Top 5 red flags to look for before investing in crypto projects
Red flags: Here is what investors know before they invest in crypto projects, says Vadym Synegin to WeWay.
Demand for crypto projects rose in early 2021, and it shows no signs of slowing down despite the current bearish market. Top companies including stock exchanges such as Binance and FTX are building new products to attract the general user and investors into the world of cryptocurrencies and blockchains.
There is a lot to choose from in the DeFi ecosystem – Non-Fungible Token (NFT) projects, decentralized financial protocols (DeFi), GameFi, metavers and more.
However, investors often do not have the right guidance when investing in cryptocurrency projects, and this lack of knowledge poses a risk to them. With so many options and information out there, it can be overwhelming even for the most experienced crypto trader. Another problem is that the crypto area is plagued by malicious scammers who want to deceive newcomers.
Red flags: Investment in crypto projects
In this section, there are some tips on how to identify a profitable project, and which ones are direct scams. First of all, investors must carefully choose which projects to invest in, as there are many risks involved.
As the name suggests, the DeFi ecosystem is not regulated. Anyone can start a crypto project by creating a token in a decentralized exchange (DEX) like Uniswap and selling it to the community. Although the project has no real value, ie it does not offer anything unique to the room, its token can serve as a speculative asset, making it a risky investment and pure pump-and-dump plan.
Moreover, there are not many legal specialists in the crypto industry today because the industry itself is young, in contrast to, for example, the stock market. Therefore, it is more difficult for investors to find qualified assistance in choosing a project for investment.
Investing in crypto projects is not that different from making other types of investments. People need to have a certain level of financial knowledge, and do their own research to see if it is worth it or not. However, there are some subtle factors we need to consider.
Do not trust, verify: How to check if a project is reliable or a scam
As investors, people need to research whether these projects offer a valuable product / service to the target audience. Or, if they look more like money-marketing campaigns. The crypto world saw countless stories of investors losing significant amounts (and even life savings) in shady crypto projects and tokens. From phishing tactics, to carpet pulling, to worthless pump-and-dump coins.
Red flags to look for
Examine
Examine developers / entrepreneurs thoroughly. Do the founders of X project have a solid and established reputation in the industry? Do they use pseudonyms? Have they worked on successful projects before or are they supported by reputable companies in the industry? If there is an experienced strategist in the project, a person who wants to lead the project to success, it is an added benefit. If the team and project managers are hiding under masks, it is better to focus on other projects.
White paper
Review their white paper. Is the White Paper confusing, difficult to read and generally vague? Does it look more like a marketing game instead of offering a useful product / service to the community? Very often people underestimate this document, but this should be prioritized because it provides an explanation of how a particular project works.
Liquidity
Low liquidity. If a project allows effort or has some sort of similar mechanism for providing liquidity, then check its total value locked (TVL). This calculation will show how much money has been earned / locked in the project. The higher the number, the more people have faith in the project.
Legal
The legal basis for the project is no less important. Many government institutions are currently introducing measures to regulate cryptocurrencies. And consequently projects that deal with it. This helps to clean up the market from illegal schemes and money laundering. Nevertheless, the investor must also take into account the legal side of the project. This will help protect investors from further problems with the government and not lose money.
Crops
Inflated return: Higher return corresponds to higher risk. An important question investors should ask is: Where will the money pay for the dividend yield from?
Red flags: Are crypto projects worth investing in?
What was explained above are some of the key factors people need to consider before investing in crypto projects.
The crypto ecosystem is a risky investment, but also a space filled with enormous opportunities. People just need to know how and where to discover them.
The demand for investments in crypto projects is very high right now. There are very few investment proposals and many crypto projects due to the rapid development in the industry. The increasing demand is also facilitated by the simple use of cryptocurrencies, thanks to which investors can easily track the development of the project and its repayment, with a focus on the project’s products, such as tokens.
All these factors show that in the coming years the world will see an influx of investments in crypto projects. This is a fantastic symbiosis, when money develops the industry and the industry adds more money to the depositors.
About the author
Vadym Synegin is VP for investor relations at WeWay. The company is a full-scale blockchain-based ecosystem that offers influences and their audiences innovative solutions to maximize their creative potential.
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