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How to Pick Winners – A Guide to Cryptocurrency Research

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cryptocurrency research

Warren Buffets’ number one rule about investing is to “never lose money” and his number two rule is to “repeat number one.” There is risk involved with every investment instrument but with proper research and vetting, loses can be minimized and gains can be maximized. If there was a number one rule in cryptocurrency investing, it might be to “do your own research”. In this article I share many of the steps that I personally take when investing into a cryptocurrency and how I analyze an investment. I hope that this can serve as a guide to those who are looking for insight into how you can put yourself into a position of success and how to perform proper cryptocurrency research.

cryptocurrency research

The first step towards picking winners is defining your investment goals. Without knowing why you are investing you, can’t determine how long you would like to be in the market or your risk tolerance. The next step is to find cryptocurrencies and to do thorough, in-depth research on the ones that you are interested in. Finally, you want to think about cryptocurrency selection as a continuous process where you are constantly refining your portfolio. Your portfolio should let winners run and limit losses.

 

Establish a Goal

Every single investor has a different goal or end game. While some are trying to pay down debt, others are seeking financial independence. It is important to actively consider this goal while researching investment opportunities because while some goals require investors to take higher risks, others allow investors to sit back and let their money grow over a long period of time with lower risk.

Many goals can be achieved without ever touching cryptocurrencies. While cryptocurrencies offer absurd gains at times, understand the fundamentals of why you want to invest in the first place. Adding unnecessary risk to your portfolio can come back to bite you.

For those of us that have an interest in cryptocurrency as a technology, movement, and community, it is a no-brainer to take the leap and to participate in the movement while also striving to achieve our financial goals. As time passes and the crypto space become more and more saturated, it will become increasingly important to vet your investments thouroughly. The days of throwing money at any blockchain and expecting superb gains are diminishing.

Finally, in my opinion, it is important to strive for a specific metric to beat. It is ineffective to say “I want a 500% return”. The fact is, if the entire market is down it will be much harder to get that exact return. With cryptocurrencies, like stocks, there aren’t many actionable steps that you can take to make your investment perform well. Picking the right investments at the right price is what locks in your return.

Instead of aiming for a dollar amount increase in your portfolio, reach for a metric. This may be: beating Bitcoin or Ether’s return, matching the market (I define the market as the return of the top 10 cryptos adjusted by market cap and averaged), or beating the market (whatever you personally define it to be). You can define these metrics as whatever you want but instead of choosing a static amount, e.g. making $1,000, you are defining a dynamic goal that will vary based on political conditions, news, and the overall atmosphere of crypto. This is important because you have no control of these things, so you want your expectations to adjusted accordingly.

Action items:

  1. define a financial goal
  2. establish if cryptocurrencies are the right investment for you to achieve that goal
  3. choose a metric to strive for

 

The Actual Research

The first thing you have to do to vet a cryptocurrency is to find one. I use several resources to find projects that I am interested in such as looking through cryptocurrency related subreddits, following cryptocurrency figures on Twitter, and scrolling through coinmarketcap.com. This is the most tedious part of the process but you do NOT need to do in-depth research on every single crypto you find, at least not yet. The purpose of this step is to simply identify projects that sound interesting or exciting to you. Cast a wide net.

Once you have a cryptocurrency in mind that you are interested in, you want to learn everything there is to know about it while keeping your investment goals in mind. Below are the steps that you will want to check off your list. If at any point while going through these steps you feel uneasy about the specific crypto as an investment, or you simply can’t find answers to your questions, move onto the next one cryptocurrency that you are considering.

