Many investors or just traders are always looking for the next crypto to invest or trade.
Trading crypto can be done via a decentralized exchange (DEX) such as Uniswap for ETH or Quickswap for Polygon.
Centralized exchanges (CEX) such as Coinbase, Binance and Kucoin is also a popular choice and more convenient to some. Determining which cryptocurrency to buy or sell requires monitoring numerous tokens.
Inexperienced crypto traders are a target for scammers, which have earned millions of dollars in 2022 according to a recent report. We will break down some of the key elements to look when choosing to buy or sell tokens.
Security Audit & KYC
A security audit is conducted by a security company. Certik for example is among the popular crypto audits firm in today’s markets. The audit assures there are hidden functions in the token’s contract that will allow the contract’s owner to manipulate the token.
For example, a hidden malicious function can suspend selling when a certain volume is reached. That way, people can only buy, which reflects in a substantial increase of the token’s price. The scammer will then ‘dump’ the tokens he is holding.
The above is unlikely to occur with CEX. Binance for example runs 2 audits before listing any cryptocurrencies. People that choose to buy and sell on DEX must be on the alert for such scenarios.
It is important to stress that not all unaudited tokens are a scam, a security audit from a reputable security firm may add some creditability.
A Know Your Customer (KYC) audit affirms the identity of the token’s owner. If the identity is known, the owner may be less likely to attempt defrauding token’s holders.
Token Supply
The supply is the amount of tokens that are available. It may be as little as 2 million to over 500 billion tokens. The supply can be checked on chain such as bscscan for BSC tokens or ethscan for ETH tokens.
For new crypto traders, coinmarketcap (CMC) is a great alternative.
In an effort to save the cryptocurrency, the Terra Luna Classic team minted trillions of tokens. The increased supply lead to a devaluation of the token.
At the time of this writing, Terra Luna is struggling to climb higher until the supply is reduced. There is no magic number for low supply but up to 1 billion may be more than enough (excluding stablecoins).
Token Holders
The amount of holders is another crucial factor to look out for. If a single address has 30% of the supply, the risk for price manipulation is elevated.
One of the popular free tools used for assessing the token holders, contract and liquidity (among other factors) is tokensniffer. Copy-paste the contract’s address, the data will then be displayed.
For the more advanced cryptocurrency traders/investors, Moonarch is another great, free choice for BSC, ETH, AVAX and FTM.
The Whitepaper and Development
Every blockchain project has a whitepaper. It clarifies the aim of the project, how the token’s system functions and what to expect. The whitepaper must be read and analyzed.
Development is reflected in partnerships, events the team is attending, the pace of features that are added, sticking to the roadmap and more.
One of the reasons for example Cardano (ADA) failed to maintain a spot with Polygon (MATIC) and Ethereum is delay in developments. Cardano is a layer 1 token with its own Mainnet.
A Cardano-based stablecoin (algorithmic), Djed, was only recently released while other chains have several stablecoins such as USDC, USDT and BUSD.
Tokenomics
This is important for both cryptocurrency traders and investors. Many projects raise funds from a presale via launchpads. The seed investors will receive their tokens in a predefined schedule referred to as the vesting period.
Early investors receive tokens at a significantly lower price before the token is available for trading (at a higher opening price). Although it varies from token to token, early investors will receive a certain percentage of their tokens on a monthly basis.
Some blockchain projects do not have a vesting period, which often results in heavy selling as soon as the token is available for trading. An example of a ‘presale dump’ was seen in Optimism (layer 2) when it was available for trading.
The above must be paid attention to. In an event a significant amount of tokens are released, it may end in firm liquidations. In turn, the price may trade significantly lower.
Crypto Trading Strategies
A trading strategy and a risk management strategy is required for cryptocurrency trading. Technical analysis, which means using the chart for buying and selling is one approach.
Nevertheless, adopting known trading strategies form other markets such as Forex or Stocks without some alterations may not be profitable in the long run.
Adjustments are required as the market conditions in crypto are different. Automated crypto systems may be worse as a shift in the market conditions is likely to reflect in the algorithm’s performance.
Understanding of the tokenomics is still required, even when technical analysis is used. When XEN was released on DEX crypto exchanges, the price fell sharply lower.
XEN is allowing anyone to mint the token for free (only gas fees are paid). As the supply increased XEN began its devaluation against the US Dollar (USD).
The chart may have generated numerous buy signals based solely on technical analysis. Traders that were unaware of the tokenomics attempted to buy XEN, which resulted in hefty losses.
Crypto Volatility
Studying the tokens is an essential part of both trading and investing. There are crypto signals that do most of the hard work for you, filtering the legitimate crypto signals providers from the fraudulent services may be difficult.
In the Forex market, crosses such as GBPAUD are very volatile. In cryptocurrencies, some tokens are more volatile than others.
Ethereum and Bitcoin are similar to EURUSD, the volatility in terms of percentage points is more stable compared to other tokens such Optimism (layer-2).
As opposed to traditional finance, the volatility in the crypto markets is greater. Studying how to manage your funds under a conservative risk management may prevent unnecessary net exposures.
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Last Updated on March 19, 2023