Before you invest in any crypto you will need to undertake some research in the currency or token to satisfy yourself that it is legitimate and worthwhile. This systematic process is called Due Diligence and your investment is at risk if this process isn’t followed.
|This is the tenth section of the Cryptocurrency and Blockchain awareness programme,
How to Crypto.
Due diligence is the investigation/audit/review that you should undertake to confirm facts or details of a coin or token that you are considering as an investment. Personally, I like to think of the following scenario when I’m about to start the process: I met this guy in a pub who told me about this crypto token/coin. It sounds great but I need to check it out properly before I put any money into it or the wife/partner will be very annoyed!
That simple statement should at least make you stop and think a bit. It’s very easy to jump in armed with nothing but a few positive statements, the promise of making money and a lot of hope. Reality though is that many people lose money because they didn’t stop to consider the most important steps.
Some of these steps are obvious and some not so. The first consideration is by far the most important and Venture Capitalists (people who invest very large sums of money in new start up projects) will base at least half of their decision to invest in crypto on this first point alone!
Quality of the team
Who are they? Are their names publicly viewable, can you check them out on LinkedIn. If so, what is their experience in the field, are they new to crypto, are their achievements believable, is what they are saying corroborated on other websites? What makes them so special that they can create such an awesome cryptocurrency that you need to invest in? You should try and get answers to any question about the teams credentials that you think is relevant.
When researching Cryptocurrency Due Diligence, you are mainly looking to see if the team is public. If they aren’t, you should ask yourself why? Is it because they are dishonest? Maybe they are hiding because they don’t want you to see how much they don’t actually know. Maybe they are a one-man-band or trying to pull off a scam? A non-public team is difficult to believe in and most people would avoid projects led by such shy people.
Remember to check the team out – some scams aren’t quite as obvious as the 2018 Ryan Gosling, graphic designer swindle. Miroskii, a blockchain banking startup project, claimed to have raised more than $833,000 from 389 investors. As you can see, the project’s graphic designer, “Kevin Belanger,” was a fake as were the rest of the team – which ran off with the contributors money as soon as they were spotted. Swindlers do actually get away with this stuff so it’s always important to check if the team are who they say they are.
Quality of the Information
Is it professionally produced and is there sufficient information available to keep your interest? Watch out for pages without tangible facts or proof. Ones full of platitudes, flowery phrases and buzzwords are typically not trustworthy – how plausible is what they are trying to say? Are they some sort of con-artist or are they genuine (and can you prove it to your partner)? If they are genuine but can’t articulate what it is they are trying to do, maybe the team is not up to the job and they are not worthy of your investment. Look for poorly formatted documentation, whitepaper, web pages etc. If there are a lot of spelling and grammar errors, their code or business ethics may be just as poor.
It would be good to see clear concise information about the cryptocurrency project presented in a way that looks professional and trustworthy. It’s surprisingly easy to put up a professional looking website to at least appease some basic form of due diligence, but it’s considerably more difficult to put details of the project in a clear and concise way that can be corroborated. Imagine you are an auditor – where is the evidence that what they are saying is true? If they can prove it, trust me, they will take every opportunity to do so.
What does it actually do?
For many people without a technical background, researching such things can be a challenge. However, you may still be able to get an understanding of the project on social media or blogs posts etc. It’s important that you believe in the value of what you are investing in and understand how it works.
The best way to approach this is to ask yourself ‘what problem does this coin/token solve and how?’? Usually this can be found in a Whitepaper which will be downloadable from the project website. This is a fundamental part of Cryptocurrency Due Diligence – whatever the project, it should have a whitepaper that you can read. In fact, projects without a whitepaper should be considered more risky by a high order of magnitude.
The whitepaper is the window into the project and it should fill you with confidence that what they are trying to do will succeed.
