Blockchains, and the cryptocurrencies that come with them, are an emerging trend in the world. And as with all things new, there is bound to be danger in this space.
In my previous post I shared about passive/semi passive income opportunities. This post shares my thoughts about what to look out for in a project, and what are some of the warning signs when it might start to go haywire.
I won’t be naming any names because it’s pointless and I don’t want to risk any lawsuits. But these points and case studies are written out of my experiences with some of these projects. If a project exhibits several or more of these points, I would advise extreme caution.
Note: These projects aren’t necessarily scams. They might just be poorly thought out projects that unfortunately have enticed people to put their hard earned case into them.
It boils down to two main topics:
The Project and the Team.
The project:
What is the use case of the project? What does it do? A project that claims it can help solve poverty? Great potential right?
Of course a project’s website, team members, and their supporters would say that the project has potential!
As someone investing in a project, you have to count on your own instinct and store of real world experience to see if there is potential in a project. Don’t let anyone try to influence you.
By the way, here’s a common misconception for the new cryptocurrency ‘investor’. Unless you are investing in a security token, you are NOT actually an investor in a cryptocurrency project. You are merely buying utility tokens in a project. And you do not have any rights or protection that is normally accorded to an investor.
If a project says that it can do a lot of things, that’s fine. But you have to assess for yourself, whether it is something that is too far fetched to be realistic.
Does it have any real world adoption?
Look, let’s get one thing straight. Lots of projects claim partnerships with big corporations out there. If I were a company who signed a server space subscription with Google, I could claim that I have a partnership with Google too. So, my advice is, don’t trust these partnerships until and unless it is something substantial.
Case study: There is this project I know that keeps on repeating over and over that they have a partnership with a major company. Well, it is true that they have a partnership. It is true that that company is carrying their product. But at the end of the day, the price of the project keeps on tanking.
Why? Besides many other reasons, this major company they partnered with isn’t a typical front-line company. They are more well known as the supplier to big name companies, and they are more well known in third world countries. So who would care about this partnership?
As an aside, the fact that this project keeps on repeating over and over a partnership with this company is a warning sign. Because it means that the project isn’t moving to make better progress. In other words they are using this other company as a crutch.
What’s the token economics?
There are several aspects to this.
What is the initial circulating supply and the total supply of the tokens? If the project has, like 10 Billion tokens, and only 1 Billion are circulating out there with 9 Billion still held by the team, there better be a very good reason why. *hint : I don’t buy it.
Even if that wasn’t the case, a project that has 10 Billion tokens? That is a red flag for me.
Case study: There was this project that launched with an insane amount of tokens. Great hype and use case, whatever. One of the reasons the token price never went up was because there’s so many tokens out there!
It’s common sense. Scarcity drives price. Chances are, the rarer something is, the higher in price it would be.
Did the project hold any private sales to private investors? And if so, did they sell a portion of the supply to them at a much cheaper price than what they are going to sell to the public? What happens in that scenario? You are going to get a group of privileged people who bought a chunk of the supply at a very cheap price just waiting to dump on the public at a huge profit, when the project eventually hits the exchanges.
What is the token velocity?
Token velocity is something that isn’t often discussed. It’s not an easy concept to understand either.
Imagine: IF I have a token that has to be consumed by a particular system in order for people to use that system, that particular token is, for all intents and purposes, out of circulation, meaning people can’t buy them. The more tokens get taken out of circulation, the harder it is to buy that token, and the price goes up. The principle of scarcity, remember?
So: SLOW token velocity, GOOD. FAST token velocity, BAD.
How would token holders benefit from holding the token?
Case Study: There’s this project that promises great staking rewards when you stake their token. Insane % returns. Sounds fantastic right? Well, turns out your returns are locked up for a year! What kind of bullshit is that? To be fair, in return for staking your tokens, you get another token that can be used in their ecosystem. But I would rather get immediate returns than have returns that is locked for a year. Come on, who knows what can happen in a year?
What happens if that token is worthless by then?
Does the project suffer from a strong co-relation to bitcoin?
It is unfortunate, but its today’s reality: a lot of projects hold a strong co-relation to the price movement to Bitcoin. IF you can find a project that doesn’t have it’s price tied to the price whims of Buttcoin (*ahem, Bitcoin ), then please share it with me!
I’ll be honest: I do not like Bitcoin. But that’s a post for another day.
The Team.
Who are the team members?
Case study: There was once this project with a founder that insists on being anonymous and he was very lofty about it. The rest of the team were open about their identities. One day he fled with the project funds. Everyone got screwed over. Now, I’m not saying you HAVE to have a team with revealed identities, but personally an anonymous team member is a red flag for me.
You would also want team members with impeccable backgrounds.
Case study: There was this project with a great token use case. Very promising. Unfortunately, the founder was involved in some shady business in the past. Ultimately, the project died. Moral of the story: investigate each team member, dig into their backgrounds and hope you don’t find any dirt.
How is the team with communications?
Communications comprises of many aspects. You have to explain your project in a clear and non-confusing way to people on your social medias and on your website. Many projects are a victim of extremely poor communication skills.
I can name you dozens of projects that are brilliant in a lot of aspects, but very bad at explaining their project to the layman. The most brilliant project in the world will not get any traction or use by anyone, if no one understands your project.
Case study: There’s this project promising interoperability between blockchains. Two years in development. Extremely bad communications with the community, no one understand their project, the team were extremely ‘holier than thou’ in their attitudes. Guess what all their early supporters are talking about? They are moaning about when they can dump their tokens. They are so sick and tired of the project they just want to move on.
Warning signs:
When a project is slow in communications, or has irregular communications. That in itself isn’t a deal breaker. But when the team keeps on stalling and pushing back project updates, something is wrong.
When a project update delivers vaguely worded details.
When you start getting news of people leaving the team.
When you have news of large token movements with no prior, satisfactory explanations from the team.
Conclusion:
End of the day, it boils down to common sense. I'll be honest : its not easy, especially if the team and project sounded really promising at the start, and became crap as time goes on. You would be trapped. Which is why I wrote this as a sort of checklist for you to consider BEFORE buying into a project.
Thank you for reading and I hope this has been useful.
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