According to the study by Statis Group, 80% of new cryptocurrency projects are just plain scams. What is more, from the 20% left that are real projects, 50% will fail. Only 10% of all the projects you see in the cryptoworld will actually survive and achieve some kind of success. How to make sure that you do not lose money 9 out of the 10 times when you invest into cryptocurrencies? This article is just about that!
If we knew what we were doing, it would not be called research, would it?
– Albert Einstein
I started my cryptocurrency journey in the middle of the bullrun of 2017, just before the famous ICO bubble. At this time, even though I already had a lot of experience from trading on traditional markets, the cryptocurrency space was a totally new thing for me, with many challenges and traps. The lessons learned were in many cases very costly and painful. I lost money more times than I would like to admit. The last big scam I remember that cost me a few thousand dollars was ICE Rock Mining. A company that was supposed to mine Bitcoin inside of a mountain that used to be a soviet bunker, and share the profits with their investors. As you can imagine, I have never seen any profits from my investment… So how to protect yourself and pass on 90% of the ‘opportunities’?
The answer is simple: DYOR – Do your own research!
DYOR is one of the most important abbreviations in the world of investment, and it is especially important when it comes to cryptocurrencies. Crypto is still unregulated and it is your responsibility to make sure that you protect your money when investing in these assets. If you get scammed, the chances are (pretty high) that you will never see your money back. The easiest way to limit the risk is to stick to the big projects with established track records and legitimacy. Nowadays, most of the biggest projects are legit but in this world you can’t let your guard down, ever. The famous Bitconnect scam was once among the 20 biggest cryptocurrency projects in the world. Pretty good for a scam… In case you want to dive deeper into the world of so-called shitcoins, DYOR is your best friend and you should always hold his hand on this journey.
Here is how to do it:
First read the whitepaper.
This is where you start. The whitepaper is a document that describes the project in detail. These details should at least include the vision, goals and a roadmap to achieve them. Take your time here. After reading the whitepaper you should have a good understanding of what the project is about and where it is heading.
It will be helpful to ask yourself questions like:
– What are they trying to achieve? Is blockchain technology even needed in this specific space? Similar to the dotcom times, there are a lot of projects that are here just to take your money and ride the new-tech hype wave. You will be able to promptly determine most of the scams by answering this question.
– How big is the market they are entering? If you know the answer it will be easier to determine the possible market cap in the future and their growth potential.
– What is the token distribution model? Is it inflationary or deflationary? How many of the coins are going to the team? What will the total supply look like? The more distributed the coins the better. You want to be super cautious when investing in a project that has a big chunk of the coins controlled by the team, or even worse, only by one person.
– How far are they from having a working product? This one is super important! Just imagine the risk difference between a project that has a working product with real uses cases vs. one with only the whitepaper full of ambitious goals, no product in sight and a competition that already has a working platform.
– Do they have a clear roadmap to achieve their goals?
The whitepaper is a standard. Basically, every project in the crypto space has one.
If the one you’re researching doesn’t it’s a big red flag—stay away!
If it does, read carefully, you will find a lot of clues to help you make an educated investment decision (most of the time it will be a DO-NOT-INVEST kind of a decision).
After reading the Whitepaper it’s time to look at the team
Just like in the world of traditional businesses, the team ALWAYS determines the success of the project.
Who are the leaders?
How experienced are they?
Have they worked with this technology before?
Do they have some previous successes that can be used to determine their skills?
Will they survive the headwinds of the next bear market?
Pay attention, nowadays the scammers are getting more sophisticated. I’ve seen at least a few false projects that had created lists of team members, including their LinkedIn and social media accounts. All false, just to look more legitimate. Dive deeper when you research the people behind the project. Make sure they are real and will do what it takes to deliver on their vision.
The team doesn’t have to be huge to achieve success but it has to be real, driven and with some proven track record.
When researching open source projects make sure you visit their GitHub profile. GitHub is a platform that software developers use for collaboration. It’s a great tool for an investor to see the development work in real-time. By visiting the GitHub profile of a project you will be able to see how many people are working and what challenges they are dealing with. In general, the bigger the development team the better, but small teams can also achieve great things.
The next step in our research is to join the community and check the media coverage.
There is no cryptocurrency without the community.
– Piotr Borowiec
Go and join their group on all the different platforms like Telegram, Discord, Facebook and Twitter. Follow their threads and join their discussions.
Are there people excited about this project?
How many of them are there?
Are people engaging?
Are the discussions meaningful? Or is it just a ‘moonboy gathering?’
