HOW TO ANALYZE ALTCOINS
What are altcoins?
In Decentra University we have already explained about altcoins. To move on to their analysis, let's take a brief look at their characteristics, knowing them will help you to improve your analysis.
Altcoins are cryptocurrencies that share characteristics with Bitcoin (BTC). For example, Bitcoin and altcoins have a similar basic framework. Altcoins also function as peer-to-peer (P2P) systems and share code, just like Bitcoin.
Of course, there are also marked differences between Bitcoin and altcoins. One such difference is the consensus mechanism used by these altcoins to validate transactions or produce blocks. While Bitcoin uses the proof-of-work (PoW) consensus mechanism, altcoins typically use proof-of-stake (PoS). There are different categories of altcoin, and they can be best defined by their unique consensus mechanisms and functionalities.
Mining-based altcoins use the proof-of-work method, better known as PoW, which allows systems to generate new coins through mining. Mining involves 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 marked cryptocurrency trading and usage since the beginning. Therefore, the value of stablecoins is linked to the value of a basket of assets, such as precious metals, fiat currencies or other cryptocurrencies. The basket serves as a reserve in case the cryptocurrency faces problems. Dai (DAI), USD Coin (USDC) and Tether (USDT) are examples of stable currencies.
True to its name, a security token is similar to traditional securities traded on stock exchanges. They resemble traditional stocks and represent shares, either in the form of ownership or dividends. Security tokens attract investors because of the high probability that their price will rise quickly.
Memecoins are so called because they represent a silly version of well-known cryptocurrencies. They are usually promoted by celebrities and popular prominent figures in the crypto space. The popular meme coins Dogecoin (DOGE) and Shiba Inu (SHIB), for example, often get their prices raised 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 within a particular network. Utility tokens do not provide equity, unlike security tokens. Filecoin (FIL), for example, is a utility token that is used to purchase storage in a decentralized storage network.
How do we evaluate altcoins?
Fundamental altcoin analysis involves observing and evaluating all available information about an altcoin. It involves looking at the use cases of the cryptocurrency and its network, as well as the team behind the project, to fully understand and evaluate the best alternatives to buy.
When analyzing altcoins, or any 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 real value. Undervalued assets, on the other hand, have more upside potential and are consistently profitable.
A thorough analysis will help you make the best decision regarding your investment decisions.
- Analyze the white paper and find the value proposition
Examine a token's white paper by providing a lot of relevant information, such as its use cases, objectives and the team's vision for the project. The white paper should give you a good idea of how the altcoin gained value for its users.
Bitcoin's value proposition, for example, is as follows: "a decentralized digital currency, with no central bank or single administrator, that can be sent from user to user in a peer-to-peer network without the need for intermediaries."
- Look for increasing demand and stable (or decreasing) supply. Watching supply and demand is one of the best ways to evaluate your next crypto investment. Now that you have a clear idea of how the altcoin adds value to its users, it's time to look at how it navigates supply and demand.
Simply put, the altcoin must have incentives that facilitate increased demand such that supply continually decreases or stabilizes. When demand exceeds supply, prices go up, thus further fueling demand.
To do this, you can access resources such as price indexes and market news from Cointelegraph.
- Assess the team and stakeholders behind the project
Now that you have a good understanding of what the project can provide, it is also important to thoroughly evaluate the team behind the project. You can find information about the team in the project white paper but try to do some independent research on them as well. You can check the team's page on the official project site, as well as their LinkedIn profiles, which they have likely made public and accessible to all.
Ask the following questions when researching each member's background:
- Have they worked on other successful and reputable projects in the past?
- What are their credentials?
- Are they reputable members of the crypto community and blockchain ecosystem?
The goal is to find out if the team behind the project is experienced and composed of experts who know what they are doing. You can check out blockchain analytics platforms and blockchain explorers to supplement your research in this regard. You can also poke around their social media profiles or check Twitter to learn about the conversations they are involved in.
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 talent still want to participate in Ethereum-related projects.
Platforms like AAVE and open sea, for example, are based on Ethereum. The logic behind ensuring that a strong core team supports the project is because it creates a ripple effect. A project with a strong and talented team attracts even more credible forward thinkers, which allows even more projects and platform improvements to be built, just like Ethereum. These individuals strive to continually improve the platforms with available project-related recommendations, creating even more value for currency holders.
Which altcoin platforms have the most potential?
When it comes to investing in altcoins, there are a variety of options you can choose from. However, it's always wise to know which ones have the most potential to ensure you'll make a smart investment.
- Ether: There's a reason why Ethereum is dubbed by many as the "King of Altcoins." Created in 2013 by Vitalik Buterin and his co-founders, Ethereum is a smart contract platform used to create decentralized applications (DApps). The founders designed Solidity, Ethereum's own programming language for smart contracts. Most of today's decentralized financial space is based on the Ethereum blockchain, while the native Ether (ETH) token continues to evolve in utility day by day.
- Chainlink: Chainlink takes smart contracts to another level by incorporating real-world data. Thanks to Chainlink, Ethereum smart contracts can now make calls to other application programming interfaces, as well as act on global events and other asset prices. Chainlink's value continues to increase as it brings in valuable stakeholders, including former Google CEO Eric Schmidt as one of its advisors.
- Stellar: Stellar aims to link global banking systems through its decentralized platform. As such, it uses disconnected payment methods such as Alchemy Pay and Single Euro Payments Area. The Stellar network then connects those systems through a decentralized ledger. In competition with Stellar is Ripple, whose entry with SEC has made it vulnerable. This puts Stellar in a prime position to take the reins and become the leading global payment network.
- Aave: Aave is already one of the leading lending protocols today and continues to offer security and anonymity to borrowers. Due to its popularity, borrowers are required to offer collateral greater than the amount they are borrowing. Collateral is held securely in escrow for the duration of the loan. In the event of default, it is automatically paid back to the lender through the smart contract.
Search Decentra University for the complementary video to this lesson.