  • Start with their website. Ethereum as an example.
    • Can you easily identify what they are trying to do?
    • Is it clean and simple to follow?
    • Key components that they should have: project overview, roadmap, link to blog or social media, team members, whitepaper, other technical papers (depending on how new the project is)
    • Explore the site and absorb as much information as possible.
  • Read the whitepaper. Nano (previously named Raiblocks) as an example.
    • A whitepaper is an informational document that is bringing attention to something, almost like a proposal. In the crypto community, teams generally release a whitepaper when they first start their project. It’s sort of like reading through 10-Q’s and 10-K’s for stocks; it’s essential.
    • Can you understand what the project is and does it fill a need or fix a current problem?
    • Does the whitepaper explain how the coin/token will gain value and do you agree with their assessment?
    • How many coins/tokens does the team hold? Are most of them purchased by individuals on exchanges or did the team withhold many when starting the project?
    • Does the project require the team to solve completely new technical challenges?
    • Is the project decentralized and open-source?
    • Is there a limited supply of the coin/token?
  • Look closer at the team. NEO as an example.
    • Visit the team members LinkedIn pages and identify their experience? Do they seem qualified to do what they set out to do?
    • Does the team seem too large or too small for the project?
    • Is the team weighted towards developing, marketing, or is it balanced?
    • How active are they on Github?
    • Do they seem like genuinely good people?
  • Follow them on social media. Decred as an example.
    • Does the team regularly communicate with the community? blog posts? videos?
    • Do they behave professionally at all times?
    • Do they do what they say they will do, when they say they will do it?
    • Does the team communicate with other projects and encourage collaboration?
  • Check what the community thinks. r/cryptocurrency as an example.
    • You need to do your own research but does the community have any critiques that haven’t been addressed by the team?
    • Is the coin hyped up more than it should be and is that affecting your judgement?
    • Does the community engage with the team in a positive way?
    • Who are their competitors?

The goal of these steps is to learn everything about the cryptocurrency; there is not necessarily a right or wrong answer to all of these questions. If you do know the answers though, you can make your own judgement call about whether or not you think an investment makes sense.  Unlike stocks where there are clearer valuation metrics, a cryptocurrency’s value is much more subjective which makes these steps critical.

If at any point you don’t feel good about what you are reading, you should move on and look into a different coin. Only put your money into projects that excite you and that you truly believe will succeed. The cryptocurrency community can be toxic in the sense that many people only promote the projects that they are stakeholders in. Just because several people are talking about a specific crypto doesn’t mean it should be the one that you are putting your money into.

Action items:

  1. search for exciting projects
  2. read their whitepapers, critique their team, and understand the project inside and out
  3. repeat your vetting process for several projects

 

Create a Portfolio

One you have several projects that you feel comfortable putting money into, you should decide which ones you like the best. The previous steps were to ensure that the investment makes sense to you. This step is to hopefully maximize the profit you get from sound projects that you have already vetted.

You can start with an investment matrix. This is a simple chart that you can build which will help you quantify certain key aspects of a project. While from reading whitepapers you may decide that you love two projects, this will assist you in deciding how to weight the two projects in your portfolio. Likewise, this tool can be used to pick one investment over a similar one.

How this is done is by listing parameters that you are interested in and scoring projects in those categories. These should be measurable parameters such as transactions per section or staking reward. After you rate your projects in these categories, you can add up the scores and compare.

cryptocurrency research

The results you get from your investment matrix are useful but you should remember that the market doesn’t think rationally or intuitively. Just because a currency transacts faster and is more secure doesn’t mean that it will grow higher in price, for example. Also, not every parameter can be accounted for here. This simply helps us visualize the differences between the current state of a few projects. You may use this data to weight your portfolio. An example is that you may decide that the project with the highest score will make up 30% of your portfolio while the lowest scoring will only make up 5%. Both projects have already been vetted by you but you expect the higher scoring one will have a lower risk:reward ratio so you bias your portfolio towards it.

The next thing to consider when selecting specific projects that you already vetted is the diversity of your portfolio. The more diverse you are, the lower risk you are susceptible to. You can diversify across currency vs. platform projects, coins vs. tokens, and simply by the goals of the project. In general though, you can only diversify so much within the crypto space. The market tends to follow the leader, Bitcoin, so even if you are invested in several unique projects, they may follow the same trajectory in a downturn.

The investment matrix will work better if all the projects in it are very similar so a good strategy is to make a couple investment matrices that each represent a unique area in crypto. An example would be a matrix for currency coins, a matrix for financial platforms, and a matrix for a smart contract networks. Then, take the highest scoring crypto from each matrix and use those to build the foundation of your portfolio. This way, your investment matrices will be optimized by using very similar projects but your overall portfolio will still be diversified by picking the best projects from each unique matrix.

Finally, you will want to rebalance your portfolio from time to time. Revisit the steps previously mentioned for vetting a project and ensure that your belief in the project still stands. If any of your cryptos have changed in price dramatically versus the rest of your portfolio, determine if your portfolio is still in line with your goals and risk tolerance. Otherwise, adjust it accordingly so that your goals are at the center of your investments.

