Your first question may have to do with how to know which cryptocurrency to buy. How to know what crypto to buy starts by understanding what cryptocurrency is and what to look for when buying cryptocurrency. When you finish reading this article, you’ll understand the basics of crypto, how to analyze different cryptocurrencies, which cryptocurrencies are evergreen choices for every investor and how to research and buy cryptocurrencies.
Understanding the Basics of Crypto
Cryptocurrency is a digital currency that exists as an encrypted set of transactions on a digital ledger known as a blockchain. A bank or government entity issues the currency and maintains a ledger of transactions with standard fiat currencies.
In the case of cryptocurrency, a computer algorithm performs both tasks. This highlights two defining features of cryptocurrency: the concept of blockchain and cryptography.
A blockchain is a digital ledger that records all cryptocurrency transactions. Each transaction represents a "block" of data strung together to form a chain that theoretically makes all cryptocurrency transactions available to all owners. The data for every transaction is encrypted using cryptography.
Cryptocurrencies share common characteristics, including the following:
- Digital form: Cryptocurrency does not have a physical equivalent like coins or paper money. The currency is code that exists inside of computers.
- Peer-to-peer form: A transaction only goes from one person to another online. There is no intermediary person or institution.
- Borderless and frictionless: There is no exchange rate for cryptocurrency being traded in the U.S., Germany or Japan. It is a currency like gold and other precious metals that trades freely across countries and borders.
- Encrypted: Cryptocurrency owners are completely anonymous because each user has a public key (similar to a username) and a private key (like a password).
- Decentralized: This means there are no banks. An owner’s private key allows them access to their digital wallet, which carries some risk. If the owner loses the private key, no bank can back them up.
- Operate in a zero-trust environment: This means that all cryptocurrencies are built and verified on a blockchain by computers based on a series of algorithms.
How to Analyze Crypto to Buy
How do you know what to look for when buying cryptocurrency? The best new cryptocurrency to buy can seem like a stumbling block for most investors. That’s because cryptocurrency is not a physical currency and cryptocurrencies aren’t companies with revenue and earnings. The rules that investors would use to analyze stocks don’t apply to cryptocurrency.
However, that doesn’t mean that you can’t evaluate cryptocurrency. Take a look at some ways to analyze a cryptocurrency that you may want to buy. First, it’s important to understand the differences between types of cryptocurrencies.
Step 1: Consider tokens vs. altcoins.
Cryptocurrencies are categorized as coins (also called alternative cryptocurrency, or altcoins) and tokens. Altcoins are an alternative to Bitcoin. All altcoins have their own independent blockchain. These can be derived from Bitcoin's open-source protocol. They can also create their own blockchain and protocol for their native currency.
Tokens operate on top of an existing blockchain and allow the creation of more decentralized applications (called DApps), which is the future of cryptocurrency. Tokens are created using smart contracts, programmable computer codes that are completely self-executing. Tokens can represent any tradable asset. DApps can be thought of as similar to an interface that allows smart contracts to interact with the blockchain. Ethereum is the most popular digital application.
Step 2: Understand the project.
Next, understand the use case (the project) for the DApp:
- Review the project’s white paper. Most cryptocurrency projects produce a white paper summarizing the objectives and how the cryptocurrency will help achieve those objectives. The white paper should also spell out the long-term vision as well as the timeline for the project. These white papers can be highly technical in nature as is the cryptocurrency itself. If you don’t understand what the project is trying to accomplish, you may want to find a different cryptocurrency to analyze.
- Research the development team and project leadership. Some of this information should be readily supplied by the company on its “About” page. Prospective investors should be concerned if it’s unclear who the founders or developers are.
- Research the “community.” Cryptocurrencies can be very fraternal. This means that many altcoins have a passionate group of followers, which is essential for a currency to gain adoption. The value of cryptocurrency depends on the basic rules of supply and demand. A cryptocurrency that nobody wants to buy or trade will be worthless. A coin that is in high demand but with limited supply will be priceless.
Step 3: Analyze market capitalization.
