Ever since Bitcoin made headlines in 2017/2018, cryptocurrency trading has become more than a blip on the radar of both individual and institutional investors. Broadly speaking, there are two reasons why people are interested in cryptocurrencies at all and those are 1) the realization of how revolutionary their underlying technologies are and 2) the potential to make an unprecedented amount of money in both the short term and long term. These two go hand in hand but the second doesn’t always follow the first.
Since cryptocurrencies are emerging assets with a relatively small market cap compared to legacy investments like gold or silver, this makes them extremely volatile. This means it is possible to make profits which are simply impossible in classical markets, but with that comes the risk of likewise experiencing sudden losses that are just as large. Navigating this terrain effectively is incredibly hard but there are a few things you can keep in mind which will help you be a smart crypto investor.
Which cryptocurrency should I buy?
Cryptocurrency trading can be described in two words: wild west. There are over 5000 cryptocurrencies currently in existence and that number continues to grow ever so slightly each day as new projects enter the crypto sphere. Very few of them are regulated in any way and some speculate this has made it harder for them to achieve public adoption. We analyzed the top 500 cryptocurrencies in depth over the last few months and determined that less than 50 of that sample were viable investments and only about 30 were still economically active. Not only that, but most of these 50 were found in the top 200 coins on CoinMarketCap. It isn’t far-fetched to assume that there aren’t many cryptocurrencies in the remaining 4500 which are worth much attention or investment. In statistical terms, this means less than 0.01% of cryptocurrencies are worthwhile investments. But how can you tell which cryptocurrency is good? How do you evaluate a cryptocurrency?
How do I know which cryptocurrency is good to buy?
Figuring out which cryptocurrency is good to invest in can be really tricky but there are a few good rules of thumb to follow. Here are the 5 criteria we used to evaluate the top 500 cryptocurrencies from CoinMarketCap:
1. Exchange listings.
Is the cryptocurrency listed on a reputable exchange such as Binance, Kraken, Bitstamp, Gemini, or Coinbase? If not, then it’s worth taking a close look as to why this is the case. Sometimes newer projects are only listed on 1 or 2 cryptocurrency exchanges and it might be a while before they’re listed on larger exchanges with higher standards. Why the difference in standards between exchanges? The reason is two-fold: their CEOs and regulation. It is known that the CEO of Binance as well as the Winklevoss twins of Gemini truly have the interests of cryptocurrency adoption at heart. As such, they are more cautious about filling their exchanges with low-quality coins. In terms of regulation, exchanges like Kraken, Coinbase, and Gemini take extra measures to make sure they are working within the bounds of the law wherever they operate. This isn’t always true of other exchanges, of which there are over 200.
2. Development team.
This is where many cryptocurrencies fail (in our opinion). No matter what the data might show, at the end of the day it is use-case and ease of adoption that will decide the long-term financial potential of a cryptocurrency. Most cryptocurrency projects market themselves very poorly in these regards primarily because they do not have a specific, practical goal. Even the cases of those that do have a well-defined mission, they have to differentiate themselves from existing competitors. There is for example a surplus of cryptocurrencies which seek to be “like Bitcoin but better” or “like Ethereum but faster”. The fact of the matter is that unless these projects are built with radically different protocols (such as Tezos’ “baking”) that are easy for the layperson to understand, such claims mean absolutely nothing and it is only a matter of time before that asset bites the dust. This is because cryptocurrencies like Bitcoin and Ethereum have established reputations, a large share of the crypto market, and also have the largest and most experienced development teams. As such, cryptocurrencies which seek to go head-to-head with the two leaders in the space must really present something novel to be worthy of long-term investment.
The number of recognized brands and businesses which back a cryptocurrency project may be the single best indicator you can use to evaluate a crypto asset. This is because you can trust that someone at that company spent a lot of time vetting the legitimacy of the cryptocurrency. The best example is probably Chainlink, which has partnered with both Google and Microsoft.