Action items:

  1. narrow down your cryptocurrencies further
  2. consider diveristy
  3. keep your goals in mind

 

Concluding Thoughts

Understand that no matter how much research you do, it is still possible to be wrong. Diversifying your portfolio among several, heavily vetted projects will give you the greatest possibility of success. Also remember that crypto in general is still very new. It is completely possible to lose a significant amount or all of your principal in such an untested asset class. While you are constructing a portfolio by selecting currencies, you must see the big picture and how each selection effects your entire portfolio which includes investments in other asset such as stocks and real estate.

Although crypto is risky, the innovation and adolescence of the crypto space is what makes it special and what makes it, as Spencer says, “the investment of a lifetime”. Although Warren Buffet isn’t too fond of cryptos, I think we can all agree that his investment advice is unparalleled. Value investing is not possible with cryptocurrencies but by applying some of Buffets’ advice, these are the general steps that I came up with and that I use to vet cryptos and to construct my portfolio.  I hope that with this insight you will find it easier to better identify strong cryptos faster and ultimately, reach your financial goals.

Avery Thompson is a co-founder at the Hodlr and student at California State University, Northridge. He has a passion for all things crypto and currently holds ETH, LTC, REQ, ZRX, OMG, and IOTA.

Bitcoin

Do like the Winklevoss Twins: Learn How to Keep your Cryptocurrency Assets Safe.

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The Winklevoss twins are pioneers in the modern day bitcoin space. They not only started their own bitcoin exchange, but they were also instrumental in creating the public adoption of the title of gold 2.0 for bitcoin. They also were worth an estimated 1.3 billion dollars in bitcoin as of December 2017, giving them the title of bitcoin billionaires. Having such a large fortune in digital asset begs the question, how do the Winklevoss twins keep this safe from most conceivable negative eventualities.

Cold storage is the answer to this question. They use an ingenious system that is more complex than simply writing down their private key on a piece of paper for safe-keeping. Their system, according to Investopedia, is as follows:

“To protect their bitcoin holdings, the brothers distributed snippets of a printout of their private keys across multiple safe deposits around the United States.”

This division of responsibility, of dividing their private keys up amongst multiple parties, makes it increasingly difficult to have a breakdown in their system because many collaborators, in this case not just multiple people but multiple banks, would have to get together in order to perpetrate theft.

Whether or not you have a large fortune in cryptocurrency, there is still due diligence that can be done to keep even your smaller investments, or fractional coins that remain on exchanges, as safe as possible. Whether or not you have a system of cold storage set in stone, it is still a good idea to verify and do research into the brokerage website or App of your choosing.

Agency problems are traditionally between the owners and managers of a business, but there is a very similar relationship between bitcoin owners and brokerage site owners. It is important to note that the problem in bitcoin is that owners of these brokerage sites and owners of bitcoin might not always have the same set of interests. Keep in mind, agency sites make money from fees related to trading and other instruments such as leverage rather than on the actual capital appreciation of the asset. This could incentivize the brokerage side to create or allow financial instruments that actually increased volatility of the assets in which they broker trades. The most common example in the last decade would be the financial crisis of 2008 in which banks ignored their responsibility as underwriters in an attempt to package for sale as many mortgage-backed securities as possible. It is important to understand what types of activities your exchange might be partaking in because inherently risky or illegal activities might possibly lead to your exchange declaring bankruptcy or being shut down by the governing body in the country where it originates.

As of the writing of this article, Gemini maintains that “[t]he majority of digital assets are stored offline in our proprietary Cold Storage system.” And Coinbase maintains that “98% of customer funds are stored offline”. Doing your due diligence and looking into the safety measures and policies of an exchange is essential for giving yourself the smallest possible chance of being a victim of fraud or theft.

Historically, the US has some of the strictest laws governing and regulating exchanges. While regulation might seem inhibitory at first glance, digging deeper we reveal some broadly overarching economic patterns. The legendary Walter Wriston, CEO of Citibank, said “Capital will always go where it’s welcome and stay where it’s well treated.” To be well treated any financial instrument must be transparent and free from fraud or potential abuse. Fair and meaningful financial regulation could be one important step toward generating a positive cash inflow into cryptocurrency projects such as bitcoin that propose to solve some of the world’s financial needs.

