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The first thing every responsible crypto investor must do before investing in altcoins is to review the project’s white paper, supply and demand elements, the team, and the stakeholders behind the project.
What are Altcoins?
The word “altcoin” is derived from “alternative” and “currency”. Altcoins refers to any alternative to Bitcoin. Altcoins are cryptocurrencies that share properties with Bitcoin (BTC).
For example, bitcoin and altcoins have a similar basic structure. Altcoins also work as peer-to-peer (P2P) systems and share code, just like bitcoin.
Of course, there are also significant differences between Bitcoin and Altcoins. One such difference is the consensus mechanism used by these altcoins to validate transactions or create blocks.
While Bitcoin uses the Proof-of-Work (PoW) consensus mechanism, altcoins typically use Proof-of-Stake (PoS). There are different categories of altcoins that are best defined by their consensus mechanisms and unique functionality.
Here are the most common types of altcoins:
Mining-based altcoins use the proof-of-work method, better known as PoW, which allows systems to generate new coins through mining. Mining is about solving complex problems to create blocks. Monero (XMR), Litecoin (LTC), and ZCash (ZEC) are examples of mining-based altcoins.
Stablecoins aim to reduce the volatility that has characterized trading and the use of cryptocurrencies since its inception. The value of stablecoins is therefore tied to the value of a basket of goods such as precious metals, fiat currencies, or other cryptocurrencies. The basket serves as a reserve in case the cryptocurrency encounters problems. Dai (DAI), USD Coin (USDC), and Tether (USDT) are examples of stablecoins.
True to its name, a security token is similar to traditional securities traded on exchanges. They are similar to traditional stocks and represent equity, whether in the form of ownership or dividends. Security tokens attract investors due to the high probability that their prices will increase rapidly.
Memecoins are named that way because they are a goofy version of well-known cryptocurrencies. They are typically touted by celebrities and popular influencers in the crypto space. Popular meme coins Dogecoin (DOGE) and Shiba Inu (SHIB), for example, are often priced up by Elon Musk, CEO of Tesla and well-known cryptocurrency enthusiast.
Utility tokens are used to provide services such as rewards, network fees, and purchases on a specific network. Unlike security tokens, utility tokens do not offer equity. Filecoin (FIL), for example, is a utility token used to purchase storage on a decentralized storage network.
How do you assess Altcoins?
Altcoin fundamental analysis involves analyzing and evaluating all available information about an altcoin. It includes the analysis of the use cases of the cryptocurrency and its network and the team behind the project to fully understand and evaluate the best altcoins to buy.
When analyzing altcoins or any other cryptocurrency, the goal is to understand whether the asset in question is overvalued or undervalued.
Overvalued assets should be avoided while undervalued assets are more ideal. This is because overvalued assets are likely to underperform and revert to their true value.
Undervalued assets, on the other hand, have greater growth potential and are consistently profitable.
A thorough analysis will help you make the best decision for your investment decisions.
Here are some helpful guidelines for analyzing cryptocurrencies before investing:
Step 1: Review the white paper and find the value proposition
Reviewing a token’s white paper provides a lot of relevant information, such as use cases, goals, and the team’s vision for the project. The white paper should give a good picture of how the altcoin will offer value to its users.
For example, Bitcoin’s value proposition is as follows: “a decentralized digital currency with no central bank or single administrator that can be sent from user to user on a peer-to-peer network without the need for intermediaries.”
An altcoin’s value proposition can guide you in further analyzing other information about it.
Step 2: Look for increasing demand and stable (or decreasing) supply
Looking at supply and demand is one of the best ways to evaluate your next cryptocurrency investment. Now that you have a clear picture of how the altcoin is delivering value to its users, it’s time to see how it navigates between supply and demand.
Simply put, the altcoin must have incentives that make it easy to increase demand in such a way that supply continuously decreases or remains stable. When demand exceeds supply, prices rise, further fueling demand.
To do this, you can access resources such as CoinMarketCap’s price indices and market news, as well as Coin 360’s heatmap.
Step 3: Assess the team and stakeholders behind the project
Now that you have a good understanding of what the project can offer, it’s also important to thoroughly assess the team behind the project.
You can find information about the team in the project’s white paper, but also try to do some independent research. You can check out the team page on the project’s official website, as well as their LinkedIn profiles, which should make them public and available to all.
Ask the following questions as you review each member’s history:
- Have they worked on other respectable and successful projects in the past?
- What are your references?
- Are they legitimate members of the crypto community and blockchain ecosystem?
The aim is to find out if the team behind the project is experienced and consists of experts who know what they are doing.
You can turn to on-chain analytics platforms and blockchain explorers to supplement your research in this regard. You can also snoop on their social media profiles or search Twitter for conversations they’re a part of.
Ethereum, for example, has such a strong investment community because every individual working on Ethereum creates value for Ethereum holders.
Despite issues like high fees and slow transactions, developers, community builders, and other top talents still want to participate in Ethereum-related projects.
Platforms like AAVE and OpenSea, for example, are built on Ethereum. The logic behind ensuring that a strong core team supports the project is that it creates a ripple effect.
A project with a strong and talented team attracts even more credible thinkers, which allows for even more projects and improvements to be built on the platform, just like Ethereum.
These people strive to continuously improve the available platforms and initiatives related to the project, thus creating even more value for the currency holders.
Which altcoin platforms have the greatest potential?
When it comes to investing in altcoins, there are a variety of options to choose from. However, it’s always wise to know which ones have the most potential to ensure you’re making a smart investment.
- Ethereum: There is a reason why Ethereum is referred to by many as the “king of altcoins”. Founded in 2013 by Vitalik Buterin and co-founders, Ethereum is a smart contract platform used to build decentralized applications (DApps). The founders designed Solidity, Ethereum’s proprietary programming language for smart contracts. Most of the current decentralized finance space relies on the Ethereum blockchain, while the native Ether (ETH) token is evolving in usefulness every day.
- Chainlink: Chainlink takes smart contracts to another level by integrating real-world data. Thanks to Chainlink, Ethereum smart contracts can now make calls to other application programming interfaces, as well as respond to global events and other asset prices. Chainlink’s value continues to rise, bringing valuable stakeholders on board including former Google CEO Eric Schmidt as one of its advisors.
- Stellar Lumens: Stellar aims to unify global banking systems through its decentralized platform. As such, it uses separate payment methods such as Alchemy Pay and Single Euro Payments Area. The Stellar network connects these systems via a decentralized ledger. Competing with Stellar is Ripple, whose clash with the SEC left it vulnerable. This puts Stellar in a prime position to take the reins and become the leading global payments network.
- Aave: Already one of the leading lending protocols today, Aave continues to offer borrowers security and anonymity. Because of its popularity, borrowers are forced to offer collateral in excess of the amount they are asking. The collateral is held securely in escrow throughout the life of the loan. In the event of a default, the creditor is automatically paid via the smart contract.