This article was originally published on .cult by Michiel Mulders. .cult is a Berlin-based community platform for developers. We write about everything to do with careers, create original documentaries and share tons of other developer stories from around the world.
So you’ve seen an eye-catching crypto project, but you’re wondering if it’s safe to actually take the plunge and invest? Analyzing crypto projects for investment purposes is an actual skill. You can compare it with fundamental or technical analysis on the stock market.
Often we come across a shiny new crypto project trying to grab your attention. But isn’t it too shiny or too eye-catching?
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Don’t invest blindly because you may end up empty-handed. After more than ten years of existence, the crypto industry still sees occasional crypto scams, and these scams continue to evolve!
This article guides you through six core elements you should look at when evaluating a crypto project. Some elements require more technical knowledge than others. However, we have added tips that can help you verify these aspects without needing in-depth knowledge of blockchain.
1. Media sweet spot
Red flag projects often try to be featured in as many publications as possible to gain credibility. However, it’s just their marketing engine running, which can also be a positive sign.
To investigate this further, take a look at the publications displayed on the project’s website. Often, companies hire PR agencies that try to add backlinks or short mentions about a new crypto project in news articles. If so, it doesn’t count as a full feature. It just shows that the project is trying to raise awareness artificially.
A project that does things right will naturally get media attention. If you see dozens of publications publishing the same piece about a project, it’s most likely paid content. That’s a red flag.
2. Advisory board and project support
Take a look at the project’s partners, supporters and advisory board. This can give you a lot of information about the maturity and professionalism of the project. High-quality projects often form partnerships with industry-leading non-blockchain companies or seek to receive funding from reputable venture capital (VCs) in the blockchain space.
For example, Pantera Capital is the first cryptocurrency fund in the US, founded in 2013. They invested in many successful crypto projects and tools that are shaping the blockchain space today. It is always a positive sign if you can spot such partners.
Other notable VC funds include:
- ConsenSys Labs
- Coinbase Ventures
- Ethereum Foundation
- Gitcoin Scholarship
- PolyChain Capital
- Blockchain Capital
Be sure to look for them.
3. Status of the project
We have already covered the marketing and business engines. What about the current state of the project?
Try to find out if the project has already built a proof of concept, MVP, or if they are already running a blockchain test network. It is a positive sign if they have already started developing the product and gathered a small community of beta testers. If people volunteer to try out a product, they see the value in the project.
Avoid projects that haven’t started development yet. We have seen many crypto projects that promise high value features such as scalability, interoperability or low fees, but never deliver what they promised.
4. Team composition
The team composition can reveal a lot about the project’s knowledge of running an actual blockchain company. The past has shown us that red flag crypto projects emerge with an extensive marketing engine and a small development team.
Projects that have received funding through VCs do not need to worry about revving up their marketing engine. Their primary concern is to deliver value as soon as possible.
Therefore, analyze the composition of the team. A pure blockchain project should have a healthy mix of engineering, marketing, design and HR staff. However, look for the following roles that add a lot of value to the project and are difficult to fill:
- Token economy designer
- Distributed systems engineer
- Smart contract engineer
5. Long-term vision
A project must have a long-term vision. Roadmaps have become the standard in the blockchain space for capturing a project’s long-term vision. It allows a team to explain how they want to achieve their goals and execute their idea.
However, any project can create a fictional roadmap. And it’s not always easy for non-technical people to understand whether a roadmap is actually feasible or not.
Take a look at the description for each milestone. It should include how the project believes users will use the product. Adoption is the bridge between vision and reality.
Although projects often have very detailed roadmaps, they often miss deadlines or fail to deliver features. Blockchain is a complex matter, and mistakes can happen.
Don’t shoot a project to miss a deadline. Consider how they communicate their mistake to the community and whether the delay is reasonable. Transparent communication is a crucial characteristic of a successful crypto project.
Tokenomics is critical to a crypto project’s long-term survival. A strong project with malfunctioning tokenomics can quickly fail, making it one of the most important factors determining a project’s success.
Decrypt.co describes tokenomics as “the study of how cryptocurrencies work within the wider ecosystem. This includes such things as token distribution, as well as how they can be used to incentivize positive behavior within the network.”
Crypto is notorious for its volatility. This often makes a cryptocurrency a speculative instrument, rather than a functional token. The goal of tokenomics is to reclaim tokens’ purpose through complex mechanisms designed by an economist.
For example, proof of stake networks incentivize users with rewards for staking tokens. Users lock their tokens for a certain period and they will receive a small reward for doing so. It is a very smart tokenomics strategy as you lock up a large portion of the total supply, which reduces the token’s volatility.
Evidence of stake networks is just one example of tokenomics. For example, the economy of the Steem project hosts three different tokens that all have unique properties: Steem coin, Steem Dollars, and Steem Power.
With so many crypto projects being launched, it is important to be able to evaluate new projects. Try to look past the project’s hype and marketing engine.
To get a good first impression of a project’s validity, spend at least two hours researching the project. Read their whitepaper, technical explanations, but also media coverage to get a different view of the project. This information will help you draw a first conclusion. Media coverage can give you a good indication of the intentions of the project.
If a project seems promising, spend more time examining the team’s composition, tokenomics and long-term vision.
A key tip for evaluating projects: If a project has a strong community of early adopters or beta testers, that’s a strong indication of the project’s validity.