#109. Cryptocurrencies and Blockchain
Checklist: Analyzing Crypto Projects for Investment
How to Assess the Quality of Crypto Projects?
The term “quality” here refers to reliability, integrity, prospects, and risk mitigation. A checklist for such an analysis may include studying the following info:
- The overall concept of the project. Does the project clearly articulate its mission? If not, this is cause for concern.
- The white paper. The presence of such a document for Web3 projects has become a common standard. However, the key value is not the fact of having this document but the information it contains. The white paper should complement and expand the general idea of what the project is and what it does.
- The roadmap. This is the information about what goals the project creators have set out to achieve and how they plan to accomplish them. The roadmap may also include a description of the stages of project development. The main thing in this point is clear, precise, and realizable objectives. If the project isn’t new, you should pay attention to the stages that have already been implemented and their compliance with the stated plans. The roadmap can be a part of the white paper or a separate document.
- Technical documentation. Web3 projects are mostly built on the principle of open-source software, i.e., they have open-source code and a detailed description of the technology. The Web3 concept assumes that the project community is able to work on its code, so it’s available on GitHub. Suspicious signs may include the absence of a clear technical description, particularly if it doesn’t provide a comprehensive understanding of its working principles and if the code is kept private.
- The actual state of the project. It’s essential to understand what stage the product or service is at: is it an idea, a prototype, or a fully functioning project? This will make it clear what needs to be invested and what aspects can be looked into more closely.
- Security audit. Given heightened hacker activity, Web3 projects must conduct mandatory security audits on their technical infrastructure. Preferably, they should be cross-sectional and regular. As a rule, information about audits is prominently displayed on the project’s website and can be checked on the websites of auditing companies. The better known the structures conducting security audits, the more reliable the project is, and vice versa.
- The project team. It’s an important point because the prospects of a particular project directly depend on the team working on it. It’s best when the founders and top management are known, and there’s an opportunity to check that they’re real people. A big plus will be if they have sufficient competencies or experience in successful project launches in the Web3 sphere. If the team is anonymous, but they have well-known and respected Twitter or Discord accounts, it’s less favorable but still acceptable for crypto projects. If the information about the team is missing or unreliable, it’s a sure sign of fraud.
- The community and communication. Pay attention to the activity of the project on social networks, forums, and other platforms. If such activity is carried out, it’s important to focus on the activity of the community. A lively community for Web3 projects is one of the key success factors. On the other hand, recently created and empty social networks are an indirect sign of a dubious project. Abrupt cessation of communication on social networks is also questionable.
- Finances and funding. Large investors are an indirect sign of the project’s solvency, as such organizations conduct a thorough check before allocating funds. Information about the investments attracted should be verifiable. Besides, other sources of project financing, such as ICOs, IEOs, IDOs, other forms of investment attraction, and their success should be studied. An important factor is information on the distribution of funds raised. Financial transparency is a good indicator.
- Partnerships and cooperation. Who does the project collaborate with or intend to collaborate with? What is the nature of these partnerships? The presence of major technological, informational, legal, and other partners and the nature of the interaction directly affect the development prospects of the project.
- Tokenomics. What tokens are represented in the ecosystem and what are their functions? How are tokens distributed? Are there large holders (whales)? What measures are taken to incentivize token holding and use? By answering these questions, one can get an idea of the internal factors and risks associated with a particular digital asset.
- The market. The size of the target market should be analyzed, as well as the main competitors and the advantages the project has over them.
- Regulation. Regulatory issues play a significant role and can create further risks and opportunities for investors. It’s essential to find out in which jurisdiction the project is registered and whether it has the licenses or permits required for its business activities.
Furthermore, all possible risks associated with the technology used, market conditions, regulatory actions, macroeconomic factors, and others should be assessed. Plus, remember that any investment involves potential risk as no one is immune to human error and unpredictable circumstances.