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Coin Bureau reveals his method for hunting down altcoins with great potential gains and the steps he takes to avoid getting burned. This isn't financial advice, rather its educational.
It's a minefield searching for hidden crypto gems. Unfortunately, many coins serve no real purpose, yet many are hyped up to follow in the footsteps of bitcoin's significant gains.
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This shared article and video, by Daily Hodl and Coin Bureau, explains how to protect your capital by identifying the key difference between a coin and a token.
“Cryptocurrency coins function more like, well, currencies… Cryptocurrency tokens are a different story. Many tokens have characteristics that make them similar to stocks in a company. Regulators like the SEC (U.S. Securities and Exchange Commission) take issue with this given that there is a lot of paperwork that needs to be done before any company can legally issue or trade securities such as stocks.
As you can imagine, not many of these cryptocurrency projects are filing any paperwork which is why many of them have been hit with hefty fines by regulators over the past few years or even shut down. If you come across a cryptocurrency token that has robust tokenomics but is at risk of being deemed a security by regulators, you might want to think twice before you throw your money at it.”
Coin Bureau also suggests that traders be on the lookout for the coin’s distribution and allocation methods to avoid being a victim of price dumps.
“A fair launch is when a small community of people start collectively mining a coin or token. Bitcoin (BTC), Litecoin (LTC), and Dogecoin (DOGE) are examples of fair launched cryptocurrencies. There are no coin or token allocations for fair launch cryptos… A pre-mine is when the team behind the project mint some or all of the coins or tokens before opening up the network to the public… It’s common for most of the pre-mined tokens to be allocated to the team and private investors such as venture capital firms with only a small percentage being sold to average folk.”
The trader says the uneven distribution of coins is a risk factor as large holders can crash the market at a moment’s notice.
He also recommends investors check on a coin’s market cap and vesting schedules to make sure they look reasonable.
Coin Bureau adds that traders should pay attention to a coin’s staking and utility.
He uses ETH 2.0 and Polkadot (DOT) as examples to illustrate the effect staking has on the price of a cryptocurrency.
“In the case of Ethereum 2.0, any ETH being staked will not be unlocked until 2022 at the earliest. This means that if the price of ETH starts to skyrocket, all that ETH being staked is not going to be making it on to any exchanges. This conveniently restricts the actual circulating supply of ETH which could enhance that positive price action. This effect is much bigger for other proof of stake cryptocurrencies like Polkadot where more than 60% of DOT’s supply is being staked. These DOT tokens are subject to a 28-day unlock period.”
TIMESTAMPS
Coins vs. Tokens
Tokenomics is short for token economics. Tokenomics include a whole series of metrics relating to a cryptocurrency coin or token such as supply, allocation, distribution, emission, and utility.
Although they are often used interchangeably, cryptocurrency coins and cryptocurrency tokens are actually two very different things.
Coins are more like currencies and are native to their own blockchains. By contrast, tokens do not have their own native blockchains, are similar to stocks, and often have specific use cases.
Supply And Market Cap
Some cryptocurrencies like DOGE have a massive supply, which is why Dogecoin is one of the biggest cryptocurrencies by market cap even though the dollar value of each coin is low.
Other cryptocurrencies like yearn.finance’s YFI token has a small supply, and it is why 1 YFI is worth more than 1 BTC even though it has one-fourth of the market cap of Dogecoin.
This is why you should always pay attention to a cryptocurrency’s market cap rather than the actual dollar value of the coin or token, and think in percentage terms rather than dollar terms.
Allocation and Distribution
Cryptocurrencies are created in two ways: by fair launch, or by pre-mine. A fair launch is when a small community of people start collectively mining a coin or token.
Bitcoin, Litecoin, and Dogecoin are examples of fair launched cryptocurrencies. There are no coin or token allocations for fair launched cryptocurrencies.
Allocation is relevant to any cryptocurrencies that were pre-mined. A pre-mine is when the team behind the project mint some or all of the coins or tokens before opening up the network to the public.
Once you have a sense of how a cryptocurrency’s coins or tokens were allocated, you can use blockchain explorers to see how the coins or tokens are currently distributed.
Vesting and Inflation
Vesting applies to pre-mined cryptocurrencies and refers to how the coins or tokens are expected to be allocated over the coming months or years.
Unlocking too many tokens at once or within a short timeframe can sink the price action of that token in the short term.
When it comes to inflation, a cryptocurrency is either inflationary or deflationary. If a cryptocurrency has too much inflation, it can reduce the value of the coins or tokens already in circulation over time.
Unless the inflation schedule is extremely aggressive, it will have little to no effect on the short-term price potential of a cryptocurrency.
Staking and Utility
When you stake a cryptocurrency as a validator or a delegator, those coins or tokens are usually locked up for some period of time. This can supercharge positive price action during a parabolic run.
‘Utility’ is also referred to as a use case and includes basically anything that drives demand for a cryptocurrency coin or token. More utility generally = more demand, which means the price goes up.
Article produced by Daily Hodl - Video & info produced by Coin Bureau
