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.  

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!

The Competition  

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.

This page is part of the How to Crypto Web Series, an awareness course for beginners interested in blockchain projects and cryptocurrency investment. Please checkout the Bibliography and Glossary of Terms pages for other useful recourses and links. To find out what we do, checkout the About Us page.

Disclaimer: CryptoNET.org.uk is not a registered investment, legal or tax advisor or a broker or dealer.  All investment/financial opinions expressed by CryptoNET.org.uk are from the personal experiences of the owner of the website and are intended as educational and entertainment material. Best efforts are made to ensure that al information is accurate and up to date but we would still recommend that you do your own research before making investment decisions. 

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Cryptocurrency Investment Tokenomics is the economics of a cryptocurrency coin or token. I.e. all the features that make you want to invest in it. This is much easier to do with a good search engine.  I’m sure you are thinking ‘hang on, Tokenomics, that will surely be in the Whitepaper!?’ and yes, you would be right but even better is to simply type “[coin/token name] tokenomics” into the search engine and see what pops up.

Tokenomics is a bit of a broad term but it’s defined as the study of the factors that impact the demand and supply of tokens for a crypto project.  We will look specifically for the following:

Initial Release Allocation 

Another important consideration for cryptocurrency investment tokenomics is the threat that investors may dump their initial investment once their perceive their profit can be recouped.  For instance, if an initial allocation of 10,000,000 coins was made to a venture capital company it may be that as soon as they reach a point that their original investment was recouped at a profit, they would look to sell all their tokens which may put pressure on the price and drive it down. A large number of institutional investors at the start of a new project is not good.  It would be better to see a larger number of smaller, retail investors at the start so that you could be sure there wouldn’t be too much selling pressure once the project started to become profitable.  

While we are on the subject, many investors will tell you that it is very important to take profits at the right time.  That is, when it is profitable to do so.  The hard part is determining when.  You may be tempted to let your investment ride and hope that the price goes up a lot more.  This is ok sometimes, but it’s good to get into the habit of getting a return on your investment as soon as feasibly possible.  Some suggest that your investment strategy would be based on a % profit value that you should stick to.  Such a percentage would be one that you would be comfortable with while still being realistic.  

Utility

How the coin/token will be used? How useful to the world is this coin/token?  If, for instance, you need to use this token to undertake a task that is important (to you or others) then the coin/token has a use case.  If it is a store of value then it isn’t very useful as Bitcoin is pretty much covered by becoming ‘digital gold’.

Maybe it is simply a token to raise money –  A project raises capital by creating a token that provides voting rights  for the future of the project.  That’s ok if you want to manage the activities as part of a Decentralised Autonomous Organisation (DAO) but not so good if you want to sit back and wait for the token/coin price to go up in value.  You may, for example be expected to be more active and vote on key management decisions).  DAO investments were quite popular towards the end of 2021 but are considered less so in a bear market.

When considering cryptocurrency investment tokenomics you should consider how you will interact with your investment and the project team. It is quite possible that you will be expected to regularly communicate with them and other investors to help shape the progress of the project and provide feedback.  Most projects have a discord channel to help with this. In other cases you may have to pay regular fees to the project (e.g. with DEFI projects). Become familiar with the utility of the coin/token and make sure you are comfortable with how it will work at the start of the project and what your responsibilities will be as the project grows.

Inflationary or Deflationary? 

Bitcoin (BTC) for instance is inflationary (it is minting new coins all the time) but the rate at which it is inflating is decreasing all the time until, in a hundred years or so, no more coins will be minted.  Bitcoin is an engineered cryptocurrency with a fixed, declining inflationary rate. 

There weren’t any Bitcoins until Satoshi Nakamoto mined one because of the proof of work activity (it’s like toiling all day in a bitcoin mine and getting paid for it in Bitcoin).  Subsequent mining activity got much harder and the coins given out as a reward are fewer. As a result, the rewards are worth more.  This is by design.

It is also worth looking at investing in deflationary cryptocurrencies since they have inbuilt mechanisms/processes to become more scarce therefore valuable over time. A good example of a deflationary crypto currency is Binance Coin (BNB) which uses the ‘Buy-back and Burn’ approach. Binance repurchase BNB coins periodically from their pool of investors and then send those coins to an un-spendable wallet address. Initially, BNB had a total supply of 200 million coins. The plan is to burn half of its supply. A recent burn (16th BNB burn) happened in June 2021 and a total of 1,296,728 BNB (roughly $395,000,000) was burned.

Generally, the more scarce the resource becomes following your purchase, the more chance it has of increasing in value.

