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We are in the midst of the most magnificent speculative frenzy of our lifetimes. The media has been on fire with articles and chatter about the monster gains in cryptocurrency.
Small investors, some starting with under $1,000, have become millionaires over the last year. Larger investors, such as the Winklevoss twins (formerly of Facebook fame), have earned billions by risking significantly more.
Now with Bitcoin hovering around $11,000, investors are hungry to find the next millionaire-making cryptocurrency. With over 900 active choices and hundreds (If not thousands) more initial coin offerings (ICOs) in the works, choosing winning investments has become very difficult.
As an active cryptocurrency investor, I have discovered five ways to increase your odds of finding the next bitcoin.
1. Monthly Volume
Trading volume is a crucial method of identifying winning cryptocurrencies. Think of choosing profitable coins and tokens as a popularity contest. The more excitement and potential of a coin, the more investors it attracts. Volume often begets volume, and speculation becomes a self-fulfilling prophecy, pushing the price higher.
I use CoinMarketCap to identify the top monthly volume rankings. Look at the top 25 highest-ranked cryptos to start your search for a winner. Make no mistake, volume does not mitigate risk, but it does reveal the popularity of a particular coin.
As you might know, bitcoin, ethereum, litecoin, and ripple are generally in the top 10, with more obscure coins like tron, cardano, and monero making up the rest of the top list.
Sure, coins ranked under the top 25 monthly volume leaders can be winners. However they are just too speculative for my taste.
Buying new entries in the top 10 volume leaders is a tactic that can be utilized to capture profits in this game. When a coin first enters the top ten, it means that there is enough interest to push it to into the rankings, but it still may be relatively unknown to the masses. For example, I noticed a coin called Tether enter the top 10 volume ranking. Due to the surging volume, I have added this coin to my watch list as a potential buy candidate.
Just like in the regulated financial markets, momentum can cause further price increases in cryptocurrency. Buying coins that are surging in price makes sense if you go about it intelligently. After all, this is a tactic used by many professional traders across all financial markets.
Again, I like to use CoinMarketCap to identify the winning cryptocurrencies for the last seven days and 24-hour periods. The way I choose coins is to look at the top 10 performing coins in the previous seven days, then look for these same coins to be in the top 10 during the previous 24 hours. For example, at the time of writing, Grimcoin was in the top ten winners of the previous seven days with a 1,700%-plus return. Grimcoin was also among the top gainers in the previous 24 hours with a 140%-plus performance.
The continual upward trend of Grimcoin sparked my interest to look at it closer. But volume should always be a primary consideration, and Grimcoin’s was abysmal, so I dismissed it as a potential investment. The next day, Grimcoin suffered the largest losses, with a 50% slash in price. Point proved.
3. Does It Solve A Real-World Problem?
There are many coins and tokens that don’t have a real-world function. Grimcoin’s website, for example, looks more like a videogame than an actual investment thesis.
Bitcoin acts as an alternative currency and is slowly gaining acceptance among major retailers. This acceptance in the real-world helps support the volume, momentum, and upward price surges.
Ripple is a prime example of a cryptocurrency that solves a significant problem in the real world. Ripple’s protocol facilitates the transfer of fiat money around the world in a speedy and highly cost-effective manner. Slated to potentially replace the SWIFT international bank transfer network, giants such as American Express and the Bank of Japan are experimenting with implementing Ripple.
Multiple cryptocurrencies solve real-world issues and/or have real-world applications. Smart contracts, healthcare applications, and even the decentralized nature of the blockchain itself are just a few of the solutions and applications behind cryptocurrencies.
Make sure that the investments you choose solve an issue or have an application that makes sense and can drive value long-term.
Every cryptocurrency has a creator and/or a management team for the application the currency is built upon. Just like with stocks, this team is often critical for the success of the project.
If possible, always take a look at the creator and/or team responsible for the launch and management of the application supporting the cryptocurrency. A good management team should resemble that of a successful company — look for relevant experience and past achievements.
Bitcoin’s creator wisely implemented scarcity into its design. There will only ever be 21 million bitcoins in existence, a fact that has surely helped the long-term upward trend in the price.
When considering an investment, make sure there is a self-limiting feature or managed control over the supply of the cryptocurrency.
Risks To Consider: Investing in cryptocurrency is extremely risky. The high volatility, untested nature, and exchange failure/hacking potential create a dramatic risk of quickly losing your entire investment.
Even if a popular cryptocurrency fits all the above factors, this does not mean you will be successful in the market. Only use the money you can afford to lose!
Action To Take: Open up a cryptocurrency account and buy a basket of Cryptos. You may just choose the next bitcoin!