How to Choose a Cryptocurrency to Invest – Part 1

Various aggregators and exchanges list literally hundreds, if not thousands, of different coins that you can buy and sell. At first, the job of choosing cryptocurrencies may seem like a hard one. However, the Pareto principle applies there just like it applies to other areas of life.

 

Pareto Principle and Cryptocurrencies

Italian mathematician Vilfredo Pareto discovered the principle in 1896 when he noted that about 20% of landowners in Italy were in possession of about 80% of the land in the country. In general form, the Pareto principle states that 20% of inputs are responsible for 80% of the outputs. For example, if you look at the floor of the room that you are currently in, you will notice that 20% of the floor gets about 80% of the wear.

What many people do not realize is that the Pareto principle also applies to the subsets of sets. For example, while it is possible to divide any set according to 80-20, the principle also applies to both the 80 and the 20 parts, meaning that 20% of 20%, or 4% of the total, would be responsible for 80% of the outcomes in the subset and 80% from the 20% will only get 20% of results.

Applied to the world of cryptocurrencies, it means that even though there are hundreds of coins available for sale, only a small fraction of them will ever gain any traction (20% versus 80%). Out of those that will gain traction, only a few will be able to survive for three or five years, which are the increments that you want to consider if you are looking to become a long-term cryptocurrency investor. So, what can you do to prepare to invest in cryptocurrencies?

 

Rankings and Patterns in Cryptocurrency Trading: 24-hour Volume

Aggregator websites such as CoinGecko.com provide all kinds of up-to-date trading data about most popular coins, including trading volumes, price changes, liquidity, market capitalization, the activity of the community, activity of developers and so on. Below you will find a description of the most important data points.

24-hour volume shows how much value of the coin has been traded in the last 24 hours. Most aggregators show this value in bitcoins (BTCs). While you do need to pay attention to the 24-hour volume, this data point is tricky because if a coin is going through a pump and dump cycle, sellers may be artificially inflating the trading volume in order to create an impression that there is more interest in coin than there is in reality.

A pump and dump scheme is when developers create a new coin and create a lot of hype around it by promising to introduce a lot of useful, unique and exciting features and capabilities. To create a coin, most developers use bitcoin source code. As people find more about the ideas behind the new coin, they get excited and want to buy the coin at a low price. The demand grows and the price starts growing, too. When the price goes up, the developers sell their coins and move on to the next coin project. That’s the essence of a pump-and-dump scheme.

Once you spend some time monitoring the trading volume of different coins, pump and dump schemes and cycles will become easy to spot. During such a cycle, the price starts suddenly going up. Then, developers start selling their coins and because of the increased supply the price goes down, typically to a smaller value than it had right before the pump, and stays there.

A typical pump and dump scheme lasts only a few days, which is why the best thing you can do to avoid getting caught in a pump and dump cycle is monitoring a coin for several weeks. Big changes in pricing over very short periods of time are a red flag that may indicate pricing manipulations. If you want to be making sound investment decisions, it is important that you base your decisions on real trading volumes, and real supply and demand, not manipulated numbers and volumes.

Try to avoid coins that have less than USD$10,000 or the same amount in bitcoin equivalent of trading in 24 hours outside big changes in pricing. While there have been success stories about people buying a new coin for pennies and selling it at a significantly higher price, later on, such stories are very rare. Success in cryptocurrency trading and investing is all about numbers, just like it is in trading and investing in regular currencies. This means that in the long-term you will have more success if you base your decisions on stable averages and not on highly volatile miracle trades and events. When you see a coin with high 24-hour trading volume that is consistently trading high, it means that the coin has a solid reputation and has a community that believes in the value of the coin.   

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