“Which cryptocurrency should I invest in?”

The digital currencies market has shrunk from USD$3 trillion in November 2021 to less than USD$1 trillion by late September 2022.

On the bright side, the lower valuations have once again made some of the biggest and most popular cryptocurrencies more affordable, with all blue-chip coins now trading at prices far below their peaks.

Of course, bitcoin remains the largest and best-known cryptocurrency, but there are thousands of others that claim to be better and faster with broader applications.

So, how can Canadian investors choose? Here’s a handy guide that explores the different factors that can influence a crypto coin’s value; risks and opportunities that affect the entire crypto market; and where to buy crypto coins.

How to pick a digital coin?

A great deal of a crypto’s value is baked into its utility. “Rather than focusing on name-brand recognition, investors should focus on utility capabilities,” says Michael Zagari, an investment advisor at Mandeville Private Client and Zagari+Simpson in Saint-Laurent, Que.

Here are some of the key questions to ask:

• What problem can the cryptocurrency solve?
• Could the emerging technology enhance user experience compared to existing technology?
• Is there a potential for a community to form?

“Investors who have a deeper connection to the project are less likely to focus on the volatility of a token,” Zagari adds.

Based on their utility, popularity, technical prowess and applications, the following cryptos could be a safe and valuable addition to your crypto portfolio, says Zagari. However, volatility is something that not all Canadian investors can ignore, as it is rooted in risk tolerance.

• Bitcoin (BTC)
• Ether (ETH), native coin of the Ethereum blockchain
• SOL, native coin of the Solana blockchain
• AVAX, native coin of the Avalanche blockchain

All these selections are layer 1 protocols—critical components of blockchain technologies and the settlement mechanisms for decentralized transactions. In other words, they form the foundation of what can be built on top of the blockchain and how fast transactions can be processed. That makes them the key constituents of the fastest-growing area of the blockchain economy: decentralized finance, or DeFi, a borderless, friction-free, cheaper and faster alternative to the current financial system.

“That means you can lend or borrow within a peer-to-peer network using smart contracts,” says Zagari. Smart contracts are programs stored on a blockchain that automatically execute when predetermined conditions are met.

“Solana and Avalanche, among others, compete with Ethereum; [therefore] holding these core layer 1s, including Ethereum, is a way to diversify your holdings with exposure to decentralized applications (dApps),” Zagari asserts.

DApps facilitate access to DeFi services such as lending, yield farming and trading, among others.

Regulatory roadblocks

Government regulations can have an outsized impact on the value of digital assets. All too often, “selling pressures on both altcoins and bitcoin have been typically based on political and regulatory factors,” Zagari notes.

Some governments aren’t comfortable with cryptocurrency’s decentralized and unregulated nature, and they look for ways to control the crypto market. Countries such as China and Indonesia have imposed outright bans, while others have proposed bills to limit crypto. Such moves can negatively impact crypto value.

More recently, digital assets have shown vulnerability to global political and economic events. “Today’s macro and micro factors seem to be affecting crypto’s coin values within the same way as tech equities,” says Zagari, but he adds, “It’s too early to tell if this trend will continue in the future.”

Furthermore, inflation, rising interest rates and a potential job market correction have caused some investors to tighten their purse strings. Zagari says, “The temptation to liquidate your crypto holdings back into fiat might be appealing for some.” This scenario, he adds, could “increase selling pressure while delaying more institutional adoption of cryptocurrencies,” leading to crypto value erosion.

Talking tokenomics

Another factor that influences the market price of crypto is a crypto’s economics. The number of coins in circulation at any given point has a significant bearing on a crypto’s value. For instance, only 21 million bitcoin units will ever be produced, and 19 billion are already in circulation. With supply capped or controlled, any increase in demand for the coin will drive up its price.

Inversely, the value of a coin whose supply isn’t capped could be diluted as more coins are minted and join circulation. For that reason, many cryptocurrency projects “burn” existing coins, a process to eliminate them from circulation and boost a crypto’s value.

Greater mainstream adoption

Mainstream adoption and wide applications create a tailwind for the value of digital coins. If a coin and its blockchain have promising prospects, such as faster transactions and lower fees, they tend to attract more developers to their ecosystem.

“In the past, the narrative of the crypto project was the driving force in price appreciation and [based] very little on utility or user experience,” Zagari says.

But that’s going to change. In the near future, the talk around crypto’s potential will be far less important compared to the utility of crypto projects and applications. For instance, the Solana and Avalanche blockchains have been attracting developers to their networks with faster transaction speeds and low costs.

“Developers who want to build applications are going to consider the best foundation to build on and are averse to moving their applications from one blockchain to another,” says Zagari.

Any tech upgrade, therefore, can create a positive momentum for crypto prices. The recent surge in the price of ether was fuelled by anticipation around The Merge, a technical upgrade that has moved Ethereum’s proof-of-work consensus mechanism to a more energy-efficient and scalable proof-of-stake model. As the transition is now complete, some experts believe the real upside may have yet to come.

Social media influence

Celebrity promotion, sensational headlines and coordinated social media hype have periodically triggered crypto price movements. In the past, a single tweet from eccentric billionaire and Tesla CEO Elon Musk has sent the value of crypto coins soaring or slumping. Even a tangential connection to celebrities’ business deals can move crypto prices.

Thus, while picking digital assets to invest, you may want to pay attention to coins that are particularly susceptible to celebrity and social media chatter—or stick with the blue-chip coins.

Speaking of social media, the chaotic nature of the medium makes it a breeding ground for crypto scams and pump-and-dump schemes. Remember, if an offer sounds too good to be true, it likely is.

Making the smart choice

If you’re interested in investing in crypto, you may want to take a look at CoinSmart (ticker symbol SMRT), a fully regulated Canadian crypto trading platform. It offers a user-friendly interface, a transparent fee structure, 24/7 customer support and the option to buy assets in Canadian dollars.

What’s more, the platform follows a robust KYP (know your product) procedure to determine which coins to offer. “The KYP process includes an in-depth look at tokenomics, protocol mechanics, team, legal history, etc.,” saysJeremy Koven, COO and co-founder of CoinSmart.

For example, while many other platforms rushed to list Terra’s LUNA when it was officially launched in 2019, CoinSmart didn’t. “The reason is that Terra didn’t pass our KYP,” says Koven. “This decision was questioned back then, but we were proven right in the long run.”

Opening a CoinSmart account is straightforward, and investors can access their funds the same day the platform receives them. Use the code money30 to sign up for an account* and receive CAD$30 in bitcoin when you deposit a minimum of CAD$100.

Read more about crypto:

• What is cryptocurrency? And how do you invest in it?
• Altcoins vs. bitcoin: What to consider while building your crypto portfolio
• Watch: Altcoins vs. bitcoin
• Watch: 10 cryptocurrencies you need to know about