Things to Look for when Investing in a Cryptocurrency
The market for cryptocurrency is booming all thanks to Bitcoin. However, this leaves potential non-investors the ability to lose money as well. Democratizing currency and decentralizing payments is what makes cryptocurrency so appealing. However, the boom of illegitimate ICOs, ponzis, or SEC crackdowns also make what is going on problematic. These are things to look for when investing in a given cryptocurrency.
#1 The Technology
I was into the crypto space since 2011. Companies like the team behind Bitcoin or even Bytecoin know what they are doing. However, I am not a fan of Bitcoin because of its price. I am a fan because the technology behind a decentralized blockchain or a P2P electronic cash system have large implications it can bring onto society. Don’t just invest in the value, but read the whitepaper and understand the technology.
#2 The Product
Lots of times people have an ICO stating they want to build a certain product with the money. That can be problematic and an immediate red flag. This is more true if they don’t use escrow or have a team with enough skills to build the product themselves. Do they have something built? Is it partially built or in beta? How much along the way are they? What technological skills do their team have?
#3 Adhering to Regulations
If an ICO isn’t either using escrow, SEC regulated, or passes the Howey test as a utility token then we can have a huge problem. If they get shut down and you aren’t refunded that can mean your investment gets shut down with them. If they aren’t SEC regulated, but are a utility token that uses escrow that isn’t necessarily a bad thing, but you still need extra caution or due diligence on those. Also make sure if you are buying cryptocurrency, you use third party vendors and don’t go to someone who claims to be a broker and are unlicensed.
#4 The Whitepaper
How well written and developed is the whitepaper? Do the creators of said cryptocurrency have a given exit plan or a clear vision for investors? One red flag is that if a whitepaper is all over the place or disorganized, it can be indication of a scam.
#5 Marketing and Communications
Lots of times, how the company answers questions articulately can be an indication they are legitimate. If people from a cryptocurrency startup sound like they don’t know what they are doing or aren’t clear to investors, that is obviously a bad sign. Another bad sign is if they say stuff such as them burning tokens if price expectations aren’t met, or them offering unrealistic return guarantees from the beginning. That can be an indication of a speculative ponzi.
Also, companies that try so hard to get endorsements by entertainment celebrities or talk shows can be an indication of a ponzi scheme. If they use the entertainment industry to promote an ICO rather then trying to go on shows talking about their product, must likely they are trying to get huge demand to run a ponzi scheme or “pump and dump” with investor’s money. This isn’t necessarily true, but I seen it happen most times.
All in all, a rule of thumb is to just be careful and investigate what you are investing in.
