New to Crypto? Look at these 5 most important factors before pressing “Buy”

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There hasn’t been a better asset class to invest in over the past five years than cryptocurrencies, with a 9,400% return since February 2017. I’m sure this astronomical gain caught your eye. , although you may not be comfortable with your understanding of the industry.

If you are new to crypto, you don’t want to overlook these five key factors. They will complete your knowledge of this complicated asset class before you decide to invest.

Image source: Getty Images.

1. Extreme volatility

If you think the stock market is volatile, you’re going to be surprised. Digital assets are much more volatile. Even Bitcoin (CRYPTO:BTC), the most valuable and developed cryptocurrency in the world, regularly experiences price movements of 5% or more.

You know your own emotional and psychological make-up best. It is therefore absolutely necessary to be able to overcome the inevitable ups and downs and to avoid any panic to give you the possibility of obtaining great returns.

It is very important that you also understand your investment horizon. If you plan to be an investor for decades, allocating a small amount (1% to 2%) of your portfolio to cryptocurrencies is a good idea. However, if you’re close to retirement, it’s probably best to stay away.

2. Show me the utility

I believe the most critical determinant of whether cryptocurrencies remain relevant and gain prominence in the future is whether there are real-world use cases. Ethereum (CRYPTO:ETH) is very promising in this regard.

Thanks to its smart contract functionality, Ethereum has been a popular platform for building decentralized applications, or dApps. These cover services ranging from games and social media to finance and identity, all without the need for a central intermediary.

Stay away from coins like Dogecoin and Shiba Inu. Instead, look for cryptocurrencies that demonstrate the potential for real utility. Cardano and Solana are two that also stand out.

3. What is the activity of the developers?

Along the same lines as researching use cases, a cryptocurrency’s chances of success depend on the number of developers working on the platform. Although there is a ton of talent revolving around the crypto industry, the smartest people will only work on the most promising projects.

According to venture capital firm Electric Capital, Ethereum topped this category, with 4,000 monthly active developers working on it. Since cryptocurrencies are still a nascent technology, there are always improvements that can be made to better serve the growing community of users. Therefore, having a lot of developers working on a particular cryptocurrency shows that there is continuous progress going on.

4. Upcoming Catalysts

Before jumping into crypto waters, it helps to know if there are any short-term catalysts that could have a significant impact on the price of a particular coin. Usually, projects with more developers will tend to have bigger catalysts, as new upgrades are always being introduced.

Back to Ethereum. It is moving from a proof-of-work consensus mechanism to a proof-of-stake mechanism. This is a huge challenge, exacerbated by the fact that the network is still running while the upgrade is being implemented. Unsurprisingly, there is a lot of uncertainty surrounding the execution of this event. But if it can be integrated without major problems, you can be sure that the market value of Ethereum will increase.

Cardano is also adding new scalability and governance features, both of which should support a higher token price.

5. Regulatory framework

This last factor concerns the entire crypto ecosystem, and keeping an eye on it is of the utmost importance. I’m talking about government regulation, which I think is the biggest question mark when it comes to the trajectory of the crypto market.

Last year, China effectively made it illegal to own, operate, or transact digital assets. And the White House is expected to soon empower various government agencies to study and regulate cryptocurrencies as they see fit.

Innovation always moves faster than regulation – just look at the big tech companies. But if you want to invest in crypto, you should be aware that regulations are constantly changing and developing. And the new rules might not be industry-friendly.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a high-end consulting service Motley Fool. We are heterogeneous! Challenging an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and wealthier.

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