The collateral is kept securely in the escrow for the life of the loan. In the event of default, the payment is made to the lender automatically via the smart contract.
