To maximize your investments in Defi you must carefully select a token. The key is to be informed about how each one works and the types of tokens that exist.
In this article we have collected the most important factors to take into account when choosing a token. Here we go!
To decide which token to buy, you should look at the most relevant features they possess:
These are the two characteristics most commonly used to evaluate a token. Market capitalization is the total value of all tokens in circulation multiplied by the current price of the token and trading volume represents the amount of tokens being bought and sold in the markets.
Capitalization = Total value of tokens in circulation x Current price of token
In this sense, a higher capitalization and volume usually means that there are more investors or at least more volume that trusts the project so it should have less risk of devaluation on the other hand it should also be less likely that the growth will be higher than the market.
As it is a matter of probabilities this does not have to be the case, so it is always necessary to contrast the capitalization and volume data with the rest of the token's characteristics.
Within the capitalization it is relevant to understand the concentration of the token, for example, if a token is in the hands of many investors it is more difficult for there to be a joint action to move the price artificially, on the contrary a player that accumulates a large percentage of capitalization can manipulate the price if it wishes.
Similarly, it is necessary to analyze where the activity of buying and selling the token takes place , if there is only one liquidity pool or exchange, there is a risk that it will not be possible to sell if the DEX or CEX has problems and this will negatively affect the price.
Conducting a fundamental analysis of the project involves evaluating aspects such as the underlying technology, the development team, actual use cases, market potential, strategic partnerships..... A thorough analysis will help determine the strength and long-term potential of the project. This analysis is similar to what is done in the traditional world to assess whether a stock is expensive or cheap and therefore whether it is likely to be bought or sold.
Below we would like to highlight two characteristics of this fundamental analysis that we believe are particularly relevant in the fundamental analysis of tokens such as ecosystem and adoption or community and governance.
Evaluating the project ecosystem and its adoption can help us understand the potential for long-term growth and utility. On the other hand, investigating the community behind the project and its ability to influence decisions through decentralized governance mechanisms will allow us to understand if there is any risk in the future of the project or if, on the contrary, an ecosystem of healthy innovation is being fostered.
When we are assuming that the value of the project is going to be captured by the issued tokens it is very relevant to understand how the tokens are distributed and issued. In addition to the concentration we have already discussed above, it is relevant to know the token issuance policy.
There are two token issuance policies:
Every year more and more tokens are put on the market (therefore, at the same capitalization, the value of your tokens will be worth less and less).
Each year there will be less or what is known as token burning (therefore at the same capitalization, each year the value of your tokens will be worth more and more).
As in crypto projects the initial issuance of tokens has a lot of weight in the total issuance it is very relevant to know how this initial distribution has been and if any of the players has the obligation to keep the tokens for a period of time.
Analyzing the aforementioned characteristics together with the type of token and its utility will allow us to understand what the intrinsic value of a token is. But in the crypto ecosystem where there is a lot of innovation and there is no history to measure well how all these characteristics affect the price, it is very relevant to take into account external aspects such as the macroeconomic situation and market sentiment which are essential aspects to consider when analyzing a token in the broader context of cryptocurrencies and the economy in general.
These factors can influence the performance and long-term viability of a token. Here are some key considerations:
Price movements, market capitalizations and trading volumes can provide insight into the direction the market is headed at the time. The cryptocurrency market has experienced boom and bust cycles over the years. Recognizing which phase of the cycle the market is in can affect your investment decisions. During bullish periods, many tokens can perform well, while during bearish periods, acting cautiously is best advised.
News, announcements and events related to cryptocurrency and blockchain technology can have a significant impact on the market. Regulatory announcements, major technological developments, exchange hacks, the entry of an institutional player among other events can cause abrupt changes in token prices. Stay informed about relevant news to anticipate possible changes in the market.
Macroeconomic factors, such as interest rates, inflation, government policies and geopolitical tensions, influence the cryptocurrency market.
You already know the main characteristics of tokens, as well as the external aspects surrounding it. Remember that it is vital that you keep yourself constantly informed to find out about all the changes and news.