The first few lines of the original Bitcoin Whitepaper from 2008
A whitepaper needn’t be overly complicated. The project will appreciate that investors aren’t always so tech savvy. Well worded whitepaper is a big indicator or a well-formed project. I couldn’t understand the technology when I read the bitcoin whitepaper, but it was still very impressive! – In their defence, it was posted to a cryptography forum full of mathematics nerds (that’s my excuse anyway).
Once you have a clear understanding of what the project does, write it down so that your mum, after reading your description, could understand it enough to make a decision on its worth. Be as objective as possible, include the good points and the bad points for which you have knowledgeable, carefully considered answers.
Which brings me on to the next point…..
What do others think?
Research the project on as many websites or social media as possible, try to see what people like and what they don’t like. Imagine that your friend is questioning your decision to invest in this, how would you prove to him/her that this is worthwhile. Better still, imagine he/she is interested and you are explaining the pros and cons of the project to help them make an investment decision. Stepping back and seeing the project from someone else’s perspective may help you be more objective.
This step is particularly important when trying to determine how the coin/token will be adopted and income/profit generation sustained. Why will you and other investors remain with the project through thick and thin? Perhaps your friend will not invest in the project and may actually challenge you for investing at a later date if the price drops. How would you reply to the inevitable challenge, ‘I told you so’?
Active and Vibrant Project Community
Most crypto projects try to set up a community of followers and investors. Many have Discord servers, and are active on Social Media.
Try to find their social media channels and ask questions. If they are reasonable answers and not just comments from moonboys (fanatics who believe that the price will go to the moon without much knowledge – they are typically full of ‘hopeium’) it should help you on your way in determining the to your investment. I personally find this a very important part of due diligence for new projects. A team who are here to stay will want to develop a large community and, as the saying goes, ‘you can fool some of the people all of the time and you can fool all of the people some of the time but you can’t fool all the people all of them all of the time.’ Most projects will have a Discord channel. It’s a great place to ask questions. Explain that you are undertaking some cryptocurrency due diligence before making an investment and politely ask your questions. Normally the people in crypto discord channels are very helpful.
Partnerships and collaborations
It is very likely that the project will need to work with other teams from other projects. It is even more likely that a reputable team will want to be linked with other reputable projects to help give them credibility. When I look at these, I generally can’t find many that I recognise and so I need to research each of them too. It’s a laborious process which will also help you understand the technology behind the project, any necessary collaboration and the role of other critical parties.
An important thing to remember is that anyone can say they are collaborating or in partnership with another project. For instance, did you know that lead partners in this website are Google and Facebook? – I use Google to search for stuff all the time as part of my cryptocurrency due diligence research for the information on this website and I am in communication with Facebook (a member of their staff sent me an email to say that they didn’t handle partnerships at Facebook and that I should contact another department).
I’m also thrilled to announce that Mr. Twitter is also likely to sign up as a major player on Wednesday next week!
Hasn’t this already been done? If so, why is this project better than the others? For instance:
Ethereum is a Layer 1 Coin with a huge infrastructure and a very good reputation – it was the first major cryptocurrency with smart contract capability. It also uses a somewhat clunky programming language (Solidity) that isn’t particularly security friendly. At the moment, Ethereum suffers from huge ‘gas’ fees which you need to pay to do business on the Ethereum blockchain. It also has a number of competitors such as Avalanche, Solana, Cardano, Polkadot and others – all of which are better than Ethereum in many different ways. Personally, therefore, I only hold a little Ethereum as I don’t think it is a particularly good ecosystem. I hold most of the others which, in my opinion, are much better.
The point is, just because a project is the first doesn’t make them the best. It’s important to understand what the competition is and why the project you are interested in is better.
Cryptocurrency Due Diligence is important but it’s only half the work! The next section follows on from this – it’s just as important and deals with the economics of you prospective cryptocurrency investment. Section Eleven: Investment in Cryptocurrency – Tokenomics.
This article is copyright 2022 by Tony Fawl, CryptoNET.
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