With new cryptocurrencies being released daily, many investors wonder how to properly research a cryptocurrency before deciding to invest. There are many amazing crypto projects out there that have valuable use-cases for society. However, there are also many projects with big promises that will end up failing. This article will walk you through how to properly research a brand new cryptocurrency or even a cryptocurrency you see on an established exchange that youâd like to know more about.
Also learn about: Top Cryptocurrencies to Invest In
How to Research Cryptocurrency – 5 Critical Factors to Consider
There are 5 critical factors to consider when researching cryptocurrency. The factors are utility, tokenomics, leadership, long-term vision, and execution.
1) Research the Utility of the Cryptocurrency and How it Works
The first thing you’ll want to look at when researching a cryptocurrency is the coinâs utility. What is this coin trying to do? Is there a specific use case for the coin, or is it just another entry into an already oversaturated market? What makes this coin different from other coins already out there?
In addition to researching the currencyâs utility, consider how it works from an engineering perspective. While not an expert in computer science myself, I’ve found that reading through the whitepapers and looking at the technology can be a great place to start when evaluating cryptocurrency as an investment.
Whitepapers are technical documents that detail how a particular crypto asset works. This can include information about the team behind the project, their plans for scaling, and more.
The more complex and well-thought-out a whitepaper is, the more likely it is that someone put real effort into creating something legit, rather than just another scam. The whitepaper should explain why this particular coin or token is needed, what problem it solves and how it will work to solve that problem.
2) Understand the Tokenomics and Incentives Behind the Cryptocurrency
Potential investors need to understand the tokenomics and incentives behind a cryptocurrency before investing. Tokenomics is the field of study that looks into the economics of cryptocurrencies, or tokens, specifically how they are generated and distributed. The field also looks at how the tokens are used within the economy of their respective blockchain. Investors should be able to explain why they are purchased and sold, who is buying them and what determines their value in the market.
Understand the tokenomics and incentives behind the cryptocurrency you’re considering buying into. What problem is it solving? How many tokens will there be? How can you use them? How will they be distributed? Why would new users join this network? Is this project a hobby or a business? The answers to these questions can help you determine whether or not there’s a real opportunity for profit here.
3) Learn about the Leadership Behind the Cryptocurrency
Do a little digging on any executives who have been involved in the cryptocurrency development. You have to be sure that these people are trustworthy, and you’ll want to look into their professional backgrounds.
It’s also important to find out whether the creators of the currency have been involved in other cryptocurrencies or blockchain projects in the past. You really want people with a proven track record in this area at the helm of your investment.
4) Research the Long-Term Vision of the Cryptocurrency
One of the most important things you can do is determine what the cryptocurrencyâs long-term vision is and whether or not this vision aligns with your own personal goals. This is best done by reading through the cryptocurrency’s whitepaper. The whitepaper will give you an overview of what problems the coin seeks to solve and how it plans to do so.
A whitepaper can be a fairly boring read, but understanding its information is crucial for determining whether or not an investment in that coin would be a good choice for you.
5) Read About the Execution and Marketing Plan
Research the execution of the cryptocurrency project and marketing plan. Do they have a good plan? Are they focused on solving a problem or providing utility to users? Is their community active and engaged? How long has their project been in development? Is it an established project or a new one? Are there any big names from the world of finance or technology associated with the project?
Check out if there’s an active developer community working on the improvement of the project. A strong developer community means that more features will be added over time and that bugs are likely to be detected and fixed quickly.
If you’re looking at a blockchain-based project, make sure its code is open source. This way, experts can review it in detail, as well as confirm whether any updates are being made to the code.
Read what experts are saying about this project. What do independent developers, financial experts, and other blockchain professionals think about this cryptocurrency?
How to Identify a Potential Scam Cryptocurrency
This is a question that gets brought up a lot – how do I know if a cryptocurrency is potentially a scam or not? With brand-new crypto projects, there is never a guarantee, but there are some actionable steps you can take to reduce your chances of being scammed.
Here are a few tips for researching potential cryptocurrency scams.
Use Etherscan or BSCscan
Put the token address in Etherscan (if it’s on the Ethereum blockchain) or BSCscan (if it’s on Binance Smart Chain) and check out who is holding the token.
Look at Holding Percentages
If top holders own a large percentage (around 75%+) of tokens, that means that itâs easier for them to dump those coins. The ownership isnât with actual holders (itâs with 1 or 2 âwhalesâ or perhaps owners of the coins. This is ALWAYS a red flag!
However, sometimes ownership is spread across many different wallets so it LOOKS like the token has many holders (when itâs actually just a handful of people with a lot of wallet addresses).
Check Activity Over Time
Next to the percentage of ownership, click on “Analytics.â You’ll see the token balance of those wallets over a period of time. If the top walletâs balance is slowly going down, that means they are liquidating the token (ie. selling off). If the top walletâs balance is increasing, theyâre purchasing more of the token.
If you notice that all of the top wallets are consistently going down, thatâs known as a âslow rug-pull.â A slow rug-pull simply means that the team or early investors are selling off the token daily and sucking funds out of the project slowly, as to not scare the rest of the smaller investors. This typically means the team behind the project doesnât believe in the project long-term. This is a huge red flag!
Another helpful tool is known as Tokensniffer, which displays the risk factors of tokens.
The Bottom Line
New cryptocurrencies are being introduced to the market daily, so itâs no wonder investors want to understand how to properly research new crypto projects. Doing your own research can help you avoid being scammed, and help you make smarter decisions when choosing which cryptocurrency projects to invest in. Stay safe out there!