You were finally starting to understand Bitcoin when talk about alternative cryptocurrencies or “altcoins” started springing up everywhere. Elon Musk is tweeting about Dogecoin. Mark Cuban is talking about Ethereum. The Motley Fool is posting about Chainlink.
What are altcoins, and should you be investing in them?
I cannot speak to whether investing in altcoins is appropriate for you. Altcoins are a highly volatile and risky asset class that offers the potential for high returns. Every investor must decide whether they are willing to bear the associated risk. When evaluating thousands of coins to select the best opportunities, it is critical to have an appropriate framework to work from. That is why I am sharing my 5-step framework.
1. Use case. Arguably the most important piece of the puzzle. What does the coin and the company behind it do? You will find hundreds of opinions on almost every single coin, but that gets us nowhere. As a physician-scientist I need the facts, the raw data, so I am well informed to make my own decisions. For that information, I access three primary sources:
- Whitepaper. This is where the team lays out the function of the coin, the use case for the project, and expectations for the future. Guaranteed to be a dry read, but also holds the most fundamental information.
- The website of an altcoin often carries similar information as the whitepaper but in a more succinct, easily readable manner. The use case should be laid out very clearly. If a coin does not have a well-managed website, that is a huge red flag. On the website, you should also be able to find information about current developments, partnerships, and their roadmap for the future.
- Social media. Love it or hate it, this is the way cryptocurrency companies primarily engage. Here they post updates, progress, and critical information that will help you evaluate the legitimacy of their proposed use case.
2. Any company can make endless promises. I want to see their plan to achieve them. Almost every legitimate altcoin company should have a publicly available roadmap. Their roadmap should include S.M.A.R.T. goals so that investors can keep them accountable to stay on track with the development of their project. If they plan to integrate their use case with the real world then I want to see partnerships start to show up. If the company adds an integration timetable for their partnerships to the roadmap that adds to their legitimacy.
3. Who is working on this project? As the CEO of a startup, I am very supportive of people who are pursuing great ideas despite a short track record, but they will still need to convince me of their credibility. What are their credentials? If they had little experience, did they bring experienced people on board? How active are the team members in the development of the project? Are their roles defined? Are they hiring and expanding positions? Is the company managed professionally? How transparent and accountable are the team members? It can be challenging to evaluate a team in such a rapidly expanding and changing field, but if you successfully identify good teams, that will go a long way towards identifying projects with bright futures.
4. An altcoin company with a great use case will have a dozen copy-cats. It will also put a huge smile on my face. Why? Competition breeds innovation. This is the fruit of companies fighting tooth and nail to stay a step ahead of each other. Wherever you see feverish competition, there is the opportunity you can leverage to your advantage. Competition allows you to separate variations of an idea more easily as you see multiple versions of the idea play out in front of you. If there is no competition, then you must reflect on why that is the case. Is it because the idea the company created is new and innovative? Or is it because the opportunity this use case provides is not as lucrative as it seems at face value?
5. Altcoin projects are all about community. Many are driven by grassroots community members who have skin in the game and are looking for any chance they can to educate others about their project. A vibrant community points to the vitality of a project. An unengaged community is commonly a dark cloud foreboding of things to come. You can put your finger on the pulse of altcoin communities through social media, chat rooms, and informational channels. A driven and passionate community can take a project from a niche idea and turn it into a global phenomenon overnight.
As a fellow medical professional, I know the importance of gathering information yourself to develop a gestalt. That is why I provided you this 5-step framework to start your journey of evaluating alternative cryptocurrencies. For the many physicians who do not have time to spend evaluating altcoins there are professional companies who can help you as you explore the opportunities this new asset class provides.
These are my personal views and opinions and should not be construed as investment advice on behalf of myself or any company with which I am affiliated.
John Stillson is a medical student at Indiana University School of Medicine and investment manager. He is the founder and CEO of the cryptocurrency investment management company, Ascension Capital, LLC, and can be reached on Facebook and on Twitter @invest_ACF. He also founded the cryptocurrency fund, Genesis Legacy Fund, LLC.
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