Disclaimer - If you haven't read my disclaimer yet, make sure you do so here. TL;DR version - Buyer beware, I am not an expert, I am fumbling my way through this like the rest of you.
Also, I hold a little bit of Bitcoin and Ethereum.
As I've started learning more about blockchain and cryptocurrencies, and wanting to start speculating in some of them, a question naturally arises - how do I know which ones will go up? I don't want to buy something only to see it go to zero. After all, I've read that somewhere between 90% and 99% of cryptocurrencies are, or will turn out to be, worthless. A 1 in 100 chance of being right is a roulette wheel I don't want to spin.
Buying stocks and bonds is hard, too, but at least there you can buy a mutual fund and diversify your risk. With cryptocurrencies, you don't have that luxury. You either have to mine it yourself, or buy it yourself through an exchange and pay all the fees.
So, if I choose to speculate in a cryptocurrency, it better be worthwhile.
The frustrating part is that while I've come up with a method to research, I don't have a good way to determine if it will be successful. Here's what I do.
First, a cryptocurrency has to solve a problem
It can't just be a "Me, too! Me, too!" thing. For example, Bitcoin was invented to act as a decentralized digital currency not controlled by any government (because of tax rules in the United States, I view it more as a store-of-value than as a currency). If there were someone who were copy/paste the Bitcoin code and modify it slightly and give it a name like ByteDollar, I would consider that a "Me, too! Me, too!" cryptocurrency. It doesn't solve a problem beyond what Bitcoin has already solved; because it doesn't fundamentally change the game with respect to Bitcoin, it doesn't seem like a good investment.
That may not be sound logic, but it's the logic I use to simplify my strategy.
Second, I need to classify it
I need to determine if the cryptocurrency is trying to be a currency (store-of-value), or a platform. Examples of currencies are Monero, DashCoin, ZCash, and PIVX. Platforms are Ethereum, Cardano, NEM, and IOTA. I usually refer to both as cryptocurrencies.
I may not understand cryptocurrencies but I do understand diversification of risk. Rather than hold only cryptocurrencies or only platforms, I would prefer to limit my exposure by holding both sets, although not necessarily in equal proportions. Since there is no cryptocurrency mutual fund, that means I have to buy them each individually (or mine them myself).
That may not be sound logic, but it's the logic I use to hedge my risk.
Third, I need a way to evaluate one vs. the other
Where in the world do I even begin? There's well over a thousand cryptocurrencies out there. How can I possibly research even 10% of them? I simply do not have time for that.
I tried searching the web and found some threads on Reddit, Quora, etc. for "good" cryptocurrency investments. There are lots and lots (and lots and lots!) of recommendations about how 'x' is going to explode, or how 'y' is super interesting. Sometimes 'z' is promising, but not as much as 'a'.
How am I supposed to keep track of all that? I am an amateur. I can't do this full time. It's really frustrating to me that I don't have the time or energy to all the research; and even if I did, I can still guess wrong.
I ultimately settled on a strategy that many people reading this will think is a dumb strategy: I go to CoinMarketCap and sort by market capitalization.
I look at the top 10-15 cryptocurrencies and single out those for further research. The reason I sort by market cap is because it means that there is at least some uptake by other people. Other people are expressing confidence in it, which means that cryptocurrency is benefiting from a network effect. I know I'm supposed to think for myself, and this is a follow-the-herd approach. And, I know that there are a lot of other cryptocurrencies that are potential up-and-comers that are buried further down the stack that I will miss out on. I'm not saying that I won't take a look at those.
But this is a starting point. I can keep track of the top 10-15 cryptocurrencies.
Besides which, the whole point of tracking cryptocurrencies is not necessarily to speculate, it's also to see which one (or ones) might be fun to join the community and start developing for. Cryptocurrency's entire value proposition is that it solves a problem with blockchain. Speculating for speculation's sake is not sustainable, nor does it deserve our respect.
There are other places to find new cryptocurrencies to invest in, but when I discover them I head over to CoinMarketCap to see what the market capitalization is. If it's too small, it's risky; if it goes up it can go way up, but without having proven itself to others, I personally need to stay away.
This may not be sound logic because it necessarily means I will miss out on gains on some revolutionary new blockchain products that are just beginning. But, it's the logic I use to turn a huge problem into a manageable one.
Fourth, there's the heavy-lifting of doing the actual research
The first three steps above are a starting point to find something potentially interesting. Next comes the hard part - doing the research.
- I start by going to the website to read the whitepapers and poke around with the documentation. With any luck, it will be readable in plain English
- Next, I head over to YouTube to see if there are any videos on it. Hopefully, there's a few
- Next, I search the web for "what is <cryptocurrency>?" I'll read five to ten articles. When you've read that many, they start saying the same thing. When every new article you read starts adding no value, you know you've probably gotten all you need to know
- I head back to the website and read up on the founders to see what their background is
- User hype is often the least genuine feedback because you can't be sure if people are excited about a cryptocurrency because it's revolutionary, or if they are pumping-with-the-intent-of-dumping once the price runs up. It's kind of like how you can't always trust a company's management to tell you the truth when it comes to investing in their organization because they have conflicting interests when talking about it.
- I don't read the code, though. Some people do and it's a good idea, but I'm not good at reading other people's code
If this all sounds like a lot of work, that's because it is a lot of work. And even after doing all that work, there's still no guarantee that if you speculate in a cryptocurrency that it will go up. Many things can go wrong like there's massive bugs in the code (I doubt I could spot them even if I did read the code); another cryptocurrency comes along that does it better; lack of developer interest; an overly complicated platform that does too much and is hard to get right; government regulation that strangles a particular cryptocurrency; misinterpreting what something does and failing to get involved for the right reasons; buying into a bubble right before it bursts; and I'm sure you can think of others.
I literally came up with all that off the top of my head in the past 3 minutes.
But at least if you do your homework, you can hedge your risk. This may not be the best logic, but it's the logic I use to separate the wheat from the chaff.
Taking the plunge
As you can see, this is the process I use to take a big problem and try to whittle it down to a manageable one. Getting involved in blockchain is not just about speculating, but about trying to use the technology to innovate. There's more than one way to make money in blockchain than just buying them, of course. You could actually build applications. Or devices that use the blockchain to communicate with other devices... securely.
By no means am I an expert. By no means will I be able to predict what will take off and what won't. But I can improve my odds of making a correct guess.
At least it's fun to try.