Important Steps to Remember Before Purchasing Your Favourite Cryptocurrency!
With cryptocurrency popularity slowly regaining traction and Bitcoin as the undisputed digital reserve, the appeal of high-yielding altcoins is yet again attracting investors and users alike.
In the bigger picture, despite cryptocurrencies still being down anywhere from 50-80%, experts believe the market has indeed bottomed out from the lows in February, with over $200 billion flowing back into the crypto space.
It is still important to consider all the risks when purchasing cryptocurrencies, as many projects will likely fail in the long-term. Just like in any emerging industry, the strong survive and the weak perish.
By following some simple steps highlighted below, you can minimize the risk that comes with cryptocurrencies and ultimately understand the wild nature of the industry…
What is the Intended Function of the Project? Does it Have a Credible Whitepaper?
Looking at the long-term roadmap will help highlight the key updates and objectives of the project. It is important to know that there are goals in place to aim towards and that the project has a sense of ambition.
The whitepaper is a detailed brief of the respective blockchain/cryptocurrency that explains the algorithm, features, and overall goal of the project. You can usually find the whitepaper on the homepage of the cryptocurrency as a downloadable PDF document.
If a project has no roadmap or whitepaper, that is normally a red flag. Some cryptocurrencies have also been known to plagiarize their whitepapers in the past.
Scalability and adoption are important objectives for the overall survival of any project. If the blockchain cannot be used at scale, it will not survive in the decades to come.
How Active are the Developers? Are You Allowed to Ask the Big Questions?
A strong development team is the foundation for any blockchain’s success. Bitcoin and Ethereum have some of the best programmers in the world maintaining their codebases.
In computer science, there will always be unexpected bugs in the code, and a good development team can bring the project to life. An innovative project will have a worthy amount of activity on its GitHub page, which is a platform where developers can contribute and review the source code of different projects.
Communicating is important and gives the community assurance that the project is open and willing to keep its users and investors in the loop. Always check and make sure you can ask the important and tough questions without being censored or blocked.
Researching the developer’s previous projects and history in the industry can also help see how legitimate a project is.
Is it a Pump and Dump Coin, or for Long-Term Holding?
Sadly, the vast majority of cryptocurrencies with small market caps are simply used as speculative assets for making more Bitcoin and USD.
Be aware of this, and if you intend to hold for the long-term, research its roadmap and what innovative gaps it seeks to fill.
A cryptocurrency does not need to be innovative, scalable, or legitimate to increase in price. Bitconnect is an excellent example of this.
Who Actually Uses It?
We’ve seen partnerships and collaborations with a variety of cryptocurrencies, such as Dash, Litecoin, and the Enterprise Ethereum Alliance. For survival and mass adoption at scale, a project needs to be used by the masses and have a relevance in the market.
If there are chances of it being used in the mainstream markets, its value is based on adoption and usage, rather than speculative trading.
Circulating Supply and Regulations
Cryptocurrencies that start with something called a “pre-mine” are met with skepticism in the space. A pre-mine is where the entire supply of the respective cryptocurrency is mined before being released into the open market.
This allows the development team to allocate as many of the coins or tokens to themselves as they see fit, which can lead to price manipulation and is especially common in ICOs.
Ask the team how they plan to tackle regulation and their relationship with the respective government of the country they base their operations in. This is another important component of a cryptocurrency’s survival, as the SEC is investigating numerous blockchain-based projects and if a cryptocurrency is deemed to be a security or fraudulent, exchanges will not list it.
There are countless other checkpoints to look for when researching cryptocurrencies. Always do critical and thorough research, and only invest what you are willing to lose.