The cryptocurrency market is currently host to over 5,000 different types of coins and tokens, each of which is acting as a hotbed of interest for millions of users and potential investors. The abundance of offerings, ongoing blockchain adoption, and considerable traction in terms of legalization, are making cryptocurrencies an attractive option for investing. However, the unsightly reality of being home to countless fraudsters and bad actors is still making the cryptocurrency market quite a challenging and risky environment for new and inexperienced entrants.
As new tokens or coins are introduced, potential investors should abide by a checklist of actions that are essential prior to engaging with any specific issuing project. The following material will explore the steps of fundamental analysis investors must take before investing in any new digital asset.
Analyze the White Paper
The White Paper is the starting point of any project. The given document outlines every aspect of the project’s concept, its unique selling proposition, the technological solutions employed, the underlying economy, the marketing and advancement strategy, as well the biographies of the project team members.
The lack of a white paper is a red flag that should be taken into consideration. However, the presence of a well-written white paper is also not a guarantee of project authenticity. Professional scammers are well aware of the importance of the document and are eager to invest in the drafting of a quality White Paper with a convincing selling proposition to attract investors to an idea that is inherently fake.
When reading through a new digital asset’s white paper, readers should take note of the wording, the grammar and the language. Poorly written white papers are clear signs of a hastily cobbled project. SWOT analysis should be conducted independently based on the white paper to understand the project’s prospects. Most importantly, readers should take a critical approach to such documents and assume potential fraud as default, rather than get enchanted with the document’s wording.
Analyze the Team
The composition of the project’s team is of paramount importance, since the professional and industry-relevant competence and experience of the people behind the idea will play an important role in the undertaking’s success. Potential investors must take independent steps to verify the identities of the people mentioned in a project white paper and cross-reference them with public sources of information in search of previous experience or misconduct.
A team with little experience may have the enthusiasm for taking on its idea, but the lack of advisers or professionals is a red flag to consider. Potential investors must also take into consideration the possibility of outright misinformation, as project founders can openly fake their identities or lie about their experience.
Analyze the Market
A white paper is not a guarantee of proper product positioning or demand. Investors should analyze the market the project is operating in to understand whether the proposed product is needed in the first place. The availability of numerous, established competitors is a serious challenge for any startup, placing its success at risk for lack of investment, interest on the part of target audiences, or poor competitiveness.
Potential investors are best advised to research and analyze projects that relate to the professional and industry experience they personally have to outline an understanding of the product’s prospects. Investors with years of experience in real estate are unlikely to have complete command of statistics or the intricacies of the supply chain industry, making analysis of a related project challenging.
Analyze Solution Viability
The project’s selling proposition must bear value for the end user and have a viable underlying monetization model based on real supply and demand. Potential investors must research the available solutions on a target market and understand whether the project they are considering has enough competitive advantages and technological innovation to survive.
Project viability can be determined by understanding whether its solution actually solves any real problems that touch across a sufficient number of users willing to pay to have them solved. Investing for the sake of hope in the future or a laid-back approach with anticipation of market growth is a sure way of losing funds.
Analyze Legal Issues
A project that looks attractive may not always be legally backed or accessible to investors. Prior to engaging in any project, investors should research whether they are allowed to participate in the ICO for reasons of sanctions, local jurisdiction limitations, or any other reasons. In addition, some project tokens or coins may bear the signs of a security, which would automatically put them at risk of scrutiny and even restriction on the part of the US Securities and Exchange Commission.
Local regulators may also be involved in restricting participation of nationals in some ICOs, making them inaccessible. Most importantly, investors should analyze whether the project’s concept violates any existing rules that would potentially result in problems in the future. Such rules can range from violation of personal data security and unsanctioned use of personal information to anti-monopoly regulations or sensitive legal issues like cannabis regulation.
Analyze the Tokenomic Model
A project may have a sound idea and could be solving a real problem, but it will remain just an idea, unless it starts earning money. Potential investors must analyze the business model the project intends to apply. This means they have to understand how the project will be making money, how much it will be charging for its services, and what other sources of income it intends to resort to for keeping the business running.
A tokenomic model usually revolves around the use of a native project token that would act as an access key to premium services and extended functionality, with fiat being used as a base currency. However, some projects rely on fiat alone and reserve the role of an arbitrary reward unit to their native tokens. Whichever approach they resort to, projects must clearly outline and prove the viability of their business models in their white papers with supporting data like projections and statistics.
Analyze the Technology
The technological basis for the vast majority of projects in the cryptocurrency space is the same and relies on blockchain. However, some projects go a step beyond and claim to be leveraging other technologies that leverage blockchain as a basis. These can include AI, Web3 functionality, biometrics, and some others.
Potential investors should understand how the technologies used in the project actually work and thus use reasoning and logic to figure out whether their application is even necessary, or is just being leveraged as a selling point to attract investors. Many projects in blockchain space do not even need blockchain to operate, but are resorting to it for the sake of riding the wave of hype and attracting attention. As a rule, such projects are short-lived and have an abundance of established competitors that are more convenient and attractive for actual users of the proposed solution.
Observe Price Performance
Investors are urged not to rush into ICOs for the sake of participation. Token prices are often artificially inflated at start as a result of marketing activity and mounted anticipation. Instead, investors should wait for the project to undergo its ICO and then observe the traction of the native token’s price.
It is common practice for both project founders and predatory traders to pump the price of a token prior to launch only to flush the acquired assets into the market right after the conclusion of the ICO, resulting in a price crash. This pump and dump scheme has resulted in billions of losses for investors. All investors are advised to wait for the project to acquire some traction and observe the dynamics of its token’s price to have some manner of understanding of its market potential.
Monitor Forums and Community
The community and its sentiment are the best indicators of a project’s traction and current state. Despite the presence of hired professional shillers and project employees in forum chats, potential investors must understand that the presence of negativity and comments that do not reflect awe or feigned fascination are the best reflections of user sentiment.
Healthy forums and chats are moderated, but not censored, while independent discussion forums are abundant, giving potential investors sufficient sources of truly independent insights into any new project. Investors are advised to read as much as possible and do their own research before investing.
The Takeaway
The abundance of tokens and coins on the market makes it a very enticing place for investors. However, applying fundamental analysis is still the first step that all investors should take before making any decisions. The risks of investing in cryptocurrencies are still immense and proper research should be conducted to avoid disappointment and losses in the future.