Is the team engaged on these community channels?
Ask questions, especially the difficult ones and see what kind of answers you get.
The best research you can do is talk to people
– Terry Pratchett
Researching the community is probably the easiest way to get some insightful information about the project. I promise you, the time you spend here will be totally worth it. You might make some awesome friends along the way and learn a lot not only about a certain project but also about cryptocurrencies in general. This should not be considered work, go out there and meet some like-minded people and broaden your horizons. Even if in the end you decide a project is too risky to invest in, it’s OK; this research just made you a more sophisticated and smarter investor.
When you already know a little about a project it’s time to assess the risk.
Liquidity risk is a very important factor an investor has to look into when evaluating smaller projects. Liquidity means an ease (or lack thereof) with which an asset can be converted into cash without affecting its price. You can determine the liquidity of the project pretty easily. First, look at its market cap (total amount of coins times their value) and see how many exchanges listed it. The best resources for this kind of research are good old coinmarketcap.com and coingeco.com. Both these websites provide a volume (liquidity) tab for projects. Obviously, the higher the volume the better, but you have to take into consideration that a lot of the volume you see is false, influenced by bots and wash trading. Usually, the smaller the project the less liquidity it has. A good rule is not to invest significant amounts into projects with an average daily volume of less than $1 million. You do not want to go all in into a project just to realize later that you have no way of getting out of it without causing its price to crash while you try to exit your position.
Regulatory risk is another factor you have to consider. First of all, can you even legally invest in this kind of an asset? Make sure you’re not breaking the law by buying a certain cryptocurrency. With all the recent regulatory implementations and changes, it is important to make sure that the team behind the project understands and follows them. Do they have a plan in case the rules imposed by local or national jurisdictions change in the future? The best way to do this kind of research is to go out there and ask questions in the project’s community channels.
Please, be aware that even the big and renowned projects might carry a high risk. SEC and other regulatory bodies do not take prisoners . . .
Then we have the product risk. The further the project is from having the working product the higher the chances are that something will go wrong on the way. Rollout delays are a standard in the tech industry (see Cardano 😂), always count them in. Remember the risk difference between a project with a working product and a one with just a whitepaper is huge. Always take under consideration how far away the team is from delivering a working product.
In general, as you can imagine, the newer the project, the higher the risk (and the reward potential).
If you’re just starting your crypto-investment journey, try sticking to already proven projects with a lot of capital and developers’ backing. I think that everyone should have in their portfolio names like bitcoin and ethereum to start with. Followed by some other established projects (producing passive income if possible) with no more than 10% of your crypto portfolio invested in low cap, more risky altcoins.
Being able to assess a certain cryptocurrency and its risk profile is the first step on your way to becoming successful with your blockchain investments.
I know, this is a lot of work…
But this work will pay off.
We’ve seen so many projects that have gone up 100 times and more. These exist and the more time you commit to finding them the more chances you have to hit the jackpot.
If the time is tight, and I can imagine it is in most cases, you can do 2 things to speed up the research process:
- Limit your investment options to projects that come from the launchpads. These launchpads vet the projects first, find the best ones and then provide them with their community backing. They are usually led by experts with a lot of experience in the crypto industry, who know a lot more than any of us. When a project launches from a launchpad, the chances of it being a scam are miniscule, plus it gets access to a lot of capital which also helps (usually 🤭). The downside to these platforms is that, in most cases, you have to stake a considerable amount of tokens in order to take part in their allocation. What is more, this allocation might be of a limited value or even only accessible to a part of the users. Considering all the pros and cons, I believe it is still an option worth looking into. All of the blockchains have these kind of launchpads, here are a few links to the most popular ones:
- The second option, when you do not have time to do all the research by yourself, is to join a group or newsletter that does all the research for you. Obviously you still have to evaluate the projects that they find but at least you do not have to look for them yourself and you only evaluate cryptocurrencies that have been already vetted by professionals. When it comes to these, there are a lot of different options. After being a member of more than ten, I settled for a couple of them that made me the most money. At the moment, my favorite products are DEXLAB and LowCaps from Mr.Advice Crypto Trading and Education group. Both of them focus on the new projects with potential that are the part of bigger trends (like DeFi & NFTs at the moment).
If the budget is tight, check out the article where I share my favorite free cryptocurrency resources, and join our free Telegram group (link below the article).
Also, make sure to let me know in the comments below what is your favorite project that no one is talking about, and what steps you take to evaluate new gems.
I wish you only profits!
Written by Piotr Borowiec