5 signs to look for before investing in crypto tokens

The crypto markets have been in an ongoing state of upheaval. From the FTX scandal, the precipitous collapse of Luna and Celsius, the insolvency of other lenders and regulatory uncertainty, investors are now more hesitant than ever to bet on cryptocurrencies.

There is a touch of skepticism to even the most viable-seeming crypto-tokens, as it is not possible to predict 100% whether the project will survive or not. Nevertheless, there are due diligence rules that can help minimize the chances of investing in risky tokens.

Ignore the hype and news cycles

By 2021, there were over 8,000 coins listed on CoinGecko’s price page. Now almost 40% of these tokens have been removed or disabled. One of the most common pitfalls in crypto in particular is that investors start following the hype. That’s what happened with Terraterra-luna-2 stablecoin, which was hyped by high-profile bloggers and media. In crypto, PR can actually work the other way around. The case of Celsius, when founder Alex Mashinsky interviewed almost every week, and then eventually filed for bankruptcy, is a good reminder that one should not look to news and PR for crypto advice.

The crypto industry is known for coin mining more than any other fintech sector. So one should be aware and always ask oneself whose interests are perceived in an article. Learn to distinguish reputable media outlets that use multiple sources and do not promote any specific product from many smaller crypto publications, which are often paid for shillings a token.

Yet even some of the biggest or most hyped projects fail. Due to the higher volatility of the crypto market, the general rule of investing only the funds you are willing to lose should be taken even more seriously. If you look at the top 20 market capitalization coins today and compare the list to those of five years ago, you will find them different. But learning how to analyze and monitor these projects can help investors avoid making the mistake of choosing such tokens.

Look into the numbers

One of the indicators to look for is market value. This is the total value of all mined tokens, showing a project’s overall size and scope.

You can also look at block explorers and analytics platforms to see all transactions and token holders. This is called “on-chain data” and it allows anyone to look at the network to see how the money is flowing. You can also go to decentralized exchanges to examine things like trading volume, how much was traded within a certain time frame, and liquidity, which is how easy it is to buy and sell the token. Sometimes it can be easier to spot a scam in crypto than in traditional finance.

“There is no guaranteed way to ensure that something is not a scam, be it in crypto markets or traditional markets. However, there is more transparency for crypto projects compared to traditional companies,” Nansen data journalist Martin Lee told me in an interview. “You can look through the smart contracts of the project and look under the hood to see if the technology is good.”

Research White Papers and Tokenomics

White papers exist to provide a detailed roadmap of the project and its goals, and can be found on the companies’ websites. They cover deployment, use cases, the technology behind the token, future plans and how it provides value to users.

Compare the white papers and promises made with the actions taken. If there is little sign of activity or unmet deadlines, a slow carpet pull is more likely to occur. For those who have not yet invested, it is a signal to skip that token; anyone holding tokens should consider getting out before losses occur.

Analysis of token economics, aka tokenomics, can also provide insight into the bigger picture of a crypto project. How is the token used in the market ecosystem? Is it more active trading or total value? How does crypto maintain its value? Is it a stablecoin tied to fiat currency, or is a burn function in place?

Don’t ignore red flags

When researching a crypto project, look for common red flags. Some obvious problems would include a poorly designed website, vague language both on the website and in a white paper, no clear understanding of intent and lack of transparency. Cory Klippsten, CEO of Swan Bitcoinbitcoin, told CoinDesk that he saw red flags when he examined Mashinsky’s bio and found a few major inaccuracies.

Rare or hard-to-find security audit reports, no recognized funds or people backing the project, promises of unusually high returns, or a team with no recognized, provable credentials and no existing public profiles are other red flags to watch out for.

James Wo, CEO and founder of Digital Finance Group, told me in an interview that conducting “due diligence on the background of core members, such as whether they are anonymous and their past experience,” 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 reputable sources.

Look for an active community and feedback from users

Community is everything in crypto. Companies have motivated users to join communities by offering airdrops and other freebies for a long time. Although the number of users shows the interest in the product, and therefore its token, the quality of this community is another thing to consider.

Investigate the activity and engagement of followers on Twitter and Discord instead of just looking at the numbers.

Crypto entrepreneur James Wo, co-founder of consulting firm JSquare, told me in an interview that it can be useful to evaluate the number of active users, the total value locked in the system, and even to “seek out any negative product discussion by users in the project community .”

Investing time in due diligence pays big dividends

While there is no way to be sure whether a crypto project and its token will succeed or not, these rules will help you navigate the space and make better decisions.

Each investor is responsible for their own due diligence. By doing your research, you can avoid hype and minimize your chances of getting involved in a defunct or rejecting project.

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