When it comes to stockmarket investing, there are some basic rules most smart investors follow.
And there are countless books, websites and TV shows that lay those rules out and tell people how to apply them.
Of course, much of the time, it seems like those methods don’t really work too well. Which is why we have seen the huge rise of index tracking funds over the last few years.
I can sympathise with the argument. I’ve sure you’ve seen the statistics. Around 1 in 20 active funds beat the index, so why not just invest in the index? You’ll save money on fees – and you’ll make a higher rate of return.
However, in crypto investing things are different. There are no actively managed crypto investment funds. And there is no “index” to track.
I’ve seen a number of vehicles come out that actually claim to work like a crypto index tracker. But then you look into their holdings and they only invest in around ten cryptos. And many of those ten are not, in my opinion, good picks.
The world is very different now
No. when it comes to crypto investing, most traditional investment rules don’t really work. After all, in crypto, you’re not investing in a company so much as an ecosystem.
The crypto markets run on sentiment, and they are highly unpredictable. Anyone who tells you they know where the market is ing on any given day is either openly lying to you, or delusional.
For instance, given all of the advancements, adoption and investment we’re seeing into cryptos, as well as the huge potential the technology itself has, I believe over the medium to long term, prices will be much higher than they are today. And if you’re reading this, I’d wager you probably agree.
However, that doesn’t mean I claim to know what crypto prices will be tomorrow, next week, or even three months from now. As you know, crypto prices can collapse or quadruple in a matter of days, or even hours, for no apparent reason.
In the short term, crypto is highly unpredictable. But like many things, when you expand the time frame, those prices make a lot more sense.
Given all the evidence I’ve seen and all the research I’ve done, I believe that in a year or two from now the crypto market will be worth many times what it is today. I also believe that many of today’s popular cryptos will fade from existence.
Many cryptos will rise to unprecedented highs, but many more will fall by the wayside.
So that brings us to the question, how can we work out which cryptos are destined for greatness and which are destined for failure?
To help me answer that question, I devised my own crypto ranking system. I’m going to lay it out here so that, should you choose to, you can adapt and use it for yourself.
Should I have come up with a flashier name than just “the crypto ranking system”? Maybe. But I wanted the name to reflect its transparency and simplicity. And giving it a flashy name just seemed a bit fake.
Introducing my crypto ranking system
In the world of crypto it is extremely important to do your own research (DYOR). Things change, new information comes in by the day and new revelations unfold. It’s hard to stay on top of everything.
I dedicate hours and hours every day to researching the latest news and developments in crypto. But even I don’t know a lot of what’s happening in this space.
So before you put any money into any cryptos, you need to do your own research into them.
Here’s how you can go about it:
Read the white papers – actually do it. Seriously.
White papers are where the creators of the crypto lay out their plan. They explain – usually very simply – how it works and what it hopes to achieve.
This is the starting point of your research into any crypto you want to invest in. You can learn an awful lot from the crypto’s white paper.
Go on the crypto’s website
Have a look around the crypto’s website. Don’t get suckered in by a flashy website. Look for the section on the team and check their backgrounds. If they have a question mark over their face or don’t give much background, steer clear.
There was a fairly high profile ICO a couple of months ago that used a picture of Ryan Gosling for the face of one of its team members. Seriously. It was soon discovered and went viral in the crypto community.
It was pretty funny, but some people who didn’t do their own research will surely have given that ICO money and probably won’t ever get it back.
Look for any partnerships they have and get a general feel for the crypto.
Take a look at the Reddit communities
Reddit is one of the best places to find information on any crypto. You have hundreds, if not thousands, of people adding to the debate. If they post something useful, they get an upvote. If it’s false or not useful, they get a downvote.
The upvoted posts and comments rise to the top. So it makes it easy to get good information fast.
The only thing with Reddit communities is that they will all shill their own coin, and mostly only post positive news about it.
So it’s also a good idea to search for posts about that coin on other crypto Reddits so you can get a more balanced view.
Now, on to the fun part – how we rank cryptos.
Each crypto is be ranked out of 45, and then given a percentage
The ranking system has seven parts, just like the seven deadly sins or the seven virtues. They are:
This is the crypto’s vision. What it hopes to achieve and how much impact that could have on the world.
This is ranked out of 10.
Team and partnerships
It doesn’t matter how grand your vision is without a strong team behind you, and without connections in the right places. A strong team with a history of success and strong ties to industry can set a crypto flying.
