- Date : 19/11/2021
- Read: 4 mins
While deciding on the right crypto for investing, you should follow appropriate asset allocation to diversify among various asset classes - including cryptocurrency - and then diversify among various cryptocurrencies to further reduce risk.
According to data published on the CoinMarketCap website, as of 13 November 2021, there were 14,106 cryptocurrencies with a total market capitalisation of USD 2.7 trillion trading at 430 exchanges globally. Given these numbers, it is very easy to get overwhelmed and be confused about which cryptocurrencies to choose for investment. In this article, we will see how you can shortlist the right crypto coins to invest in.
There are many things to consider when choosing a cryptocurrency for investment.
Here are four important factors:
1) Market capitalisation
Ranking cryptocurrencies based on market capitalisation is one way of selecting them for investment. Here is a list of the top 10 cryptocurrencies ranked by market capitalisation.
Table: Top 10 cryptocurrencies based on market capitalisation
Note: Data is as on 13 November 2021.
As seen in the above table, out of the total market capitalisation of USD 2.79 trillion for all cryptocurrencies, Bitcoin (43%) and Ethereum (19.6%) together contribute 64%. So, these are the bluechips of the crypto world. Accordingly, you can choose to invest some money from your overall cryptocurrency allocation in these two.
2) Total coins to be mined and current supply
Look at whether there is going to be a limited supply of a particular cryptocurrency. You should also consider the number of coins that are already in circulation. For example, Bitcoin’s overall supply is limited to mining 21 million coins only. As of August 2021, 18.7 million coins are available, with only 2.3 million more coins to be mined.
The demand for Bitcoin is increasing with every passing day as more and more people are investing in it. But supply is limited. The increase in demand and limited supply leads to an increase in the price of any digital asset, and the same applies to Bitcoin also. So, while deciding which crypto to buy for investment, you should check what will be the overall supply and how much of it is already in circulation.
3) White paper
Every cryptocurrency has a white paper that mentions all the details of the coin, like the purpose for which it has been created, the problems it will solve, the technology it uses, etc. The white paper also mentions the vision of the coin's creators. If the white paper seems realistic, you may consider investing in the coin with an initial amount.
Over time, you can gauge whether the vision mentioned in the white paper is getting implemented in the real world. If yes, it will reflect in the value of the coin going up. Accordingly, you may take a call on investing more in the specific cryptocurrency.
4) Use cases
One of the important things mentioned in the white paper is the coin's use cases. It is one of the main factors that will drive acceptance among its users/investors. Over time, new use cases may get developed. The more the number of use cases, the wider the coin's acceptance will be, and the more the increase in its value.
Let’s consider an example. Technology-wise, Ethereum currently has one of the best use cases. It is because of these use cases that Ethereum has the second biggest market capitalisation after Bitcoin. It might be one of the best cryptos to buy now.
If the coin’s use cases go down, the probability of the coin’s value going down and the coin not surviving will be higher. So, you may consider the coin’s use cases as a key factor while deciding on the best cryptocurrency to buy.
As an investor, you should follow appropriate asset allocation. At a broader level, you should diversify in various asset classes such as equity, debt, gold, real estate, and cryptocurrency investments. And within crypto, you should further diversify into various cryptocurrencies. You can do this based on factors such as market capitalisation, demand and supply, use cases, etc. Lastly, just as with mutual fund SIPs, it’s better to invest small amounts regularly rather than plonk down a lump sum at one go.
Disclaimer: This article is intended for general information purposes only and should not be construed as investment or tax or legal advice. You should separately obtain independent advice when making decisions in these areas.