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Dollar Cost Averaging, a Useful Strategy for Any Asset Class

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Dollar cost averaging can lead to an effective way of reducing risk in an investment. This technique requires buying an asset over an extended period of time and at different price points, so that the total cost of an investment will be the average cost of the combined prices. It is important to note that reducing risk is another way of saying reducing volatility. So what is volatility in terms of a classical financial definition?

Based on investopedia, we find that:

“Volatility is a statistical measure of the dispersion of returns”

Dollar cost averaging will not produce the greatest theoretical return, which normally can only be attributed to perfectly timing the market and is something that is incredibly difficult, if not impossible to do, in an efficiently traded market given a long enough time frame. Dollar cost averaging will also not turn a losing investment into a winning investment and the investment must still be profitable in the long run for dollar cost averaging to produce a positive return. However, it will certainly help smooth out the volatility of returns and ensure that an investor is getting closest to the fairest price possible for a particular investment.

There are various reasons that investments at times might become oversold or overbought, meaning that at certain price points an investor might be paying too much for an overvalued asset or too little for an undervalued asset. Behaviorally, at times people might panic sell due to a fear of losing money or euphorically buy up assets without a rational premise in the hopes that prices will continue to rise.

Luck also can play a role in investment returns as unforeseen news can impact an investment both positively and negatively and to an extent that is hard for anyone to project prospectively. The advent of algorithmic trading sometimes creates periods in which selloffs occur due to a series of stop losses being hit. The most famous stock market flash crash happened on what is called Black Monday in 1987 where the Dow lost 22.6% of its value in a day. This was the largest single day percent price drop in the history of the Dow. After the dust settled, this crash was attributed to both a mass mechanical and behavioral over adjustment having little to do with a fundamental change in the market overnight.

Of course, propensity for risk is always up to the individual, but for an investor looking to reduce the volatility of his or her holdings, dollar cost averaging could be an effective way of doing this across a broad array of securities, commodities and alternative investments alike.

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Fundamentals

Ledger Nano S: 4 Reasons to Get One Now

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The Nano S, built by Ledger, is a cryptocurrency hardware wallet which allows even those of us who aren’t tech-savy to keep our assets safe. It works by isolating your private keys, which are on your hardware wallet device, from your computer. It also forces you to confirm all transactions on the actual device, rather than your computer, which may be infected with malicious software. You generate a 24 word seed to recover your funds in the event that you lose your device. Visit here to learn more about the basics of the Nano S and hardware wallets.

 

Why you should pick up a Nano S

Security:

The Nano S, and competitors such as Trezor, are extremely secure against malicious software on your computer and individuals trying to access your private keys. In the case of the Nano S specifically, your private keys are generated in a secure environment on your hardware wallet. The Nano S uses a secure element to ensure firmware integrity on your device. The only case known to date of a Nano S being compromised is where human error was involved, not because of device failure.

Form Factor:

The Nano S resembles a USB and is extremely light weight and compact. It can easily fit in your pocket or backpack and includes a lanyard so that you can wear it around your neck if you want. The buttons are readily located above the screen and make it simple to control your device.

Cost:

Ledger regularly has capacity issues with producing their devices. Because of this, the prices can fluctuate based on demand and what they are able to supply at the time. Currently, the Nano S costs 79 Euros. I have seen it below 60 Euros, especially during special events such as Black Friday. This price is lower than several competitors.

Variety of Coins:

The Nano S can store the following coins: (note: Fido 2UF is the 2FA app)

Ledger Nano S

 

Where the Nano S falls short

Low Storage Space:

When you want to access your funds on the Nano S, you must open the appropriate application on both your computer and hardware wallet. Unfortunately the Nano S has low storage space so it only allows you to have a handful of apps downloaded at the same time on the device. This does not impact the number of assets you can hold as you can delete and re-download apps without any effects on your money. It is merely an inconvenience.

Applications:

As of right now, most currencies have a separate application on desktop. For example, there are two different applications for Bitcoin and Ether. It would be a lot easier if all the desktop applications were combined into one and you would simply activate individual wallets by opening the appropriate application on your device. This is the way that Trezor does it and that it should be done. I reached out to Ledger’s CEO to ask about the plan to release the new application. He said, “yes,” we are planning to release a new app and “we’ll publish more information this week (blogpost on ledger.fr).” It has now been 3 weeks since he sent that but to be fair Ledger has been busy lately. I would expect the new application to be released soon.

[UPDATE 2/23/2017 – Ledger has released the blog post detailing the new application which is a significant improvement to what they currently have.]

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