Vadim Synegin with WeWay shares with us 5 warning signs that you should not ignore before investing in a cryptocurrency project.
Demand for crypto projects 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 casual users and sophisticated investors to the world of cryptocurrency and blockchain.
From decentralized finance (DeFi) protocols to meta-universe projects, non-fungible tokens (NFTs) and GameFi, the choices for investors are endless.
But often investors take a decisive step without having enough knowledge, which poses a risk for them. Indeed, even for the most experienced traders, the sheer number of options and information can sometimes be confusing. In addition, the crypto market suffers from fraudsters who do not hesitate to prey on newcomers.
What do you need to know before investing in a cryptocurrency project?
In this section, we share tips on how to identify profitable projects and crypto scams. First of all, investors should carefully choose the projects in which to invest, because the risks are numerous.
As the name suggests, the decentralized financial ecosystem is unregulated. Therefore, anyone can start a crypto project by creating a token on a decentralized exchange (DEX) such as Uniswap and then selling it to the community. Even if a project has no real value, meaning it offers nothing unique to the market, its token can serve as a speculative asset, making it a risky investment and a simple pump-and-dump system. (technique of market manipulation, which consists in the mass purchase of an asset with the aim of artificially increasing its price).
In addition, we have very few lawyers specializing in cryptocurrency, because the sector is still very young, unlike, for example, the stock market. Therefore, it is more difficult for investors to get the right advice on cryptocurrency investments.
Indeed, investing in a crypto project is not so different from other types of investments. Investors should always have some level of financial knowledge and do their own research to see if a project is worth it or not. However, there are several key factors that we must consider.
How to ensure the reliability of a crypto project?
Before investing, it is necessary to determine whether the crypto project offers a valuable product/service to its target audience. Or if it’s more like a fundraising marketing campaign. There are hundreds of stories of investors who have lost fortunes due to crypto scams. Fraudsters’ techniques are becoming more and more sophisticated, from phishing to worthless tokens.
Red flags to look out for before investing in a crypto project
Do your research
Research the developers/founders thoroughly. Do the founders of Project X have a solid reputation in the industry? Do they use pseudonyms? Have they worked on successful projects before or are they behind reputable companies in the market? If the project has an experienced strategist, that is, someone who wants to lead it to success, this is an added advantage. If the team and project managers are hiding behind masks, then it is better to turn to other projects.
Read the white paper or project white paper. Is it confusing, hard to read, or just unclear? Does this sound more like a marketing game than a useful product/service for the community? Very often people underestimate this document, but its role is important because it explains how the project works.
Is the project sufficiently liquid? If the project offers a staking service or has a similar mechanism to ensure liquidity, check its Total Value Locked (TVL). This indicator will show you how much money is invested/locked in the platform. The higher the number, the more people trust the project.
Do not forget about the legal aspect
The legal framework of the project is as important as other aspects. Many governments are now introducing measures to regulate cryptocurrencies, and therefore cryptocurrency businesses. This helps to clean the market of illegal projects while fighting 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 profit, the greater the risk. Therefore, the investor should ask himself the following question: where does the money come from that allows the platform to pay interest?
Is it a good idea to invest in a crypto project?
Above we have seen some key factors that people should consider before investing in any crypto project.
The crypto ecosystem is a risky investment, but it is also a sector full of opportunities. People just need to know how and where to spot them.
The demand for crypto projects is very high right now. Due to the rapid growth of the sector, we have very few investment offers and many crypto projects. This growing demand is also fueled by the ease of use of cryptocurrencies, through which investors can easily monitor the development of a project and its profitability. This is due to the focus on its products, such as its tokens.
All these factors indicate that the world will see a large influx of investment in crypto projects in the coming years. It’s a wonderful symbiosis: money grows the industry, and the industry makes more money for its investors.
About the author
Vadym Synegin is the Vice President 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 only. Any action taken by the reader based on the information found on our website is done solely at the reader’s own risk.