You're thinking about buying some cryptocurrency and you're not sure which one(s) to buy? Here's a guide which outlines my decision making process and it may help you decide whether you should invest your hard earned money into a project.
First up, when you're investing into an Initial Coin Offering, you're mostly gambling. The popularity of ICOs is booming because an ICO allows a company to sidestep the regulations around investing. Some of the companies you look at will not be able to deliver on their promises and some of them will have no intention of ever delivering. There will be fewer success stories than disaster stories.
Whether you're buying a currency or into an ICO the process is the same - perform your own due diligence and do your homework! Do not rely on other people's 'analysis.' Their interests are not necessarily aligned with yours. In this space, keep in mind that for someone to win, someone has to lose. There is every opportunity for your investment to rocket or for you to lose it all.
Ready to play?
Calm yourself down and relax. The worst time to invest is when you're in a Fear Of Missing Out mindset. Don't rush, there's plenty of time and plenty of future opportunity, if you miss this one deal it's not the end of the world. Thinking about all the mad gains a coin can make you? Push that aside, investing when you're greedy is like buying food when you're hungry, when you're investing, your mood should be set to: Deeply Suspicious.
Once you've established your mindset, you must remember the rules of the game:
- Risk and only what you can afford to lose.
- Do not become impatient, you will become indecisive or rash.
- Overspending will bring anxiety, stress and make you become irrational.
- Invest only in what you understand.
Read the White Paper.
A White Paper is the authoritative document from the organisation which outlines concisely a complex issue and presents how the organisation understands the situation and will tackle the problems. There's no standard template for a White Paper but the minimum they must tell you is:
- The problem. Is there actually a problem which needs to be solved? Do you understand the problem the team are trying to solve? If you have contacts in the relevant industry, ask them for their opinion on how urgent the problem is.
- The need for a blockchain. Blockchains are very fashionable now but what is the need for one? The utility of the blockchain is the decentralised, permission-less, democratised and trust-less access of data. Is this relevant, how does it help if at all? If there's no strong case for a blockchain, then walk away.
- What about the token? Is the token necessary and how will it be distributed? What does the token do? What about the incentives to use, hold or sell it? Is there a way to sell it if there is, where? It's going to help if it's listed on the more reputable exchanges. Are there any legal and/or tax implications as a token buyer/holder/seller? Be particularly wary about premined tokens and instamined tokens. If the company is successful and gets bought out, what happens to your investment?
- The team. They should at least have public LinkedIn accounts. Verify these to make sure that they're not fake. How old is the profile, do they have many contacts? Check their career history, is it relevant to the project, do they have endorsements? Perform a Reverse Image Search, it's common for scammers to steal images off innocent people on the internet.
- Roadmap. Does the team have a clear vision and understanding of what they need to achieve and by when? Are the targets realistic, are they achievable? What happens if they fall behind?
- Is there an actual product? This is a game changer. Obviously a project asking for investment with a working product is going to be much more attractive than a team describing just a concept.
- Does the team have a Github? The team can establish a lot of trust by publishing their code on Github for review. Has the code been audited already by an independent third party? Investors familiar with the code will be able to determine the technical legitimacy of the project.
- Partnership. Partnerships are important and add legitimacy to a project. Partners will be able to leverage each other's expertise, contacts and access to markets leading to much bigger opportunities.
"DADI used our whitepaper text and in some points it's not even has been rewrited, it's just copypaste and plagiate, and if it will continues - It could be a case for court." Sergey Ponomarev, Founder of Sonm Network.
Marketplace. Is there a market and does the coin have customers already? Also consider competition. Competition is good and it signals that there is a need for that service/product. Obviously there is a first to market advantage and a space drowning in competition will make the project more difficult to succeed. However, this is a global market place not a winner takes all market. You can invest in more than one organisation, treating your coin as a sports team or having an 'us vs. The World' mentality will seriously affect your ability to see opportunity and threat.
Communities. Check out the projects communities on Reddit, Telegram and Discord. While this may be largely out of the project's control observe how the community behaves. Are they obsessed with price? Do they censor contrarian views regardless of legitimacy? Do they ruthlessly attack other coins? Although these platforms only represent a small part of the community, they are all red flags which may signal a Pump and Dump scheme.
Fear Uncertainty Doubt.
Invest in something you do understand. If you don't understand the product, you won't know why you're investing and leaves you very vulnerable to Fear Uncertainty Doubt. Remember that large amounts of money are at stake here and that for someone to make money, someone else has to lose money. There are groups of superbly motivated people who will sew discord and disharmony to manipulate the price to where they need it to be.
If the price of the coins you hold dips and you don't know why you bought the coin in the first instance, you'll feel immense pressure to get rid of it just as soon as possible. Maybe you rationalise that you need to minimise your losses, but nothing might have actually changed with the project apart from the price which might also recover. You don't lose money until you sell at a loss.
Make sure you follow the project on Twitter. This is one of the best places to get official news from the team. If the team haven't released or confirmed and 'big' news, treat it as a rumour.
It is possible that regulation will have a negative effect on cryptocurrency. Just because blockchains are decentralized does not mean that governments can legislate against them. A country might ban cryptocurrency and that would certainly affect the price. However a government will never be able to seize cryptocurrency without the owner's permission and the act of making it contraband might even increase it's value, after all making something illegal does not make it impossible to acquire.
States and Central Banks might even co-ordinate a huge amount of effort and resources to infiltrate or even buy-out and entire currency in order to control and manipulate it. Users will always have the option to abandon the state controlled currency and Hard Fork it to a more libertarian version.
If the project is presenting their investment opportunity as offering very low risk and very high returns or, use the words 'guaranteed' or 'consistent' in relation to delivering high returns, beware.
No coin is consistent and all coins are high risk with only a few which will be high reward. If the project sounds too good, take another look. Remember, there is no free money.
Cryptocurrency in it's current form is very volatile. When you experience your portfolio's value rocket, you'll feel like a rock star genius and when the corrections and dips happen, you'll probably curse the day you bought into crypto! Protect your investments and mental health as best as you can and don't listen to other people's opinions until you've performed your own research.
About The Author.
Lester Lee. "I'm not a financial advisor. If you buy cryptocurrency, your investment might increase. Or decrease. Or stay the same."
The content of this article does not reflect the official opinion of Fierce Edge.