This is ranked out of 10.
Why the tokens have value
So you have a grand vision, a strong team and good connections. But in your system, will the actual crypto – the token people will invest in – be needed?
You get a lot of cryptos that sound like great ideas, but when you look into them, there is really nothing giving the tokens any value. In extreme cases, the entire crypto could function without tokens at all.
This is ranked out of 10.
Passive income potential
This one is sort of like a bonus. It’s a guaranteed income. Most people don’t realise this, but a lot of cryptos pay out the equivalent of dividends just for holding them, or for doing a minor bit of work.
If your crypto is paying you dividends, you have the power of compound interest on your side. And what’s more, if that crypto really goes up, you have a viable passive income on your hands.
This is ranked out of 5.
This one is straightforward. How much competition does this crypto face, and is it already a market leader?
As this area is so new, and as there is competition for all cryptos from many different areas, I have put slightly less importance on this factor.
That is why this is ranked out of 5.
Ease of use
Now, cryptos by their nature are complicated. It’s a big idea to get your around.
However, for cryptos to truly hit the mainstream, they need to be easy to the layperson to use.
Most cryptos get this. Think about Apple, it’s not the best or the fastest or the most advanced. It is simply the most easy to use. It just works.
However, in the world of cryptos I don’t see ease of use as being quite as important as some of the other components in this ranking system.
So this is ranked out of 5.
Of course, we need a place to dock points. A crypto may be promising in all the above areas, but it may have a glaring flaw that needs to be taken into account. That’s why I’m including a caveats section in the ranking.
This will be a negative rating and will bring down the overall score. A score in this category is a negative, not a positive number.
This is ranked out of (minus) 10.
All of this together gives us a theoretical perfect score of 45.
Of course, no crypto is going to achieve a 45, but a higher score indicates more potential and most likely a better investment – in my eyes at least.
Now, as I said, this ranking is just a starting point. It’s important that you build on it with your own assessment before you put any money in.
Along with this ranking, I also include these other sections. These are more time focused, so they don’t figure into the score.
Current market cap and what that means
Just as with stocks, the market cap of a crypto has a huge bearing on its risk level and profit potential.
A smaller market cap means it has big potential, but is likely a lot riskier.
A bigger market cap means it’s likely more stable, but less likely to rocket thousands of per cent in a matter of weeks.
Again though, this is crypto, not stocks. And often some of the highest market cap coins drop 70% in value, or rise 500% in value in a matter of days.
Are there any upcoming developments, announcements, partnerships or breakthroughs?
In the world of crypto, a new release, partnership or rebranding can send prices flying.
As you can no doubt guess, this is a paragraph or two on my overall thoughts about the crypto, taking all of the above into account.
The ranking system is simple. And it’s simple for a reason. There is so much that is unknowable, new and untested in crypto, it’s impossible to set any firm conclusions.
I’ve seen other crypto analysts who use spreadsheets to develop in-depth cost, worth, and fair value assessments. But how can you possibly know the “fair value” of an asset that is so new and undiscovered?
The potential of cryptos is far beyond what most people realise.
Then again, how can you have such a definite system to assess an asset class that will regularly drop 50% for no discernible reason?
The one thing you can be sure of in the world of crypto, is that you can’t be sure about anything.
No one knows how big this industry will become. No one knows how big the next bull run will be, or how long it will last. Just as no one knows when the next crash will be or how long that will last.
I have developed this simple ranking system that makes it easy to see the best and worst points of a particular crypto. It’s a starting point for you to do your own research. Nothing more, nothing less.
So that’s how it works. If you are thinking of investing in any particular crypto, I’d advise you to run it through this system yourself to give you a better idea of its potential.
In my first issue of FTI: Crypto Wire I have run my three favourite platform cryptos, as well as my absolute favourite crypto right now, through this ranking system.
If you’d like to find out what those cryptos are, and how they held up, you can take out a trial of FTI: Crypto Wire here.
As well as ranking those four cryptos, in the first issue I lay out exactly why I believe cryptos will change the world, which industries they are disrupting, and what we should be looking out for as crypto investors.
If you’d like to read it, and find out my favourite cryptos and their rankings, you can find out more here.
And as an Exponential Investor reader, you can claim a 71% discount on the normal price using this code: CWSAVING.
Until next time,
Editor, Exponential Investor