The Point: Among several factors that can be analyzed when assessing cryptocurrencies, here are 3 fundamental factors that are critical yet often missed.
What Are They?
1 – Intrinsic Value: Though the term in this context is still evolving, for now, intrinsic value refers to the sum of services that a cryptocurrency and its underlying technology provides.
- If a crypto is in use ( you can check Blocktivity) and actually solves a “real-world” problem, then you need to investigate the company’s development capacity to outpace competing crypto technologies to speculate on the viability of its continuing use.
- Cryptos backed by large corporate partners may be a plus, but you have to figure out whether the corporate partner actually injected capital into it, has a contractual agreement with the crypto developer, and is actively involved in the crypto’s development—in short, you need to get a sense of the quality, motivation, and goal of the corporate partnership.
- Newer cryptos have already been exposed to the scalability problems experienced by older cryptos like Bitcoin and Ethereum; so find out what solution a given cryptocurrency is implementing to solve the scalability problem.
2 – Protocol Coin vs. Utility Token:
- A protocol coin is there to support an entire blockchain ecosystem; for a protocol coin to be rendered obsolete, the entire ecosystem must collapse.
- A utility coin is built atop an “app” within a blockchain ecosystem; for a utility coin to be rendered obsolete, all it takes is for nobody to use that “app.”
- Both have a different set of risks and opportunities for wider usage—choose carefully.
3 – The Motivations Driving Demand
- Last but not least, you need to figure out of a cryptocurrency is solely used for trading or people might actually need to use it for reasons other than financial speculation.
- Also, try to determine if a crypto, most likely a utility token, is targeting a particular industry, and do your best to assess the viability of its usage within that industry; ultimately, it all boils down to market demand and the nature of that demand, whether speculation or industry use.
THE TAKEAWAY: These three fundamental factors—intrinsic value, coin type, and the motivations driving demand—provide a basic framework to help you begin assessing a potential cryptocurrency investment (emphasis on “begin”). Although there are several other factors to consider, the ones mentioned above can serve as guideposts to help you direct your research.
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