Consequently, it has been one of the best performing cryptocurrencies over the past year and likely has a lot of room for growth going forwards. However, you should make sure to dig deep when it comes to these partnerships. Many cryptocurrencies will show a number of partnerships on their websites but upon further analysis the partnership may be under a different context outside of crypto, such as an agreement concerning the purchasing of computing hardware of software services. If you can’t find any hard evidence of direct funding from these apparent partners, then you might want to take a closer look at how the crypto scores on the other factors before investing.
5. Economic activity.
Is the cryptocurrency you’re interested in economically active? As mentioned previously, out of the top 50 or so coins we identified with the previous 4 criteria, almost half of them were dead – there had been next to no trading activity or volume in the past few months or even years. This can be depressing since some of those projects seemed promising such as Selfkey, a cryptocurrency which sought to provide an alternative to current KYC procedures (it has since dropped in ranking to around 700). The fact of the matter is even if it checks all of the previous boxes, it won’t mean much if there is little to no trading going on for that asset and especially if the team has moved on to other more promising avenues.
Finally, remember to actually check the exchanges the coin is trading on. Although CoinMarketCap may show a high 24 hour trading volume for the coin, when you look closely at trading views in many exchanges, especially at the 30 minute or 1 hour settings, you will clearly be able to see whether the coin is actually being actively traded. Stay away from exchanges and/or trading pairs which show frequent gaps during these time frames!
Best Cryptocurrencies 2020
Now that we’ve gone through these important criteria, here’s a short list of some of the best cryptocurrencies to invest in 2020 and why. Remember that it’s on you to do your own research, and your list may look different than ours! (This is not investment advice!)
Bitcoin (BTC) – because it’s the most popular cryptocurrency and has the lion’s share of the market. Also, the price of most other cryptocurrencies is dependent on the price of Bitcoin. It is also the best researched cryptocurrency and many models have projected its future price to rise by substantial margins in the coming years and decades.
Ethereum (ETH) – because of its potential. Decentralized applications can be built off of Ethereum (think regular applications but with no middle-man taking profit). Also, many other cryptocurrencies use built using Ethereum’s network. This means that Ethereum’s long term price is dependent on the success of both decentralized applications and many other cryptocurrencies, of which there are many and more are added to the list each day.
Ripple (XRP) – because of its efficiency and partnerships with large money processors such as Moneygram. XRP has had substantial institutional backing, and despite being generally disliked within the cryptocurrency community, it can process payments much quicker than most blockchains. This makes it a top contender as the “ideal” currency for transferring wealth quickly across the globe at an extremely low cost (which is what Bitcoin was initially designed to do).
Basic Attention Token (BAT) – because of its adoption. Brendan Eich created the Basic Attention Token to reward users for viewing ads on the otherwise completely ad-free Brave browser. The Brave browser has seen very impressive adoption in recent years, and the high-quality data that willing viewers provide to advertisers has resulted in tens of thousands of partnerships with Brave.
Orchid Protocol (OXT) – because of its use case. OXT is used to pay for decentralized VPN services. Orchid made the news after being suddenly listed on Coinbase, one of the most reputable cryptocurrency exchanges in the world. Although they currently only offer VPN services for phones, they will soon be expanding to desktop and will likely see a level of impressive adoption like the Brave browser. By the end of April 2020, it will also be listed on Gemini, another straight edge crypto exchange.
Decentraland (MANA) – because of its futuristic appeal. Decentraland is a decentralized virtual world wherein non-fungible (unique) items and limited plots of land can be bought in exchange for MANA tokens. Once MANA tokens are used to buy a non-fungible LAND asset in the game, the MANA tokens are burned. This is significant because there is a fixed supply of MANA tokens. This means that if the game picks up steam, which is likely given its incredible design and growing popularity, there will be an extremely high demand for the limited supply of MANA tokens to buy LAND assets in-game.
Long term cryptocurrency trading vs. short term cryptocurrency trading
After you’ve decided which cryptocurrencies you want to invest in, you then have to decide whether you are going to be a short term or long-term trader. As you might have been able to tell, the rules of thumb we outlined in the previous section are more for long-term traders who plan to “hold on for dear life” or “HODL” through periods of extreme volatility until their crypto assets mature and/or experience a surge in retail investment.
