Investing in cryptocurrencies can be a thrilling experience because tables can turn easily in this world. And if there are only a few participants involved that hold the maximum amount of currency then you can expect the turn of tables more frequent. Therefore the question arises of how to research and evaluate cryptocurrency projects because now it is more difficult than ever before.
Why? Because at the time of writing, there are more than ten thousand coins available and if you want to stay away from the scams and the potential downfalls then it is necessary to make informed decisions. To overcome this challenge I have compiled this guide where I have listed tested steps that will help you analyse different cryptos. By following these steps, you will be able to differentiate between a scam and a real project. You will especially be able to tackle the FOMO which is the reason mostly for bad decisions. Therefore without much ado let’s get started.
1. Quality of the white paper
Any legit cryptocurrency has a white paper available for the public to know the reason for its existence, the details about its tokenomics, the problems it aims to solve, and much more.
Remember that the white paper is always mostly easy to understand with clear details about everything (except some parts that are for technical readers only). But if you get your hands on a white paper that does not clearly define the reason for its existence and its problem-solving techniques then it’s the first and the biggest red flag. The language of the white paper is very clear and to the point but if the one you are reading has uncertain terminologies then you should think about other crypto projects.
2. Research the Leaders
Cryptocurrencies are developed to solve a problem and they require a good set of team members to do so. If you want to have an idea about cryptocurrency before investment then you should research its team.
You should find their names and expertise on the ‘About’ pages. Also, you can visit their LinkedIn page to get an idea about their vision.
If the crypto project has not shown transparency and is hiding their developers and key members then this should count as a red flag.
However, not all crypto projects with anonymous team members are scams like Bitcoin but nowadays most are if there is anything sketchy. So it’s better to be safe than sorry.
3. Judge The Community
Almost all cryptocurrencies enjoy a supportive community where members are very active and discuss improvements and problems. If you want to learn about the crypto then you should understand and judge its community. Check whether the community members are active or not. Also, are they participating in solving the problems arising?
To do this you can join their telegram or other channels. By having this idea you can know if the project is going to be a success or is just a mere speculation.
4. Understand the Technology
Cryptocurrencies have now become very popular and we all know that they are built on a distributed system called blockchain. The reason for the inception of cryptocurrencies was to have a financial system that is free from human intervention. It was built in the hopes of avoiding third-party profits and corruption.
If you want to always have the upper hand not just in selecting the right crypto but for your whole journey of the crypto investment then you should have an idea of how blockchain works. You should understand the technology behind the crypto projects and judge who is interacting with them. Otherwise, you will be like every other investor who just wishes the prices of their cryptos to rise overnight and become popular.
5. Understand the Vision
When you read the white paper on Cryptocurrency then you should find a clear vision of how it is going to solve the problems.
Don’t fall victim to the projects that promise too much. Also, check whether the vision enlisted is even achievable or not.
There are also projects called ‘’vaporware’ which are all good but fail to take off. Therefore if they have an extraordinary vision then they are not likely to gain much.
6. Read the Road Map
Cryptocurrencies usually use line graphs to show the expected progress of their events on a road map. It’s very simple and has milestones broken periodically. All the milestones move towards a common set of problem-solving.
A good road map is always complete and well thought out. Furthermore, it gets updated regularly according to the current status of the project.
But if a cryptocurrency project does not have a well-defined road map or the road map seems to be too shiny then it’s too much of a red flag. Also, make sure that the milestones are not based on money earned because milestones always show their goal irrespective of the money raised.
7. Learn the Tokenomics
The distribution of the cryptocurrency, how it is circulated, and how much will be the total supply of the Cryptocurrency, the study of these three factors is called tokenomics.
Tokenomics is essential for a crypto project because it will be the determining factor of its rates over time.
In other words, tokenomics is the economic model of a crypto project therefore understanding its supply is crucial. There are three kinds of supply to review before making any decision:
Circulating Supply: it is the supply that refers to the amount of current crypto in the market
Total Supply: it is the total amount of cryptocurrency including the amount that has been removed from circulation
Maximum Supply: for every crypto project there is a fixed maximum amount that will be issued over time.
Also, it is essential to know the schedule of the distribution of tokens because some projects use uneven token distribution methods to increase the rates of their tokens. One more thing that should be kept in mind while reviewing the supply and distribution and that is to check how much of the tokens do founders have. If they have a larger portion of the tokens then you have to strictly scrutinize the project.
Understanding the nature of the applications of the tokens is also necessary because their application will tell you the stability of their rates. If for example, the tokens are supporting DApps then they all have a lettable value, unlike the tokens that are just being used for payment only.
8. Perform Due Diligence
Crypto prices fluctuate due to many reasons, one being the news or events like for example the Bitcoin halving which led to an event where main investors jumped to purchase more Bitcoin at decreased rates which in turn increased its price due to high demand.
Another reason for the rate fluctuation is because of the investors. They neither want to be left with lesser-rated cryptocurrency nor do they want to be left out of the giant price leap.
Know that every cryptocurrency should follow the same trends as other cryptocurrencies and if the rates are significantly out of the box then again it’s a red flag!
9. Reviewing The Use Cases And The Potential Market
Since every crypto is intended to solve a particular problem therefore understanding its potential market is crucial. It is important to check whether the problem the crypto is aiming to solve does exist or not. Because the crypto will be useless if the problem is already being solved by any other crypto project.
The size of the market is also worth noting because if the crypto project is aiming to solve a problem that is related to a small group of users then the project will have a smaller market.
Therefore make sure the project is solving a real problem and a big one at that for a significant market. For example, Ethereum(ETH) is built to support and expand blockchain technology and smart contracts. Another example is Solana(SOL) which speeds up the transaction process.
10. Potential For Growth
A stronger team, sound tokenomics, and a well-structured road map—these three affect the potential for growth the most. If they are strong then the project is likely to grow with time. Make sure to gauge the growth potential before deciding to invest.
11. Market capitalization
Market capitalization can give a good idea about the stability of the coin as the cryptos with bigger market caps are more stable than the ones with smaller market caps. Market cap essentially shows the value of the crypto coin.
12. Transparency
If the leadership of the crypto project regularly updates its community on the latest updates, progress, and developments of the project then it’s a good sign because the team is transparent and is not hiding anything from the community.
A bad sign would be the team that is withholding information and is being sketchy about the project. Regular communication is very important because it shows that the team is confident about its project.
Wrapping Up
Well, that would be my guide to ‘How to Research and Evaluate Cryptocurrency Projects’. By now, I can assume that you know how to do proper research before investing in a crypto project. Because only if you understand a project then you can make an informed decision and will not be a victim of any scam.
