As cryptocurrency is becoming more and more popular, more investors are looking into cryptocurrencies as a strong alternative investment compared to stocks and bonds. This is for 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 this: caveat emptor. Let the buyer beware. Before an investor puts their money into cryptocurrencies, they should do their due diligence and research the coin they’re putting their money into to ensure that it is a good investment.
This guide will serve as a general overview to rules you should follow when doing your due diligence and investing in various cryptocurrencies. Of course, your due diligence should extend beyond these rules and should involve your own best judgement as well.
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 investment in general. Only put up as much money as you’re willing to lose. The truth is, bad things can happen to an investment even when you do all the due diligence you can. Maybe something unexpected came up with the development team of the coin. Maybe an unknown security flaw was discovered in the coin, making it worthless. Either way, you must be willing to lose all of the money that you have invested if a worst-case scenario ever happens. Don’t overextend yourself.
Overextending yourself is when you have too much money invested into a cryptocurrency. Let’s say that a coin drops 50% in value because of a recently discovered security flaw, and you’ve overextended yourself by putting all your money into it. Now you’re going to start making bad investment decisions as a way to recoup your investment because you couldn’t afford to have lost that money in the first place. 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.
Is the Development Team Good?
An important aspect to look at when analyzing a cryptocurrency is to analyze the development team of the project. Here are some red flags you might find when looking at the development team:
The developers are not 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).
Developers have no technical experience
It’s important that at least some members on the development team have technical experience or a technical background. Even better is if the founder has technical experience. If none of the developers on the project have a technical background, that may be a sign that you’re getting scammed.
Development team is not transparent
This is another red flag that many people overlook. Transparency and honesty is incredibly important in a development team. Lack of transparency is a red flag that you should look 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 of their projects rationally and thoroughly? Does the team answer common questions about the project? Does the team consistently update the public about progress on the project?
Members of team have negative histories
This is more of a miscellaneous item, but 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 with projects that have team members like this and tread with caution.
Does the Technology Make Sense?
Another aspect to look at when analyzing a cryptocurrency is whether the fundamental technology behind the cryptocurrency actually makes sense and is unique. The cryptocurrency should have a unique and solid use-case that is not easily replicable. The technological use-case of the coins should not be easily replicable with many other cryptocurrencies. In these instances, the technology behind the coin doesn’t make sense.
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 behind them, and will last as more and more adoptions occurs due to the unique use-case.
Obviously, this is some very basic investment advice. But paving the way for new community members is our task, as a team. If you have more specific questions, you can feel free to contact us by email anytime and we will be happy to answer your questions, or redirect them to the right people.