How to Evaluate the True Value of a Cryptocurrency

How to Evaluate the True Value of a Cryptocurrency

It's easy to correctly estimate the value of items such as shoes or even a house. You can tell the shoe's value by its quality by feeling the leather or looking at the craftsmanship. You can evaluate if a house is worth moving into by taking a tour of the rooms, and looking at the roof condition, pipe drainage, locks, etc.

With cryptocurrency, evaluating its value is more complex and often requires much attention and analysis. There are approximately 22,932 cryptocurrencies, according to CoinMarketCap.

Imagine trying to guess which ones are worth the investment and which ones aren't. Sounds like a financial nightmare, right?

Fortunately, there are markers or things to look out for when evaluating the true value of a cryptocurrency.

6 Things To Consider When Evaluating The Value of A Cryptocurrency

1. Read and Understand the Whitepaper

A cryptocurrency white paper is a document that explains the goal of the crypto project, the use cases of the coin or token, the technology used to create it, improvement and new feature plans, and how the cryptocurrency offers value to investors, traders and the everyday user.

However, It is important to know that the creators can mislead or skew what is written in the white paper to attract investors and users. This is something that unfortunately happens often in the crypto world.

A recent example is the Titanium Blockchain and its crypto token, $BARS. Its founder and CEO, Michael Alan Stollery, raised $21 million in an initial coin offering (ICO) before it was discovered (from his admission in court ) he falsified parts of the project's white paper. For more context, an ICO is a fundraising project where the creators of a cryptocurrency project request investment and offer tokens or free coins as a reward to interested investors and traders.

He also posted false client testimonials on the Titanium Blockchain website and false claims of business relationships with the United States Federal Reserve. He was sentenced to four years of prison in March 2023.

Titanium Blockchain CEO behind BARs ICO fraud, put behind bars for 4 years
Titanium Blockchain CEO and founder Michael Stollery has been sentenced to prison over his role in a “cryptocurrency fraud scheme” which involved an initial coin offering for BAR tokens.

After reading the white paper, asking some practical questions and receiving full answers is advisable before buying into the project. Some of these questions include:

  • Are the project's goals realistic?
  • Are the tokens being distributed as promised in the white paper?
  • Are they solving a real problem or inventing a new one?
  • What is the market's opinion of the project and its creators?

2. Research about the team behind the project

Just like a company is as good as the people working there, a cryptocurrency project's value is closely tied to the team behind it. The white paper should typically have information about the core team members, but researching them on your own can help.

The founders and developers of the crypto coin or token should have public records of who they are and what they do. If the developers or team behind a new cryptocurrency are unknown or have a dubious-looking online presence, chances are high that the coin will be a liability to your portfolio.

Also, a team of people who have shown their faces can be recognized and made to face the consequences if their crypto project turns out to be a scam, like the Titanium Blockchain example we gave above.

3. Look at the on-chain data and analysis

On-chain data are verified transactions that have been recorded on a blockchain. This data can be found through block explorers like Etherscan and BscScan, project reports and data charts.

Some of the data worth looking into include:

  • Active addresses: Check how many blockchain addresses have been active since the project launch. The more active addresses, the better the chance of the project being solid.
  • Transaction count and value: Check how much activity has taken/taken place on the network and how much value has been transacted. The more activity and the higher the value, the better.
  • Staking: Staking means locking up your crypto to earn rewards and help keep the blockchain secure. It's like saving your money in the bank; the longer you stake your coins, the more you earn. The amount of crypto staked at a particular period indicates the interest level in the project. Read how to make money from staking below:
What Is Crypto Staking and How to Earn Money From It
Crypto staking means locking a cryptocurrency in a wallet for a specific period to secure a blockchain network and validate its transactions
  • Hash rate: The hash rate is the amount of energy or computing power needed to process transactions on a Proof-of-work system. It is a vital indicator of a cryptocurrency's health or lack thereof. The higher the hash rate, the less susceptible it is to a 51% attack. A 51% attack happens when a group of miners controlling more than half of a cryptocurrency network's mining power try to take control of the blockchain.

4. Look into the cryptocurrency’s tokenomics

Tokenomics is an umbrella term for all the factors that affect a coin or token's value, such as maximum and circulating supply, use and distribution.

Maximum supply is the highest number of a particular token (written into the code of a cryptocurrency by its developers) that can be mined or produced. Circulating supply is the number of tokens in circulation.

What can the cryptocurrency be used to do? Is it used for online game payments? Is it used to pay for browser features? Is it used to pay for NFTs or digital art?

For instance, ETH is used for trading NFTs and as currency, while USDT is a stablecoin that helps manage crypto volatility.

At the risk of sounding like Captain Obvious, invest in projects that have actual use, or else you may end up wasting time and money.

Read more about tokenomics below:

Crypto Tokenomics; 5 Things That Affect Crypto Price And Value You May Not Know About (Number 2 Is Probably The Most Important)
There are currently over 20,000 cryptocurrency tokens in circulation. Getting caught up in the hype is easy, but tokenomics help reveal the real deals.

5. Find out the market cap, trading volume and liquidity

The financial details of a cryptocurrency is one of the most important ways to evaluate its true value. The three key financial indicators to consider are the market cap (capitalization), trading volume and liquidity.

Market capitalization: The market cap offers insight into the current and potential growth of the cryptocurrency. It is calculated by multiplying the circulating supply by the current price of the crypto coin or token.

Trading volume: This is the amount of cryptocurrency that was traded daily, weekly, monthly or any particular amount of time.

Liquidity: This means how easily a cryptocurrency can be bought or sold at market price (or close to market price). The more liquidity a cryptocurrency has, the easier it is to sell it at the current trading price.

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6. Assess the Community and Marketing

The power of a community cannot be overestimated.

"Every successful individual knows that his or her achievement depends on a community of persons working together." – Paul Ryan.

When a cryptocurrency project has a community that believes in its value and is willing to invest in it, the token/coin will likely appreciate in value. Here are some community-related questions to ask about a cryptocurrency:

  • Is the community active?
  • Is there a fair balance between developers and everyday traders in the community?
  • Is there a lot of hype and shilling happening?

On the marketing side of things, the team behind a project has to market its token to ensure it stands out and attracts real users. In a heavily saturated crypto market, the team needs to plan and execute marketing campaigns to build brand awareness and retain users.

Here are some marketing-related questions to ask about a cryptocurrency:

  • Does the project have a marketing team?
  • Are they getting and keeping their users?
  • How are they marketing the product? Is it through shilling or proper marketing strategies?

Always remember: a cryptocurrency token or coin's price increases if there is market interest and corresponding investment from traders.

Final Word

Fundamental evaluation analysis should be non-negotiable before buying any cryptocurrency, no matter how lucrative the coin or token seems.

DYOR (Do Your Own Research) is not just a buzzword; it can actually save your finances.

Disclaimer: This article was written by the writer to provide guidance and understanding of cryptocurrency trading. It is not an exhaustive article and should not be taken as financial advice. Obiex will not be held liable for your investment decisions.

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