Analyzing cryptocurrency doesn’t follow the same rules as investors use to analyze a company or its stock so you might wonder how the words “market capitalization” or market cap apply to cryptocurrency. Many investors may think that assigning a market cap to cryptocurrency but market capitalization commonly used cryptocurrency metric defined as:
Total Circulation Supply x Price
In other words, a coin with a total circulation of 300,000 coins and a price of one cent would have a market cap of 3,000 (300,000 x 0.01).
Because of the volatility of cryptocurrency, however, market caps can change suddenly and significantly. In this regard, crypto investors can apply some of the same logic as with stocks. That is, cryptocurrencies with a larger market cap tend to be less volatile than the ones with a smaller market cap.
Step 4: Review the “tokenomics.”
In addition to knowing the relationship between a cryptocurrency’s supply and its market cap, it’s critical to understand the distribution, circulation and total supply of a cryptocurrency, also called “tokenomics,” which affects the price of cryptocurrency over time.
Tokenomics is based on the relationship between a coin’s circulating supply, which is the amount of the coin currently in the market and its total supply, which is the amount of the currency after all the available tokens have been unlocked and distributed. It is also based on the coin’s maximum supply, which is the total amount of the coin there will ever be.
Bitcoin has a maximum supply of 21 million, which means at some point, there will never be any new Bitcoin mined. This is an indicator that the price of Bitcoin will rise significantly in the future because each individual bitcoin (or fraction of a Bitcoin) will become much more valuable.
Step 5: Look for trusted sources.
Many investors want to do the research for themselves but cryptocurrency can get very technical in nature. You can access many online sources to assist you. For example, MarketBeat provides a cryptocurrency screener in addition to a daily cryptocurrency newsletter. Other reliable sources include Messari, Glassnode and CoinGecko.
5 of the Best Cryptocurrencies to Buy Now
The first and most commonly recognized platform is the Bitcoin network. However, there are thousands of cryptocurrencies available. Here is a list of five of the best cryptocurrencies to buy as of this writing.
Bitcoin remains the largest of the cryptocurrencies. As of October 2022, it has a $350 billion market cap. One of the key arguments for owning bitcoin is the idea of scarcity. Only 21 million bitcoins will ever be “mined” and over 19 million are already in circulation.
Bitcoin has also become widely accepted as a medium of exchange. Payment processors such as Visa and Mastercard allow Bitcoin to be used in transactions, which creates more institutional interest in Bitcoin.
Bitcoin is also controversial because of its proof-of-work (PoW) validation mechanism. While users appreciate it for its safety and security, it draws the ire of environmental advocates who are concerned about the amount of electricity used in bitcoin mining.
Ethereum is right behind Bitcoin in terms of market cap. Ethereum launched in 2015, about six years after Bitcoin. The coin is used as the payment or “gas” behind the platform, which is known for executing smart contracts. This has made Ethereum one of the go-to coins for developers, particularly those interested in creating nonfungible tokens (NFTs).
This popularity has come with a cost. As digital networks go, Ethereum has become kind of slow. But that is likely to change with “the merge” that happened in September 2022. It transitioned Ethereum from a PoW protocol to a proof-of-stake (PoS) protocol. This makes the network faster and lowers the gas fees for developers. It will make Ethereum a more environmentally friendly token as well.
Cardano is another PoS project. Cardano was the first coin launched with that mechanism in place. Cardano is popular among developers. As of September 2022, 1,000 projects were created on the platform’s blockchain, which gives credence to the idea that it may be a buy-and-hold coin for the long term.
The founders take a staged, measured approach to rolling out the entire Cardano platform. Each stage has brought new functionality to the platform. Cardano trades with the symbol ADA and recently released its rewards token, ADACash, to much fanfare.
Ripple is a blockchain project used to facilitate fast and inexpensive cross-border transactions. Think about what has to happen to send money to a friend or relative overseas using the current SWIFT system. The funds have to leave your account in dollars and are delivered to the receiving country’s bank, where the funds are subject to exchange rates. It’s a project that’s not timely and inefficient.
The Ripple token takes the place of the currency. You buy Ripple, send it to the receiving party who receives the funds as Ripple and then convert them into their native currency. All of this happens in seconds or minutes (as opposed to days).
