Cryptocurrency gets a reputation as a volatile asset that's rather hard to pin down. Prices fluctuate a lot, and you can wake up in the morning to see the values are entirely different from what you saw last night. This can cause many traders to steer clear of cryptocurrencies. Who wants to entertain the probability of losing more money than they gain? Nevertheless, an ever-growing number of traders are drawn in by crypto and are looking to add it to their portfolios.
The main reason is that digital money isn't going away anytime soon, and, according to researchers, it might actually be the future of finance. But if you're starting your trading journey now, you might feel a little puzzled. There are thousands of cryptos out there, and if you're not knowledgeable about each, figuring out which one you should add to your holdings can be really challenging. Here are some aspects to look out for before you settle on something.
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Market capitalizationMarket cap is one of the most important aspects of choosing crypto. Seasoned traders are well-aware that analyzing how big an asset is means that it is also more likely to be safer and less susceptible to crashes and market failures. In the crypto ecosystem, this figure refers to the value of all the coins that have been mined since a particular crypto's launch date. The current number of coins in circulation is multiplied by the market value of a single currency. The resulting number gives you a good idea of what you can expect from a particular digital coin.
Market capitalization can also be used as a guide to determine the relative stability of a particular token. For example, in the case of coins that are more well-known on the market, such as Ethereum, you'll notice that the overall numbers are more stable. However, before you learn how to buy Ethereum, you also need to figure out how to read a chart in order to figure out the warning signs of a possible spike in prices. Even ETH, the biggest altcoin in the world, can sometimes experience significant volatility due to the nature of crypto markets.
So, when you're choosing a crypto coin, look for large-cap capitalization. They're the safest bet, especially for newcomers to the field. Those in the mid-cap range are significantly more volatile, but there's still plenty of growth potential. If you feel comfortable with a certain degree of risk, you can also try out this section of the market. Small-cap crypto is the riskiest option, prone to swings and crashes over very short periods, sometimes as little as a few minutes or seconds.
As such, one of the most important aspects before you start trading, is to figure out your rough risk threshold.
Price performanceWhether you're looking for short-term gain or long-term holdings, knowing a crypto's past price action and gains should be an essential part of your decision. In the case of continuing investments, you can start by looking for the coins that have achieved the highest gains over a specific time, say between six and twelve months. If you want to go the extra mile, you can even run an assessment over a few years. If there's a reasonable belief that an upward trend will continue, you can guarantee future returns using this strategy.
In the case of shorter-duration undertakings, using price performance is known as price action trading. Making use of technical analysis, you can evaluate future price movements using historical statistics. The most important thing is learning as much as possible about crypto. Keep up with the news since important worldwide events typically do influence the market and can make all the difference for your trades. It goes without saying that economic news is relevant as well, so keep an eye out for the latest information if you want to stand a better chance of predicting future price movements.
SupplyMuch like in the case of fiat currency, the amount of crypto in existence also determines its value. The belief that scarcity creates value holds true for cyber money as well. The more there is, the lower its value, and vice versa. However, there's an additional layer to crypto. There is a total and max supply of tokens. While the total market cap is based on the current supply, the diluted market cap uses the max supply figures. Therefore, when you evaluate a coin or token, you need to consider how the two values stack up together. Determining this amount is what also establishes whether a certain price point is attractive or not.
Something that appears cheap at first glance might, in reality, be highly inflated when considering supply numbers. The more significant the difference between the max and the diluted market cap, the more you should approach the trade with caution or even abandon it altogether. Future token releases can lead to heightened levels of price deprecation.
Market nichesThere are several sectors within the crypto market, and you can base your decision on whether or not your estimations show that a particular niche has growth potential. For example, decentralized finance is currently one of the most popular applications for crypto. These undertakings offer an alternative to the typical transaction patterns and remove the control of banks, other institutions or third-party entities that manage data.
Stablecoins are another area where you could invest. Working mainly like the rest of crypto, the difference here is that stablecoins are pegged to commodities or fiat currency. As such, they are considered relatively safer compared to other cyber coins since their price fluctuations are much milder.
And, of course, we can't ignore internet trends. Memecoins, heavily associated with internet culture and initially created for fun, have become increasingly popular among traders, given how the WorldWideWeb's capacity for jokes will never pipe down.
When you're taking the first steps in the world of crypto, it can seem daunting. But with a bit of confidence and plenty of research, you'll be able to create a successful trading career for yourself.