More and more people have jumped into investing in cryptocurrencies, whose popularity has skyrocketed in 2021.
But entering this market requires prior knowledge to avoid making mistakes that result in irreparable losses. The volatility generated by the tokens is quite high and an X-ray of the cryptoactive in which to invest should be made. Do not get carried away by noise. Not because of the impulses.
Many people wonder how to spot cryptocurrencies that should not be invested in. Those digital assets for which you do not have to bet money, despite the fact that they have grabbed the attention and are in the spotlight. What factors must be taken into account not to invest in a cryptocurrency and why?
Raúl López, head of Coinmotion Spain, explains to Business Insider Spain that the large number of cryptocurrencies on the market makes it sometimes more difficult to find those that are really a good investment or that have a useful practical use.
“Cryptocurrencies are showing that their reason for being and their characteristics are as valid as traditional financial systems”He says.
“For this reason, in order to find a crypto asset in which to invest with certain guarantees, it is important that its characteristics allow it to adapt more easily to changes,” he says.
Fundamentals matter when deciding to invest
According to Alejandro Zala, head of Bitpanda in Spain, before launching to invest in cryptocurrencies, it is important to do some research: “A deep fundamental analysis that allows us to understand what we are investing in and, in the case of crypto assets, that we remember that it is a technological world linked to finance”.
Zala explains that you have to pay attention to its market capitalization, how many coins or tokens are in circulation and how many there will be in the future, among other factors. “It is advisable to also investigate who is behind the project, why it is innovative, what solutions it provides, what roadmap has been set or what strategic alliances have been sealed”, he explains.
And of course the tokenomics of the project crypto. “This concept unites the token, which is the asset in which it is invested, and its economy,” says Zala. In short, a way to define his monetary policy.
López, in this regard, believes that it is very useful to know where the real value in which one is going to invest resides and what may be the factors that can contribute to its growth or decline. “My recomendation is know the roadmap of the project and what utility or solutions a cryptocurrency provides; check if they have been meeting the milestones, if they make sense (both those already achieved and future ones) and if they will add value to the project”, he highlights.
The more of these factors that are studied in depth, the greater the knowledge of the possible behavior and risk of the product, and the less possibility that its performance will surprise or disappoint. An informed investor is freer in his financial decisions and also has more chances of success.
“By doing a brief fundamental analysis and coupled with common sense, we can pretty much define the possibility; who makes up the team (get into their social networks to find out what they really say they are in that project and have not taken their photo), what is the meaning of the token, what do they give me in exchange for having it, how many tokens are in circulation, how new tokens are released, the prices it has had throughout its history…”, he explains to Business Insider Spain Along the same lines, Carlos Callejo, Head of Technology (CTO) at Stocken Capital.
Ismael Santiago, professor and doctor in finance at the University of Seville and CEO of Olivachain I+D+I, points out that one way to detect cryptocurrencies in which to invest is when the prices of cryptoactives are well above the intrinsic value that is obtained with methodologies such as Stock to Flow and INET Model. “It is in this last model that the exchange equation M * V = P * Q is considered, and clearing M to make the proper comparisons with the real market value of the cryptoactive,” he describes.
The latter focuses on the theory of money: Part of an identity, the exchange equation, according to which the value of the transactions carried out in an economy must be equal to the quantity of money existing in that economy times the number number of times money changes hands (P = price level; Q = production level; M = quantity of money; and V = velocity of circulation of money, that is, number of times money changes hands)
Santiago warns that the fact that there is a very high percentage concentration of the tokens in very few addresses (as happens in Dogecoin, where 10 addresses hold 44% of the total), is a clear indication of a cryptoactive in which it should not be invest.
“To this we must add when there is no white paper (manifesto written by the people who create a cryptocurrency in which everything related to it is detailed: technology used, summary of the concept, future applications…) or if it is scarcely solid, or when there is no sustainable business model in the value proposition of technology (by the cryptocurrency), compared to what already exists in the market (…) Also, if there are no developers who are actively supporting the crypto asset with visible projects, for example, on Github”, he adds.
Legislation should be a good point of reference
Another aspect to take into account would be that the project demonstrates its interest in strictly complying with the current regulations and laws of the country in which its headquarters are located.
According to López, when investing in this sector, good advice would be that, in general, you have to apply common sense when making certain decisions.
Before investing through a platform or service, it is highly recommended to seek information about the company behind it to ensure that it is regulated. If you have a license or work under a European regulation, all the better.
“This way we make sure that it has had to pass strict external security audits”, points out the Coinmotion expert. In short, that it complies with European legislation on cryptocurrencies, mainly with 5 and 6 AMLD (Prevention of Money Laundering), and that it follows the necessary standards to protect the privacy of its clients according to current regulations.