Many cryptocurrency traders use a combination of both long-term and short-term trading strategies, and those that do have repeatedly stated that the profits from day trading are often the same as simply holding the asset over a longer period of time. This will of course in large part depend on which cryptocurrencies you are invested in and whether or not you have the information and experience you need to make good calls in a volatile market.
You could theoretically disregard all of the advice given in the previous section and opt to play around with more questionable cryptos. The advantage there is that lower level coins tend to have more volatility, especially those with smaller market caps and limited liquidity (being listed on only 1 or 2 exchanges).
As mentioned previously, higher volatility means more potential for both profit and loss. It is well known within the trading community that the most epic gains are made with these lesser-known, “low quality” cryptos but also the most brutal losses. This is probably why short-term trading and long-term trading tend are said to be equally profitable: with larger more established cryptos, there is less volatility and the gains are gradual, whereas with smaller cryptos the gains are immediate but uncertain and the asset’s viability may not last longer than a year or two.
Last but not least, it is absolutely critical to make sure your funds are safe no matter which style of cryptocurrency trading you prefer. This means making sure your cryptocurrencies are stored securely on your own private wallet. These cryptocurrency wallets can be either digital or physical, with the latter being the more secure option.
There are dozens if not hundreds of cryptocurrency wallets out there. Some of the most reputable include Atomic Wallet (multi-crypto digital wallet) and Trezor (multi-crypto hardware wallet). If you have watched any cryptocurrency trading videos, you have probably heard the terms “hot wallet” and “cold wallet” being used from time to time. A hot wallet is where you store cryptocurrency you are planning to trade in the near future, whereas a cold wallet holds cryptos that you do not plan to trade any time soon. Physical cryptocurrency wallets are generally preferred as cold wallets whereas digital ones are used as hot wallets. Always remember to keep your funds safe, and never forget the popular saying:
That means take it off the exchanges when you’re done trading it!
How to be a successful cryptocurrency trader in 2020
Before you run off and start making some mad cash, it’s important to remember a few things.
First, only invest what you are willing to lose. Bob Loukas, a well-respected cryptocurrency influencer, recommends that you don’t invest more than 10% of what you own into cryptocurrencies. He has also noted multiple times that this percentage can change depending on your age and obligations, and that younger investors can generally risk more of their wealth without it having a catastrophic effect on their life. However, there is a more important reason why he recommends investing only a small portion of your total assets and this ties into the second rule of cryptocurrency trading.
Invest strategically, not emotionally. Although investing more than 10% of your total wealth into cryptocurrency may not bankrupt you if the entire market goes belly up, investing any more than that will make it very hard for you to be emotionally neutral during periods of intense volatility. Bob Loukas has also highlighted that this is just as true when it comes to bull runs – you won’t be able to wait to sell at a target price point because it will be too stressful to do so. As Baron Rothschild famously said, you have to learn “to buy when there is blood in the street” and also know how to sell at the right time. That has historically been the hardest thing to do in any market but remembering this third piece of advice will help you with that.
Use cryptocurrency trading tools
This can be something as simple as learning about the various indicators such as the Stochastic RSI, the MACD, and more cryptocurrency-specific models like the Stock To Flow model. You should also take the time to learn about the various bullish and bearish candlestick patterns in trading. Finally, consider looking into emerging apps and platforms such as CryptoMood. These powerful trading tools can do things like track large transactions on blockchains (Whale movements), see social media posts and breaking news in real time from a single point of view, and even set custom alerts for various prices or patterns you’re looking for in any of the 5000 cryptocurrencies that exist. In the case of CryptoMood, they take it one step further than just basic data aggregation – they generate additional indicators such as news sentiment and social sentiment which track people’s and news authorities’ opinions about cryptocurrency using a natural language processing and AI. Tracking these changes is exactly what you need if you want to have the best chance at buying the dips and selling the tops!