The crypto market is in a state of chaos. Starting from the FTX scandal, the collapse of Luna and Celsius, the bankruptcy of lenders, and regulatory uncertainty. Investors are now more hesitant than ever to buy crypto.
There is a sense of skepticism even of the most viable looking crypto tokens as there is no way to 100% predict whether the project will survive or not. However, there are rules for conducting due diligence that can help minimize the chances of investing in risky tokens.
Ignore the Hype and News Cycles
As of 2021, there are over 8,000 coins listed on the CoinGecko pricing website. Now, almost 40 percent of those tokens have been delisted or disabled.
One of the most common pitfalls in crypto in particular is for investors to start following the hype. That happened with the terra luna stablecoin, which was inflated by top bloggers and media outlets, according to Forbes.
In crypto, PR can actually work backwards. The case of Celsius, when its founder Alex Mashinsky, ended up filing for bankruptcy, is a good reminder that one shouldn’t look to the news for crypto advice. The crypto industry is known for shilling coins more than any other fintech sector. So, one must be aware and always ask oneself whose interests are seen in any article.
Learn to distinguish trusted media that use multiple sources and don’t promote a particular product from the many smaller buy crypto publications, which are often paid to promote tokens.
Even some of the biggest or most hype projects can go bankrupt. Due to the higher volatility in the crypto market, the general rule to only invest funds that you are willing to lose should be taken more seriously.
If you look at the top 20 coins by market cap today and compare that list to five years ago, you will notice a difference. However, learning how to analyze and monitor these projects can help investors avoid making the mistake of choosing a token type.
Buy Crypto by Paying Attention to the Numbers
One indicator to pay attention to is market capitalization. This is the total value of all tokens mined, indicating the overall size and scope of the project.
You can also check out the block explorer and analytics platform to see all transactions and token holders. This is called data on-chain, and it allows anyone to view the network and see how money is flowing.
You can also go to decentralized exchanges to check things like how much volume is being traded in a given time period and liquidity, i.e. how easy it is to buy and sell tokens. Sometimes it’s easier to detect fraud in crypto than in traditional finance.
Buy Crypto by Checking the White Paper and Tokenomics
The white paper exists to provide detailed guidance on the project and its objectives, and can be found on the company’s website. They cover distribution, use cases, the technology behind the token, future plans, and how the token delivers value to users. Compare white papers and promises made with actions taken. If there is little sign of activity or time limits are not being met, the likelihood of a slow rug pull is higher.
For those who haven’t invested yet, it is a signal to pass the token. Anyone with tokens should consider exiting before any losses are incurred. Token economics analysis, also known as tokenomics, can also provide insight into the big picture of a crypto project. How are tokens used in the marketplace ecosystem? Are there more active trades or total value? How does crypto maintain its value? Is it a stablecoin tied to a fiat currency, or is there a burn function?
Don’t Ignore Danger Signs
When checking out a project to buy crypto, watch for common red flags. Some of these problems can be seen in several ways. Just examples of displays include poorly designed websites, vague language on both the website and white paper, no clear understanding of intent, and a lack of transparency. Cory Klippsten, CEO of Swan told CoinDesk that he saw red flags when he investigated Mashinsky’s bio and found some major inaccuracies.
For example, infrequent or hard to find security audit reports, no funding or prominent people backing the project, promises of unreasonable profits or a team with no credentials and no existing public profile are other red flags to watch out for.
James Wo, CEO and founder of Digital Finance Group, said that doing due diligence on the backgrounds of key members, such as whether they are anonymous and their previous experience. This is a critical factor in deciding whether to trust a crypto project or not. It is also useful to take insights from people in the industry and read public analytical reports from trusted sources.
Look for Active User Community and Feedback
Community is everything in crypto. The company has been motivating users to join the community by offering airdrops and other freebies for a long time. Even if the number of users shows an interest in the product, and therefore, the token, the quality of this community is another thing to consider.
Investigate follower activity and engagement on Twitter and Discord rather than just looking at the numbers.
As James Wo said, the community can help to evaluate the number of active users, the total value locked in the system, and even look for negative product discussions by users within the project community.
Time Investment In Due Diligence Pays Big Back
While there is no guarantee whether a crypto project and its token will be successful or not, these rules will help navigate the space and make better decisions. Each investor is responsible for their own due diligence. By doing your research, you can avoid the hype and minimize your chances of getting involved in a project that doesn’t work or goes downhill. These five ways to buy crypto are certainly not perfect. However, this method will help traders and investors to invest in crypto better and avoid big losses.