Ripple remains engaged in a court case with the SEC. Although Ripple is confident it will win, the outcome is still unclear at the time of this writing. The issue is whether or not Ripple should be treated as a security.
Learn more: What is an SEC filing and how does it relate to market indexes?
Polygon is an offshoot of the Ethereum blockchain. The platform’s goal is to improve the scalability and infrastructure of Ethereum. It accomplishes this with a “layer two” concept that expands the Ethereum blockchain into multiple chains. This allows faster transaction speeds.
The platform supports the Tether (USDT) stablecoin and is making investments in carbon neutrality. Meta Platforms and Stripe have adopted Polygon, which will likely help facilitate the coin’s adoption.
How to Buy Crypto
Let’s take a look at some steps to buy cryptocurrency.
Step 1: Determine your future goals.
Figuring out your future goals isn’t as cut-and-dried as it may seem. Cryptocurrency can serve many purposes. Many individuals buy cryptocurrency as an investment that they believe will increase in value over time. The most common way to make money with cryptocurrencies involves using a buy-and-hold strategy.
Some investors want to have a supply of cryptocurrency as a medium of exchange, such as Dogecoin. Dogecoin doesn’t have any particular utility aside from as a medium of exchange. One of the most publicized use cases for Dogecoin was when billionaire and owner of the National Basketball Association’s Dallas Mavericks said Dogecoin would be accepted as payment for some purchases. The same is true of AMC Entertainment, which accepts Dogecoin as a form of payment.
Still others want to own cryptocurrency as a store of value. Bitcoin is referred to as digital gold and Ethereum as digital silver. As of this writing, there’s no evidence that cryptocurrency is an inflation hedge or a hedge against fiat currency. There are many who believe that will ultimately be the greatest reason to own cryptocurrency.
Step 2: Find an online crypto exchange and open your account.
You may be surprised to know how many crypto exchanges exist. Some of the more popular exchanges include Coinbase and eToro. A growing number of brokerage houses give their clients the option to invest in cryptocurrency.
Once you find an exchange to trade on, you’re ready to open your account. Because cryptocurrency is decentralized, the only time you need to use fiat currency is to fund your trading account. You’ll need to make sure you have the required tools:
- Digital wallet (cryptocurrency wallet): Cryptocurrency is stored in a digital wallet. The digital wallet is software that makes it possible for the blockchain to recognize the owner.
- Public key: The public key is similar to a username that allows balances to be transferred from one account to another.
- Private key: The private key is a password that allows the user to confirm the transaction.
Step 3: Practice diversification.
Similar to investing in stocks, it’s a good idea to carefully divide your cryptocurrency investments among several coins to mitigate risk. Cryptocurrency is highly volatile and it’s not surprising to see the price of a coin more 5% to 10% in a single direction in a day. Unlike the stock market, the crypto market never sleeps. Crypto exchanges are open 24/7, 365 days a year. You’ll have to monitor your accounts a bit more frequently than you might check your stocks.
If you’re new to crypto or have a limited amount of funds available to purchase crypto assets, many analysts say it’s best to stick to Bitcoin and Ethereum as the best crypto to buy now. These two stalwart names will survive whatever shakeup happens as a result of potential regulation. Plus, these are the coins that institutional investors buy.
How Do You Know When to Buy and Sell Cryptocurrency?
Are you still asking, “How do I know which cryptocurrency to buy?” or “How do you know when to buy and sell cryptocurrency?” If so, it’s worth understanding that as with stocks and other investments, there is no single best time to buy cryptocurrency.
However, keep the current market conditions in mind. Cryptocurrencies are still in their infancy and subject to a lot of volatility.
But is it safe to buy cryptocurrency? Is it like learning how to screen penny stocks or forex trading, some of the riskiest types of trading on the market? Some uncertainty is due to the fact that lawmakers have taken a close look at cryptocurrency and may impose some form of regulations on them. Regulation is generally seen as a necessary step toward mass adoption but we still don’t know how much it will mute demand among early adopters who bought crypto precisely because it was unregulated.
On the other hand, there is evidence of more adoption by institutional investors. When that happens, not only will it be considered a good time to buy crypto, but crypto investing is likely to become a lot safer than it seems today.