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Crypto projects have garnered interest not just from the tech-savvy crowd but also from everyday retail investors. Many see its potential for significant gains by getting in early on decentralized, scalable, and utility-driven projects.
With over $90 billion invested in crypto startups and nearly $6 billion lost to crypto scams, knowing how to analyze a crypto project before investing is imperative. Here is a step-by-step guide for your crypto project analysis
NOTE: Crypto investments involve significant risk. Do not take the views mentioned here as financial advice. Please conduct thorough research before making any investment.
How to analyze a crypto project before investing: Key pointers
1) Go through the whitepaper
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The first step before investing in a crypto project is its whitepaper. Non-ambiguous terms, clearly stated project goals, and a vision of the technology behind the project are signs that the foundations are strong.
2) The technological foundation
A solid technological foundation ensures a trustworthy project. So keep an eye out for these:
- Does the project aim to solve a specific and pertinent crypto problem?
- What is the technological architecture like- does it have a smart contract in place, does it have a consensus mechanism
- How feasible are the scalability options?
3) The tokenomics
A transparent project clearly explains how its tokens are minted. It specifies whether the tokens will be generated gradually through emissions or earned over time through staking rewards.
Next, check for the token distribution pattern. If a large number of tokens are concentrated in the hands of the founders or in a few wallets, it is a red flag. As such, these distribution patterns make the project vulnerable to manipulation as they concentrate power in the hands of a few.
You must also keep a tab on the token burning events to regulate the supply as per the situation. The tokenomics of a project is the first stage that shows the signs of a crypto scam.
4) The team: founders, marketing team, and investors
The project founders and people backing them are the first brand ambassadors. Founders with proven track records are the strongest indicators of a project's long-term potential.
A transparent team will openly share all key information about the core members. Verify credibility by reviewing their social media presence and LinkedIn profiles. Next come the investors and strategic partners for the projects.
5) Auditing mechanism
Audits performed by reputable firms, along with the existence of a bug bounty program, indicate that the project has strong fundamentals. An audit by any firm in itself does not ensure that the project will not default down the line. However, audits by reputable firms help reduce the likelihood of governance loopholes or faulty codes passing through undetected.
6) Governance model
For newer projects, a centralized governance model helps make quick decisions, while mature projects benefit from decentralized models that offer transparency and community ownership.
7) Market cap
The market cap of a crypto project is a critical indicator of its stability and reliability. Generally, tokens with a market cap of at least $1 billion tend to be safer as they reflect strong investor confidence. A crypto project with a large user base is less susceptible to sudden price changes or manipulation.
8) Extent of volatility
Volatility is common in the crypto world. However, extremely high price fluctuations for the native token are a red flag. Extreme volatility is indicative of a rug pull. When checking for patterns in the price rise, look for specific time durations. For instance, keep an eye on the token price before and after one month, three months, and the all-time price movement. If the increase is gradual, then it may not be a classic “pump and dump” scam.
9) Legality
If you are wondering what to check before investing in a crypto project and the native token, the answer would most definitely include its legality. The legal framework is indicative of internal transparency. It is best to stay away from projects that do not clearly state their adherence to laws in the long term.
With the crypto markets flourishing, investors keep rushing in. However, scamsters are also on the prowl, seeing the hype as an opportunity for exploitation. That is why due diligence is essential for every investor.
