How to Analyze Cryptocurrency: The Basics

Cryptocurrency investing can be a great way to diversify investments, but figuring out which cryptocurrency is suitable and which isn’t can be challenging. To make an informed investment decision, it is important to know how to analyze cryptocurrencies.

1. Review the White Paper

Most crypto projects provide a white paper, which helps define the objectives and technical details about the blockchain and its cryptocurrency’s role. True white papers contain terms and language data scientists, programmers, and developers understand. For instance, Solana has a whitepaper that describes how the blockchain will work and what the token is used for.

Cybertruck’s white paper, on the other hand, does not—it is a flashy website that talks about the potential for building a community. A disclaimer at the bottom of the webpage states, “$CYBERTRUCK is a meme coin with no intrinsic value or expectation of financial return. There is no formal team or roadmap. The coin is completely useless.”

A cryptocurrency with utility or a reason to exist should have a white paper that clearly defines the project’s goals, how it will achieve them, and how the cryptocurrency will function. Legitimate white papers define a problem being solved with the blockchain and token, and this problem and solution should be crystal clear to investors.

2. Research the Team

Cryptocurrencies are typically created by a team of founders and software developers who help create the solution to a problem. To better understand how a project could perform, you should research the professional experience of the project team. 

This may include reviewing LinkedIn profiles to learn about the professional background of any of the technical or leadership staff and the previous projects that the team members have launched. Also, the “About” page on any cryptocurrency’s website should clearly articulate who is helping build the project and what their expertise entails.

A red flag would be a team of anonymous founders or developers who don’t reveal their identity publicly or an inexperienced team that has not built or scaled any projects in the past.

3. Learn About the Leadership

Crypto projects with the potential to make a difference have a clearly defined executive team that handles the execution, financials, and marketing. Learning more about who is leading a cryptocurrency team can give insight into the probability of success for a project.

Here are a few questions to ask when researching a crypto project’s leadership:

• Do they have a history of successful leadership positions?
• Are they reputable/well-known leaders?
• Do they have a history in the crypto industry? Is it good or bad?
• Are they public-facing or anonymous?

While some projects with anonymous founders have had success, such as Bitcoin, there are others with bad intentions. The cryptocurrency is likely not legitimate if the project’s leadership is sketchy or if it avoids important topics.

4. Get to Know the Community

Most cryptocurrencies are community-driven projects that typically require a strong, supportive community to grow. Learning about a cryptocurrency’s community can help you gauge whether a project will succeed or if it is pure hype and speculation.

Joining the community’s Discord or Telegram channel can help you learn more about it, as well as get your questions about the project itself answered. If a large community base is well-organized and frequently promotes the project, it could be a sign that a cryptocurrency has the potential to grow. Communities should be discussing issues with the blockchain and improvements that could be made or have other similar discussions—in addition to the regular conversations that might occur between people with similar interests. If all you find is hype and pumping, it is a good bet that the cryptocurrency project is not legitimate.

5. Understand the Technology

Cryptocurrencies are a new concept built on distributed systems that have existed for decades. The original intent behind them was to remove human involvement (and thus corruption, mistakes, and third-party profits) from financial systems. If you can gain even a partial understanding of how blockchains work and can be used to solve problems, you’ll have an upper hand in deciding whether a cryptocurrency is worth investing in.

However, you don’t need to know how to program or maintain a blockchain—but learning what a token is, what the blockchain does, how it is maintained, what is stored on a blockchain, and how the blockchain is interacted with by users is essential for would-be investors. Otherwise, you’re only speculating on prices and hoping the coin becomes popular.

6. Understand the Vision

Cryptocurrencies should have a clear vision of their goals, with a road map that estimates how they will get there. This should be readily available in the white paper and on its website. The vision of a crypto project should give enough details for you to understand what problems it is solving and the potential user base.

For example, if a website has statements like “cryptocurrency is the future” but does not define or articulate a clear vision for how the cryptocurrency solves a specific user problem, it is a red flag.

7. Review the Road Map

The road map for a cryptocurrency project is a timeline of events that shows its expected progress. Typically shown on a line graph, the road map should have clear and concise milestones broken down on a quarterly basis, all moving the project toward a predefined set of goals.

The road map may be available in the white paper, though most crypto project timelines are ever-changing and are listed on a website. If there is no defined road map, or if the milestones are too generic (or based on money raised or earned), it is a red flag.

8. Learn the Tokenomics

The term “tokenomics” refers to the distribution, circulation, and total supply of a given cryptocurrency. This is important, as it affects the overall price of a cryptocurrency over time. Similar to shares of stock in a publicly traded company, the price of a given cryptocurrency reflects supply and demand. The more shares there are, the more demand there needs to be to increase the price.

Here are three important data points to review before investing in any cryptocurrency:

• Circulating supply: The cryptocurrency currently in the market
• Total supply: The total amount of cryptocurrency issued, including those that have been removed from circulation
• Maximum supply: The maximum amount of tokens that will ever be issued

All three of these statistics can greatly affect the price of a given cryptocurrency, so understanding supply is essential for cryptocurrency investors.

Some cryptocurrency projects use uneven token distribution methods to try and influence prices. Reviewing the token unlock schedule can help you understand how the tokens will be distributed and to whom they will go. Projects that give the founders a large portion of tokens at release should be viewed with a skeptic’s glasses.

9. Review the Data

Cryptocurrency prices are known to swing up and down wildly. One reason for these wild swings is that investors do not want to be left out of the next big price jump, nor do they want to be left holding a cryptocurrency that has dropped significantly in price (unless they are very bullish about it).

Users influence prices as well, paying for cryptocurrency at the going market rate, but this activity is much less significant an influence than investing and trading.

Cryptocurrency prices also react, sometimes explosively, to news and events because of investor anticipation. For example, Bitcoin halvings are believed by many investors to be events that increase its price because there is a reduction in the rate at which new coins are introduced. However, what’s really causing the price changes is demand because investors associate the event with a price jump—so they start buying more, causing the price to increase.

The price of the cryptocurrency you’re reviewing should follow the same trends other cryptocurrencies have because traders and investors will generally treat them the same as they do other investments. Prices that seem out of place should raise an eyebrow.

The Bottom Line

A cryptocurrency analysis involves examining all the available information about a digital asset. Understanding and researching the topic helps you to determine why it’s priced the way it is and whether it is worth investing in.

The comments, opinions, and analyses expressed on Investopedia are for informational purposes only. Read our warranty and liability disclaimer for more info. As of the date this article was written, the author does not own cryptocurrency.