Vadym Synegin from WeWay shares with us the 5 warning signs not to be overlooked before investing in a crypto project.
Demand for crypto projects has reached record highs in 2021 and despite the current bear market, it shows no signs of slowing down. Leading companies, including crypto exchanges such as Binance and FTX, are creating new products to attract both intermediate users and seasoned investors in the world of crypto and blockchain.
From decentralized financial (DeFi) protocols to metaverse projects, non-replaceable tokens (NFTs), and GameFi, the choices available to investors are endless.
But often investors take the plunge without having enough knowledge, which poses a risk to them. Even for the most experienced traders, the sheer amount of options and information can be confusing at times. In addition, the crypto market is plagued by scammers who do not hesitate to trap new entrants.
What should you know before investing in a crypto project?
In this section, we share some tips on how to identify profitable projects and crypto scams. First of all, investors should carefully choose the projects they want to invest in, because the risks are many.
As the name suggests, the decentralized financial ecosystem is not regulated. Therefore, anyone can start a crypto project by creating a token in a decentralized exchange (DEX) like Uniswap and then selling it to the community. Even if the project has no real value i.e. it offers nothing unique to the market, the token can serve as a speculative asset making it a risky investment and a simple pump and dump system (market manipulation technique that consists of buying an asset en masse to artificially increase its price).
In addition, we have very few lawyers who specialize in crypto, because the sector is still very young, unlike the stock market, for example. This makes it more difficult for investors to get the right crypto investment advice.
Indeed, investing in a crypto project is not that different from other types of investments. Investors should always have some degree of financial knowledge and do their own research to see if the project is worth it or not. However, there are a few important factors to consider.
How to ensure the reliability of a crypto project?
Before investing, one should determine whether the crypto project offers a valuable product/service to its target audience. Or, if it’s more like a marketing campaign to raise funds. Stories of investors who have lost fortune in crypto scams run into the hundreds. From phishing to carpet pulls to worthless tokens, scamming techniques are getting more sophisticated.
Red flags to watch out for before investing in a crypto project
Do your research
Research the developers/founders thoroughly. Do Project X founders have a solid reputation within the industry? Do they use pseudonyms? Have they worked on successful projects before or are they supported by reputable companies in the market? If the project has an experienced strategist, ie someone who wants to lead it to success, this is an added advantage. If the team and project managers are hiding behind masks, it is better to move on to other projects.
The white paper
Refer to the project whitepaper or whitepaper. Is it confusing, hard to read or just unclear? Does it look more like a marketing game than a useful product/service for the community? Very often people underestimate this document, but its role is essential because it explains how the project works.
Does the project have sufficient liquidity? If the project offers a staking service or has a similar mechanism to provide liquidity, check the Total Locked Value (TVL). This indicator shows how much money is invested/locked in the platform. The higher the number, the more people trust the project.
Don’t forget the legal aspect
The legal basis of the project is just as important as the other aspects. Many governments are now introducing measures to regulate cryptocurrencies, and thus crypto businesses. This helps to free the market from illegal projects and to combat money laundering. Nevertheless, the investor should also pay attention to the legal aspect of the project in order to avoid legal problems and protect his capital.
The higher the return, the greater the risk. The investor should therefore ask himself the following question: where does the money come from with which the platform can pay the interest?
Is it a good idea to invest in a crypto project?
Above we have seen some important factors that people should consider before investing in a crypto project.
The crypto ecosystem is a risky investment, but it is also an industry full of opportunities. People just need to know how and where to spot them.
The demand for crypto projects is currently very high. Due to the rapid growth of the sector, we have very few investment proposals and many crypto projects. This growing demand is also enhanced by the ease of use of cryptocurrencies, which makes it easy for investors to monitor the development of the project and its profitability. This by focusing on its products, for example its tokens.
All these factors indicate that the world will see a large influx of investments in crypto projects in the coming years. It’s a wonderful symbiosis: the money makes the industry grow and the industry earns more money for its investors.
About the author
Vadym Synegin is the VP of Investor Relations at WeWay, a 100% blockchain-based company that provides influencers and their audiences with innovative solutions to maximize their creative potential.
All information on our website is published in good faith and for general information purposes only. Any action the reader takes based on information on our website is entirely at their own risk.