With the increasing popularity of cryptocurrency, more investors are looking into it as a strong alternative investment compared to stocks and bonds. This is for a good reason too, considering that the market cap of the entire cryptocurrency market is more than 10X than what it was at the beginning of this year. Many investors are enticed by the high potential returns of cryptocurrencies and the fascinating new technology behind many of these cryptocurrencies.
However, investors should always follow the principle of caveat emptor, or, let the buyer beware. Before anyone invests their money into cryptocurrencies, they should do their due diligence on the coin they’re putting their money into to ensure that it is a solid investment. This guide will serve as a general overview of the rules you should follow when doing your due diligence and investing in cryptocurrency. However, your due diligence should extend beyond these rules and involve your own best judgment as well.
How Solid Is The Developer Team?
An important aspect to look at when analyzing a cryptocurrency is to analyze the development team of the project. Many investors omit to do this simple, yet powerful research, only to regret it later. Here are some red flags you might find when looking at the development team:
1 - The developers are not being listed
This is the biggest red flag for a project. If you can’t find who the developer of a project is, chances are the developer doesn’t want their name attached to the project for a good reason (i.e. it’s a scam).
2 - Developers have no technical experience
It’s imperative that at least a few members of the development team have a solid technical background. Building decentralized applications is not an easy feat. Managing millions of raised dollars is even harder. Reputation matters. If none of the developers on the project have a technical background, that may be a sign that you’re getting scammed.
3 - Development team is not transparent
This is another red flag that many people overlook. Transparency and honesty are two important aspects to consider in a development team. Lack of transparency is a red flag that should be looked out for, as it may indicate other issues with the team or the project. There are several ways to determine the transparency of the team: Does the team respond to well-thought-out criticisms rationally and thoroughly? Does the team answer common questions about the project? Is the public constantly updated about the project’s progress?
4 - Team members have negative backgrounds
It includes members of the team having a criminal history, being adversarial when addressing others, etc. Although this is not an indication of the competence of the team, it is an indication of the attitude of the team member. Be wary of projects that have team members like this and tread with caution.
Only Invest As Much As You’re Willing to Lose
This is the number one rule for you as an investor, not only for cryptocurrencies but also any other investment. Only put up as much money as you’re willing to lose. The truth is, bad things can happen to an investment even if you do all the necessary due diligence. The unexpected could happen with the development team of the project, or an unknown security flaw could discovered in the coin, making it worthless. Either way, you must be willing to say goodbye to all the money that you have invested if a worst-case scenario happens. Don’t overextend yourself.
Overextending often leads to bad financial decisions, which leads to losing even more money. To avoid this scenario, make sure that your portfolio is well-diversified.
Does the Technology Make Sense?
Another aspect to look at when analyzing a cryptocurrency is whether the fundamental technology behind the cryptocurrency makes sense and is unique. The cryptocurrency should have a unique and solid use-case that is not easily replicable. If the cryptocurrency serves no definitive purpose, the coin becomes a speculative bag with no underlying value.
Look for cryptocurrencies that have a technological “edge”. These are cryptocurrencies that are focusing on unique use-cases and technologies that no other project is working on. These cryptocurrencies have strong fundamentals and will grow exponentially as more their adoption increases.
In conclusion, make sure to do thorough and proper due diligence before investing your money into a cryptocurrency. Although cryptocurrencies can be high risk, they can also provide a substantial return provided that you do the proper research. Above all, remember to diversify your investments and avoid projects with major red flags. Avoid investing in a coin simply based on hype, and understand what the coin’s fundamentals features are. Finally, remember that you will probably be invested for the long-term. As long as a coin’s fundamentals are solid, tiny price dips shouldn’t matter. In fact, price dips represent perfect buying opportunities.