This one article was originally published on .cult by Michael Mulders. .sect is a Berlin-based developer community platform. We write about all things career, create original documentaries and share countless other untold stories from developers around the world.
So you’ve seen an eye-catching crypto project, but you’re wondering if it’s safe to take the plunge and invest? Analyzing crypto projects for investment purposes is a real skill. You can compare it to fundamental or technical analysis on the stock market.
Often we come across a shiny new crypto project trying to get your attention. But isn’t it too shiny or too flashy?
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Don’t invest blindly, because then you might end up empty-handed. After more than a decade of existence, the crypto industry still sees the occasional crypto scam and these scams continue to evolve!
This article will walk you through six core elements to look for when evaluating a crypto project. Some elements require more technical knowledge than others. However, we have included tips that can help you verify these aspects without requiring in-depth knowledge of blockchain.
1. Media sweet spot
Red flag projects often try to be featured in as many publications as possible to gain credibility. However, that’s just their marketing engine running, which can also be a positive sign.
To explore this further, check out the publications on the project’s website listings. Often companies hire PR agencies that try to add backlinks or brief mentions about a new crypto project to news articles. If so, it doesn’t count as a full feature. It just goes to show that the project is trying to artificially raise awareness.
A project that does business well naturally gets media attention. If you see dozens of publications publishing the same piece about a project, it’s most likely paid content. That’s a red flag.
2. Advisory Board and Project Support
View the project’s partners, funders and advisory board. This can give you a lot of information about the maturity and professionalism of the project. High-profile projects often form partnerships with leading non-blockchain companies or seek funding from reputable venture capital funds (VCs) in the blockchain space.
For example, Pantera Capital is the first cryptocurrency fund in the US, founded in 2013. They have invested in many successful crypto projects and tools that are shaping the blockchain space today. It is always a positive sign if you can spot such partners.
Other famous venture capital funds Involving:
- ConsenSys Labs
- Coinbase Ventures
- Ethereum Foundation
- Gitcoin Exchanges
- PolyChain Capital
- Blockchain Capital
Make sure to keep an eye out for them.
3. State of the project
We’ve already covered the marketing and business engines. What about the current state of the project?
Try to determine if the project has already built a proof of concept, MVP, or if they already have a blockchain test network. It’s a positive sign if they’ve already started developing the product and gathered a small community of beta testers. When people volunteer to try a product, they see value in the project.
Avoid projects that have not yet started developing. We’ve seen many crypto projects that promise high-end features like scalability, interoperability, or low cost, but never deliver what they promised.
4. Team composition
The team composition can reveal a lot about the project know-how in running a real blockchain company. The past has shown us that red flag crypto projects are popping up with a vast marketing engine and a small development team.
Projects funded through VCs don’t have to worry about getting their marketing engine up to speed. Their primary concern is to deliver value as quickly as possible.
Therefore, analyze the composition of the team. A pure blockchain project should have a healthy mix of engineering, marketing, design and HR staff. However, look for the following roles that add a lot of value to the project and are difficult to fill:
- Designer of symbolic economy
- Distributed System Engineer
- Smart contract engineer
5. Long-term vision
A project must have a long-term vision. Roadmaps have become the standard in the blockchain space for capturing the long-term vision of a project. It allows a team to explain how they want to achieve their goals and execute their idea.
However, any project can create a fictitious roadmap. And for non-technical people it is not always easy to understand whether a roadmap is really feasible or not.
View the description for each milestone. It should include how the project thinks users will adopt the product. Adoption is the bridge between vision and reality.
While projects often contain very detailed roadmaps, they often miss deadlines or don’t deliver features. Blockchain is a complex matter and mistakes can happen.
Don’t shoot a project before missing a deadline. Evaluate how they communicate their failure to the community and whether the delay is reasonable. Transparent communication is a crucial feature for a successful crypto project.
6. Token economics (Tokenomics)
Tokenomics are vital to the long-term survival of a crypto project. A strong project with malfunctioning tokenomics can quickly fail, making it one of the most important factors determining the success of a project.
decrypt.co describes tokenomics as “the study of how cryptocurrencies work within the wider ecosystem. This includes things like token distribution and how they can be used to drive positive behavior in the network.”
Crypto is known for its volatility. This often turns a cryptocurrency into a speculative instrument rather than a functional token. The goal of tokenomics is to reclaim the purpose of the token through complex mechanisms designed by an economist.
For example, proof of stake networks incentivize users with rewards for deploying tokens. Users lock their tokens for a certain period of time and receive a small reward for doing so. It’s a very smart tokenomics strategy because you’re locking in a large chunk of the total supply, which reduces the token’s volatility.
Proof of stake networking is just one example of tokenomics. For example, the economy for the Steem project hosts three different tokens that all have unique properties: Steem Coin, Steem Dollars and Steem Power.
With so many crypto projects launched, being able to evaluate new projects is essential. Try to look beyond the hype and the marketing engine of the project.
To get a good first impression of the validity of a project, spend a minimum of two hours researching the project. Read their whitepaper, technical explanation, as well as media coverage to get a different view of the project. With this information you can draw a first conclusion. Media coverage can give you a good indication of the project’s intentions.
If a project looks promising, spend extra time researching the team’s composition, tokenomics, and long-term vision.
An important tip for evaluating projects: if a project has a strong community of early adopters or beta testers, it’s a strong indicator of the project’s validity.