What is the Circulating and Diluted Supply? 

Circulating supply is simply the amount of coins/tokens that are publicly available to buy or sell.  Diluted supply is the total expected number of coins or tokens that will eventually be released. The higher the Diluted supply, the higher the pressure for downward price movement since the asset will be less scarce over time.

As of April 2022 the amount of Bitcoin in circulation was 19,000,000.  The diluted supply is 21,000,000, there will never be more than 21 million Bitcoins.

The bigger the difference between the circulating and diluted supply, the more chance there is that the price will lower over time.  Scarcity is in important factor in crypto investment – there needs to be a very clear and believable use case for a currency to increase in value as more of it is minted.

Risk Management  

Cryptocurrency Investment tokenomics isn’t an exact science and it’s unlikely that you would have positive answers to all the points above and this may be for many reasons.  For instance, you may be unhappy with the experience of the team.  Or there may have other niggling doubts.  

In such cases, more research will help.  It would be best, at this point to re-investigate the information gained in the Investment in Cryptocurrency – Due Diligence section, ‘What do others think?’ 

One of the best places to get more answers is to check the latest posts on social media and specifically, the project community.  Key places to visit are twitter and Reddit (people love to hate in Reddit but there can be some good articles too). Ask questions in the Discord community if they have one. Don’t be afraid to google your questions, others may have had the same worries and published the answers you seek.

It’s important to mitigate your risks and not invest based on faith.  Aim to be as objective as possible, don’t rely on gut feeling as it can be a fickle friend.

Future Plans.  

It is very rare that a project starts and finishes at the same time – That isn’t as  silly as it sounds – Bitcoin, for instance started with only 50 coins and it wont finish minting until around 2140!  Cardano had a very clear roadmap with set phases and milestones.  

The phases of the roadmap are named after key science and literature figures.  Cardano is seen by investors as a project that is based on important research and development decisions and careful planning rather that the quick exploitation of an idea.  You can see this clearly in the Cardano project roadmap.  The project is considered (despite it’s current performance problems) to be a safe longer term cryptocurrency investment.  It’s future plans are clear.

Future plans may include a plan for additional use cases. It may be that the project (or community if they have voting rights for their token) may have plans to release one or a number of high value applications or hold a significant event (e.g. the burning of a large proportion of tokens etc.).  Additional use cases and detailed future plans increase the case for investment (provided of course, that you believe the project team are capable of delivering them).  

Cryptocurrency Tokenomics – Conclusion

These are just a few of what I would consider the most important tokenomics.  There are many more and it would be better to pay particular attention to those that are important to you.  I’m not an expert, but these are a good start. Can you think of additional tokenomics that would be important to you?

Most experienced crypto advocates recommend that you do your own research.  Cryptocurrency is all new, I’m personally not convinced that anyone can say they are an ‘expert’. One of the worlds most respected scientific societies is the The Royal Society.  I think their motto is useful when it comes to crypto investment, ‘Nullius in verba‘ meaning ‘Take nobody’s word for it‘.

Doing your own research is to help you consider (objectively) if the investment that you are about to make is worthwhile.  You are trying to take the emotion away from the investment process and although much of the above seems laborious, it’s your money to lose.  It’s up to you how much research you undertake.  When it comes to crypto, try to aim for Warren Buffetts (famous US investor) investment principal; “Rule Number 1. Never lose money.  Rule Number 2.  Never forget Rule Number 1.”  

Doing your own research is a no-brainer for all successful investors. Hopefully you have also read through and understood the first part, Cryptocurrency Investment – Due Diligence. I believe you will need to undertake both studies before making any profitable cryptocurrnecy investment.

In section twelve we will stop to briefly take a look at how governments and central banks want in on the action: Are CBDCs Good or Bad?

This article is copyright 2022 by Tony Fawl, CryptoNET.

This page is part of the How to Crypto Web Series, an awareness course for beginners interested in blockchain projects and cryptocurrency investment. Please checkout the Bibliography and Glossary of Terms pages for other useful resources and links. To find out what we do, take a look at the About Us page.

Disclaimer: CryptoNET.org.uk is not a registered investment, legal or tax advisor or a broker or dealer.  All investment/financial opinions expressed by CryptoNET.org.uk are from the personal experiences of the owner of the website and are intended as educational and entertainment material. Best efforts are made to ensure that all information is accurate and up to date but we would still recommend that you do your own research before making investment decisions. 

If you have found this page useful, please consider a small donation to help fund the site:

[crypto-donation-box]

Thank you.