The cryptocurrency markets have been experiencing constant turmoil. Due to the FTX controversy, Luna and Celsius’ unexpected collapse, the bankruptcies of other lenders, and regulatory uncertainty, investors are now less inclined than ever to wager on cryptocurrencies.
Even the most promising crypto tokens are viewed with some suspicion because it is impossible to predict with absolute certainty whether a business will succeed or fail. Nonetheless, there are guidelines for conducting research that might reduce the likelihood of buying dangerous tokens.
Avoid the hype and the news cycles
On CoinGecko’s price website, there were more than 8,000 coins listed in 2021. Almost 40% of the tokens have now been taken off the market or deactivated. Following the hype is one of the biggest traps investors fall into, especially when it comes to cryptocurrencies. The Terra stablecoin, which was inflated by prominent bloggers and journalists, is an example of what happened. In the crypto world, Publicity is actually reversible. The story of Celsius, whose inventor Alex Mashinsky gave interviews almost every week before ultimately declaring bankruptcy, serves as a helpful reminder that one shouldn’t rely on news and Marketing for cryptocurrency advice.
More than any other fintech area, the cryptocurrency industry is infamous for coin shilling. So, it is important to be attentive and to carefully consider whose interests are represented in every piece. Recognize trustworthy media from a variety of tiny crypto sites that frequently receive payment for endorsing a token, and may be distinguished from those that use several sources and do not promote any one product.
Nonetheless, even some of the largest or most publicized enterprises fail. Because of the greater volatility in the cryptocurrency market, it is even more important to heed the basic advice to only invest money you are willing to lose. The top 20 market capitalization coins today are different from those from five years ago, if you compare the two lists. Investors can, however, avoid choosing such kinds of tokens by learning how to research and track these initiatives.
Analyze The Numbers
Market capitalization is one of the indicators to watch out for. A project’s overall size and scope can be determined by looking at the total value of all mined tokens.
To see all transactions and token holders, you may also check out analytical services like block explorers. This is referred to as “on-chain data,” because it enables anyone to observe the network to track the movement of funds. Also, you may visit decentralized exchanges to look at metrics like trading volume, which measures how much was exchanged over a given period of time, and liquidity, which measures how simple it is to purchase and sell a token. In cryptocurrency, it can perhaps be simpler to identify a scam than in conventional finance.
Whether it be in regular markets or the cryptocurrency world, there is no surefire way to tell if something is a scam. Yet, compared to typical businesses, there is more openness for cryptocurrency ventures, Martin Lee, a Nansen data journalist, told me in an interview. You can examine the project’s smart contracts and examine the technology’s workings from the inside out to see whether it is reliable.
Explore Tokenomics And The White Papers
On companies’ websites, you can find white papers that provide a comprehensive roadmap of the project and its objectives. They go into distribution, use cases, the technology underlying the token, upcoming plans, and the value it offers users.
Compare the promises and white papers to the actual deeds. A gradual rug pull is more likely to be happening if there are little indications of activity or unmet deadlines. If you haven’t invested yet, you should pass on that token. Anybody who now owns tokens should think about selling them before losses arise.
Study of token economics, also known as tokenomics, can provide information about a crypto project’s overall goals. In what ways is the market ecosystem using the token? Is there more trade activity or higher value overall? How does the cryptocurrency keep up its value? Does it have a burn feature or is it a stablecoin that is linked to fiat money?
Don’t Disregard Warning Signs
Watch out for frequent red signs while researching a cryptocurrency project. A badly designed website, ambiguous language in both the website and a white paper, an unclear grasp of aim, and a lack of openness are a few glaring issues. When Cory Klippsten, CEO of Swan Bitcoin, looked into Mashinsky’s biography, he discovered a few significant falsehoods that raised red flags.
Other warning signs to watch out for include infrequent or difficult-to-find security audit reports, a lack of trustworthy money or people supporting the project, claims of unusually high returns, or a team without credible, verifiable credentials and without an existing public reputation.
In an interview, James Wo, the CEO and founder of Digital Finance Group, stressed the need of doing your homework on a crypto project’s core members, including their backgrounds and whether or not they are anonymous. Additionally useful are industry insiders’ perspectives and publicly available analytical reports from credible sources.
Seek for an active community and consider input
Crypto is all about the community. Airdrops and other freebies have long been used by businesses to get consumers to join communities. Although though the number of users demonstrates interest in the product and, consequently, its token, the caliber of this community is another factor to take into account.
Instead of focusing only on the statistics, look into the activity and engagement of followers on Twitter and Discord.
It can be beneficial to assess the quantity of active users, the total amount of value locked in the system, and even to seek out any bad product talk by users inside the project community, as James Wo told in an interview.
Time Spent on Due Diligence Produces Excellent Results
These guidelines would assist people navigate the market and make wiser decisions, even though it is impossible to predict whether a cryptocurrency project and its token would succeed or fail.
Every investor must conduct their own research. You can avoid the hype and lessen your chances of getting engaged with failing or failing ventures by conducting your study.
