Cryptocurrencies: 5 points to check before investing
As you may have noticed, the crypto market has been picking up since the autumn and, inevitably, this can once again make you want to invest 😏. But in what? We take a look at the things to watch out for.
When you land in the world of cryptos, it's easy to get lost among the more than 10,000 cryptocurrencies that exist on the market. Let's be clear, beyond bitcoin, ether and a few other well-known cryptocurrencies, some are akin to real bets while others are driven by projects with genuine long-term ambitions.
So here are a few points to watch out for that will help you know a little better what you're getting into!
👉 The profile of the creators
This is the first thing to look at. The better known the designers are, the more likely you are to find out about their background, their activities, what they've done before.
Go and take a look at their social networks to gauge their popularity. If this information is hard to find or unclear, there's a good chance that the project isn't very serious 🤔.
Look at the composition of the team too. Generally speaking, the more transparent the project is about its intentions, and its organisation, the lower the likelihood of a scam.
However, also be vigilant about the attitude of those who might want to show too much. This attitude is adopted to reassure as much as possible. The best recent example is Terra-Luna, where one of the co-founders, Do Kwon, had made a cult of personality his trademark.
Today, the project has lost almost all its value and its co-founder is currently in prison.
👉 Project communication
Grand promises are always suspect. A good project won't need inordinate communication to make itself known.
By the end of 2017, BitConnect had managed to federate a community whose supporters describe it as a veritable religion. The high point of its communication came on 28 October 2017 at a conference organised in Pattaya (Thailand), images of which made the rounds of the internet.
In particular, one of the main investors can be seen shouting out the name of the project, which quickly became a joke on social networks.
After reaching a total capitalisation of $3 billion, the eponymous company will close abruptly and the price of its cryptocurrency will plummet, leaving thousands of investors out in the cold.
Also beware of those promoting it. Fraudulent projects won't hesitate to pay a premium to certain unscrupulous influencers to get the word out.
👉 Project documentation
All projects publish what's known as a "white paper", a sort of presentation of the project 👨🏻💻.
"A serious project will take the time to detail its technical specifics." Otherwise, it's "a bad sign", explains Arthur, co-founder of the DeFi France collective.
"Also shun websites with too many spelling mistakes or that don't have a very polished presentation. In general, be wary of any signs that the project is unprofessional," he continues.
👉 The usefulness of cryptocurrency
The usefulness of a cryptocurrency is a measure of its seriousness 💡. Always ask yourself why a project decides to launch one.
Some will be indispensable in the governance of an organisation and will give access to voting rights to guide a project's strategy. Others will be essential for securing transactions, particularly in a proof-of-stake system such as that of the Ethereum blockchain.
But in some cases, their usefulness will be purely speculative. Included in this category are memecoins, cryptocurrencies with no real project that originated as a joke.
The best known of these are Dogecoin, inspired by a photo of a Shiba dog, or Pepe Coin, inspired by "Pepe the Frog", a cartoon character. With these cryptocurrencies, expect nothing more than to play at the casino!
When a project is going to issue its cryptocurrency, the founders will determine the terms of issue, which can influence part of its price. Here are the parameters to watch out for:
- The distribution: generally, the distribution will be between the project's original teams, investors and the community of its users. "Over the years, standards have emerged. In general, the project's founding team will receive between 15% and 20% of newly created cryptocurrencies. If the team appropriates too large a percentage, you should flee the project," explains Timothy Stevenson, a specialist in tokenomics analysis for investment firm W3index.
- Vesting: this term refers to a period during which the investor undertakes not to sell the cryptocurrencies. "As in traditional finance, the aim of this process is to build investor loyalty to the project. On the other hand, it is necessary to monitor the dates on which investors will be able to sell their cryptocurrencies, especially if the project has developed well. In this case, an investment fund will be tempted to take advantage of the good price performance to sell them, which could have a significant impact on its price," warns Timothy Stevenson.
To monitor these two parameters, the CryptoRank site is very useful.
- Currency creation: this is the rate at which cryptocurrencies are put into circulation. If too much is issued in relation to the number of buyers, the price may fall rapidly.
- Listing platforms: one of the primary functions of an exchange platform such as Coinbase or Binance is to provide easy access to cryptocurrency purchases. This is therefore a parameter to look at carefully. If the crypto you have your eye on isn't listed by a well-known platform, that's not necessarily a good sign.