The year 2017 was without question a scintillating year for cryptocurrencies. In that year, Bitcoin’s market cap rose from $13 billion to $250 billion, while the entire cryptocurrency market grew from $16 billion to $600 billion. The surprising thing, however, is that while a lot of people “smiled to the bank,” many people also lost huge sums of money.
According to Forbes, 46 percent of startups that raised capital via initial coin offerings (ICOs) are dead already despite raising over $104 million. The Statistics Brain Research Institute in California also reported that roughly 25 percent of startup companies fail in their first year and some 71 percent will fail over a 10 year period.
Still, along with the same line, the European Securities and Markets Authority (ESMA), said that ICOs were extremely risky and highly speculative investments and many of the coins or tokens have no intrinsic value other than to use them to access or use a service/product. ESMA went ahead to warn that investors risk the total loss of their investments.
ICOs from all indications do not qualify as financial instruments and the firms involved in ICOs hardly conduct regulated investment activities such as the Prospectus Directive, the Markets in Financial Instrument Directive (MiFID), the Alternative Investment Fund Managers Directive (AIFMD), and the Fourth Anti-Money Laundering Directive. In an ICO, a business or individual issues coins or tokens and puts them for sale in exchange for fiat currencies such as the Dollar or Euro, or more often virtual currencies like Bitcoin or Ether.
With ICOs, any investor from anywhere can put their money to work in a new token being issued to fund the project. Most investors are not reading about the company’s breathtaking and disruptive idea. Instead and unfortunately, they are only interested in the quick mind-blowing ROI they can make.
They fail to research the firms launching the different ICOs, they gamble on the fact that a $0.25 coin will suddenly take a quantum leap to $2 (800 percent) in a matter of weeks. Some investors who seemingly make an attempt at getting fleeting information about firms launching ICOs depend on the third party to feed them the jaundiced information they work with.
It’s completely and totally absurd how anyone can think of investing thousands of hard-earned dollars without a thorough check or background research. It boils down to absolute laziness on the part of investors since you don’t need a rocket scientist to carry out due diligence. For any investor who does not want to be taken for a ride and does not want to flush funds down the drain, it is pretty much advisable that you do your own research (DYOR) before investing in any ICO.
If your question is why do your own research? Then you need to know that blockchain figureheads have warned that 90 percent of all cryptocurrencies will fail and we should invest with caution. The primary reason is that there are plenty post-ICO coins in circulation that don’t have practical economic growth strategies and whose development teams are failing to live up to promises made.
They are thriving because of the careless enthusiasm by investors which has made developers believe they can capitalize on the growing hype surrounding cryptocurrencies, without needing to prove utility, adoption, and economic demand to match their market valuation. They just want to make quick kills and don’t care about the ‘cryptocurrency’ original goal to develop solutions to improve society.
So it’s very important you invest in cryptocurrencies that display strong fundamentals since there is bound to be a mass movement of investment and you may find yourself plummeting down the deep blue sea.
Before you embark on the steps of DYOR, it’s very important to note that quite unlike traditional investments like stocks, the fundamental analysis for cryptocurrencies is radically different since there are no financial statements to work on. Cryptocurrencies are not corporations, they instead represent value or assets within a network.
The viability of any cryptocurrency depends on the participation of the community (users, miners, and developers). They are basically decentralized and manifest the different applications of blockchain technology.
Another reason for the difference in the procedure of performing this fundamental analysis is the fact that the crypto space is still in the infancy stages, with virtually all of them at the developmental stages. This is responsible for the very few uses cases in the real world and hence the absence of track record to showcase for their uses.
It’s, therefore, necessary to use a different approach and methodology in carrying out this fundamental analysis. Taking into cognizance the complex nature of cryptos and their attendant technology, there is every reason to embark on DYOR in order to arrive at better investment decisions. Armed with a good perception of a coin’s fundamentals, you will not be handicapped when forming an opinion about the coin.
The following 7 steps of DYOR will amazingly save you from the unwarranted, heartrending, and colossal loss that may be your lot. Since according to the Business Insider, well-known coins such as Bitcoin, Ethereum, and Bitcoin cash account for 80 percent of the market by value, meaning that a huge number of low-value coins are circulating. Most have thin trading volumes, making them ripe for pump-and-dump manipulation and you need to be careful not to be caught in the cross-fire.
- Secure good sources from which to do your research
Without good sources of information on a particular cryptocurrency, you can’t make any headway in your research and eventual investment. You must be extra careful when analyzing. The first place you look up for information about the cryptocurrency you want to invest in is the white papers. This must be from the original website of the cryptocurrency.
The white papers are documents created by the development team of a cryptocurrency detailing how the coin works and the purpose for its creation. You will be given a comprehensive outline of the core mechanics of the cryptocurrency and the complete overview. You must not dabble into any sort of investment in a cryptocurrency without first going through the white papers.
The white papers are usually crafted in technical language but this must not put you off. You must painstakingly read through them and do everything possible to understand and comprehend what you have read. This will give you the required edge you need to do your buying and selling of the coin.
- Find out the main communication channels of the development team
You need to keep yourself up-to-date on all the latest developments of the coin you are buying and therefore must find out how such information is released. It may be through a chat application like slack, telegram, twitter, or on their official blog.
