Every year, the top cryptocurrency list varies dramatically: some prominent projects have faded into obscurity, while underdogs have risen to the top. Predicting these market movements is crucial to outstanding gains only possible in crypto, but forecasting the future is never so simple: those that try to time the markets end up with significant losses 84% of the time. A preferable alternative is to try to avoid negative outcomes by hedging your bets, acting on factual information and keeping away from projects with red flags in crypto, which (in crypto or elsewhere) are usually exactly in those places where you don't think of looking.
Investing in crypto successfully requires mastering approaches for identifying projects with true disruptive potential and marking out those that are bound to fail. The gains from technologically promising projects can dwarf even the trajectories of “memecoins” like Shiba Inu. Here are some good examples of those:
- is the current second-largest cryptocurrency and pioneered smart contracts. With its creators it brought to the table amazing talent, groundbreaking technology, backed by a strong and involved community. Ethereum proved itself an outstanding investment, appreciating 14,000 times relative to its price at launch.
- had a simple use case: inside the exchange users could use it to save money on fees. At the ICO, it was just $0.10. Since then it launched its own chain, implemented smart contract capabilities and reached an all-time high of $686.
- was founded by an initial developer of Ethereum with a clashing view. He believes that stages of development should progress slowly but surely, rather than following trial-and-error. Its initial coin offering (ICO) price was $0.0024, and it has risen 1000x since then.
Fundamental analysis is a great approach to understand if a cryptocurrency has growth potential. It entails examining economic, technological and financial aspects of the project, looking for favorable conditions. In addition, the quality of the team behind the project is vital to its success. Some of the fundaments that apply to cryptocurrencies can be divided into a few categories, each with its own common red flags:
#1: Tokenomics
Every year thousands of new cryptocurrencies and tokens are launched but few succeed, and Tokenomics is one of the aspects that play a large part in this. It consists of rules and processes for the creation, initial distribution and supply management of tokens, plus some other aggregates. How is governance set up? Do the creators and early investors get a pre-mined amount of coins? Is this process transparent? Are they forbidden from selling until some set time?
There’s a behavioral chain of red flags that’s very common in “memecoins” Tokenomics: an enormous total supply with an infinitesimal price, which makes naive investors believe that it can easily reach “normal” prices someday, injecting their money into the coin. Then creators start changing the workings of their token to make headlines about increasing scarcity and utility, attracting new naive investors and forming a community around memes of hopeful astronomical returns.
#2: Use Cases
Exit scams in crypto are nothing new or uncommon. Two famous examples are OneCoin, of which the founder suddenly disappeared with over $4 billion in stolen cash, and BitConnect, uncovered as a ponzi scheme by the Texas Security Board. One thing these two had in common was no disruptive technology driving them. Their growth was solely set upon promised returns and as soon as these immediate returns were gone, people fled like flies.
Projects that offer compelling use cases and provide benefit to their users are the polar opposite of these instances. Chainlink, a pioneer of Blockchain Data Oracles, is one such case. It solves the problem of obtaining correct and tamper-proof information to base the execution of smart contracts on. This is highly valuable for Web 3.0, be it in finance, healthcare, governance, telecommunications, and more. Take notice of this: Serious project teams do not promise guaranteed profits to investors; instead, they focus on the usefulness of their ideas.
#3: Decentralization and Blockchain Technology
While blockchain is undoubtedly a revolutionary technology, maintaining a proper open and decentralized LEDGER can sometimes be a liability for a project that could function just fine without it. Subpar initiatives frequently employ buzzwords to gain funding, and blockchain is one of the most effective to achieve this.
Of course, when it comes to software, the practicality and quality of the final product are not always guaranteed. As most individuals aren't blockchain software developers, third-party audits are recommended, almost required, to ensure that the product a team promises actually exists, operates properly, and doesn't contain any vulnerabilities designed to be exploited later by its own creators.
