When deciding on diversification of portfolio, many investors choose to go for cryptocurrencies. No doubt, crypto investment is a great way of diversification, but jumping into it directly without searching for the best cryptocurrency to invest in could create a loss-bearing situation for you. There are many things that you must take care of to make advantageous decisions in the crypto market.
Factors To Consider While Choosing A Cryptocurrency
Here are four important factors that you have to consider while choosing the best cryptocurrency to invest in –
- Market Capitalization – In simple words, the market capitalization of any particular cryptocurrency is the total value of all the coins of that currency that have been mined. It is used to determine the dominance and popularity of cryptocurrency. For choosing the best cryptocurrency to invest in, ranking them on the basis of market capitalization is considered the easiest way. Below is the list of the top 5 cryptocurrencies ranked by market capitalization-
Bitcoin – $381,516,521,882
Ethereum – $203,093,880,323
Tether – $67,546,041,565
USD Coin – $51,797,687,794
BNB – $45,371,410,291
- Coins to be mined vs. Current Supply – Always consider the supply of cryptocurrency before investing. Check whether the cryptocurrency you are planning to invest in will have a limited supply in the future. For example, Bitcoin’s supply is limited to only mining 21 million coins. As of August 2021 data, 18.7 million coins are already supplied in the market, and only 2.3 million more coins are left to be mined.
As more people invest in Bitcoin, its demand increases with each passing day, but its supply is limited. If there is an increase in demand while supply is limited, the prices of the product tend to rise, and the same applies to Bitcoin.
So, while deciding which crypto to invest in, you must check what will be the overall supply and how much is already in circulation.
- White Paper – The white paper mentions all the coin details, like the purpose behind creating it, the problem it will solve, the technology it uses, etc., and every cryptocurrency has it. It also mentions the vision of the coin’s creators; if it seems realistic, you may consider investing in it.
Over time, you can assess whether the vision mentioned in the white paper is getting implemented in the real world or not. If the answer is yes, it is the best cryptocurrency to invest in, and if you have already invested, then you may take a call to invest more chunks of money in it.
- Use cases – The cryptocurrencies are not merely used for payment of goods and services; here are five use cases for crypto assets –
- Use Case 1 – Digital cash
- Use Case 2 – Programmable money
- Use case 3 – Collateral
- Use case 4 – Governance
- Use Case 5 – Collectibles
The use cases of coins are mentioned in the white paper and are one of the main factors that drive acceptance among its users or investors. Also, there are chances of new use cases getting developed over time. The more the number of use cases, the more will be acceptance of the coin and the increase in its value.
To understand it more clearly, let’s take an example. Ethereum has one of the best use cases, technology-wise, and because of these use cases, Ethereum has the second biggest market capitalization after Bitcoin. So, it might be the best cryptocurrency to invest in now.
If the use cases of the coin are down, then the chances of a coin’s value declining and its survival threat are higher. So, you must pay key attention to the use cases of the coin before making a decision.
As an investor, consider allocating your money to different asset classes. You should diversify your portfolio by including equity, debt, real estate, gold, and cryptocurrency in it. And remember to always keep searching for the best cryptocurrency to invest in for diversifying within crypto. You can do this by relying on the factors such as market capitalization, white paper, use cases, etc.