You will have the opportunity to communicate and interact with the developers of the coin. You will be able to avail yourself of the opportunity of questions and answers through this medium. Updates from the people who actually program the cryptocurrency can also be obtained here and you will also be able to see how the developers interact with the community.
- Learn from community forums
There are quite a handful of community forums out there you can learn more about cryptocurrencies from. Forums like Reddit, Bitcointalk, and Steemit give simple definitions and breakdowns of certain concepts that can be ordinarily complicated for a newbie in the cryptocurrency world.
The community forum is usually well-informed and you will be able to grasp the mechanics of the coin far better. From the forum, you can find out answers to questions that may be plaguing you and also find out which schemes are fraudulent and their operational basis. Examples of such schemes are:
- Cloud mining services — Fraudulent cloud mining websites offer anyone the opportunity to get in on a bitcoin mining operation and earn money rewards by just providing initial capital upfront without the need for you to buy your own computing hardware. It’s a fraudulent scheme that pays you out as long as there is a queue of new users. Once the pool dries up, the whole setup will collapse and your investment is gone.
- Bitcoin Investment Packages (BIPs) — They are high-yielding investment program that promises high returns with small payout structures. You are conned into buying a subscription package that qualifies you to receive a daily or weekly payout which tends to be very profitable at first. The fraudulent nature it portends gives BIPs a limited life cycle and usually shuts down anytime there are little new users left. You must not be carried away with their complex buzzwords they are all geared at putting you into confusion and acceptance with a phantom show of credibility.
- Multi-Level Marketing (MLM) schemes — They come with ambiguous offerings or services that are based on referral schemes. Typically you will have individuals promoting a referral scheme that is cryptocurrency related and urging you to click on their referral link. Quite unlike the first two schemes, MLM is easier to identify since they generate revenue through affiliate marketing rather than dealing with actual cryptocurrencies.
- Find out the functional benefits and prospects for adoption of the coin
Though skeptics are of the view that cryptocurrencies have no real value this may not be altogether true. The simple economics teaches that anything that has both attributes of utility and scarcity has value, this definitely makes the case for a lot of cryptocurrencies. The utility of any cryptocurrency will lie in its potential to be a more efficient commodity than we already have, while the scarcity is all about its finite supply.
There must, therefore, be a useful purpose to the coin you want to invest in, which confers on it the functional intrinsic value. What is the real reason for users to buy it? If there is none, the market price will fall as soon as investors lose interest.
There must be a significant market for the currency to flow through. A coin is only useful when a lot of people need it and hence the demand will be high. The market should create enough volume to drive demand or to make the coin to remain stable. You must endeavor to find out if there are enough potential users of this service to fuel stable demand for its currency.
What is the strength of the coin’s financial investment? The financial investment will help the project to develop a functionally beneficial service. The coin will then be able to capture the set target market and that will also hasten its adoption. The adoption strategy should be put into practice and not just something that is confined to the minds of the developers. It’s the adoption strategy that will bridge the gap between dreams and reality. A good investment is when you put your money into a coin that has an edge over the others since it will be more widely adopted.
- Research the team
Any company that has a strong team and vision is set to go a long way. The amount of money that is sunk into a company may mean just nothing if the team and management are a bunch of inexperienced toddlers in the cryptocurrency world. The money put into a company will not stop the failure of the company if not judiciously utilized.
Check out what the different members of the team have achieved individually. Consider their diversity, how they will bring that to bear, and the chances of their combined effort to make the project a success for you.
There is no harm in checking up Linkedin and other credible business-platforms for in-depth information about the team. Compare what you get on the social network platforms to what you have on their websites or white papers.
Their advisors may not be all that relevant to the information you need to invest. It’s quite easy to get anybody on the board of advisors without the person contributing anything tangible to the growth and running of the company. You need to be very careful, a lot of these names that are bandied about is just a way to get you off the balance and eventually scam you.
- Check out the ICO code base
It’s very clear that majority of cryptocurrencies are open sourced, projects that are close sourced or fail to reveal their code base most likely will have no credibility. Though a few cryptocurrencies are close sourced, all cryptos that have been stigmatized as scams, refuse to reveal their code base and actually do not have them.
Good ICOs always share their GitHub repository and get the code audited by the community who also suggest improvements to the code base. Open source code allows the code to be seen and reviewed. Any ICO that does not provide the links to the code is fraudulent.
- Discover the technology behind the cryptocurrency
An exceptionally advanced cryptography that has been thoroughly tried and tested is a good sign for the future of any coin you want to invest in. The technology that powers a coin is as important as its intrinsic value. A sound cryptography powers a blockchain-based digital currency and cannot function without it.
If you find out that there have been several technical issues surrounding a digital currency as you research it, then you need to beat a fast backtrack. The cryptocurrency is definitely not worth investing in, it’s a phony.
With the seven steps discussed above, you will be able to carry out your DYOR. Cryptocurrencies have certain unique traits like decentralization, full transparency through a public ledger, and an open source code that is visible to anyone. These are characteristics lacking in scams and Ponzi schemes, which are usually centralized and opaque.
It’s only when you carry out DYOR that you can identify these characteristics and avoid the temptation of falling a victim. Knowledge is power and it affords you the opportunity of understanding the nitty-gritty of the workings of cryptocurrencies and the underlying technology that powers them. When you are adequately armed with the right information you would safeguard yourself against scams.