How to Research a Cryptocurrency Before Investing

If you’ve spent much time investigating cryptocurrency, you’ve probably heard the advice to research any coin or project before you invest in it. But, what does that mean? How do you research a cryptocurrency, and what do you look for?

“Do Your Own Research”

Cryptocurrencies are built on solid software and there are genuine and promising applications for them. Furthermore, people do make money investing in cryptocurrencies, but people also lose a lot of money in cryptocurrency scams. Therefore, before you put any money at all into a cryptocurrency, you should spend some time investigating whether the currency is legitimate or not.

You can begin inspecting a cryptocurrency as soon as you hear about it, before you begin any serious research. Consider:

  • How did you hear about it, and what did you hear about it?
  • Did you hear about it from a reliable and trusted source?
  • Did you hear about the project that the currency enables?
  • Or, did you hear about how much money it’s going to make investors?

Two more mantras for early crypto investors: No one gives away free coins, and if it sounds too good to be true, it probably is.

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5 Things to Look for When Researching a Cryptocurrency

Assuming that you heard about the cryptocurrency from a trusted source and it sounds solid, there are still some litmus-paper boxes that you can check before thinking about getting involved with a project.

1. Find the Purpose

Most cryptocurrencies are minted as a reward for verifying blocks of data that serve some function other than supporting the currency itself. If you’re a Bitcoin tribalist, you may realize that Bitcoin fails this test.

Related: How Does Crypto Work and How Can You Invest?

That doesn’t mean that Bitcoin is a scam. Bitcoin has been around long enough and has enough of a demand that supporting itself is enough. That’s not likely to be true of any other coin playing this game. In other words, Bitcoin is not a scam but any coin promising to be the next bitcoin is probably a scam.

The downside of this is that it does mean that you might miss out on an opportunity to get into a project as one of the project’s very first investors because you sat around waiting for a coin to prove itself. It’s true. You could miss out on an opportunity to “get in on the ground floor.” The good news is that you’ll pass up a lot more opportunities to “get scammed.”

If you really, really, really don’t want to pass up what sounds like an amazing opportunity to buy up a brand new coin, get familiar with another crypto investment mantra: don’t invest more than you can afford to lose.

2. Find the Whitepaper

The crypto shouldn’t only promise to solve some a problem. It should promise to solve that problem in a way that makes sense.

Blockchain projects are typically laid out in a whitepaper—a publicly available document detailing the blockchain’s mission and how it works. Even Bitcoin, which was published anonymously, has a publicly available whitepaper that is still widely read and circulated.

Having a whitepaper isn’t enough. The whitepaper has to be good. For example, the Squid Game cryptocurrency that famously fleeced investors had a whitepaper, but it was poorly written and edited.

Related: How the “Squid Game” Crypto Collapsed: The Warning Signs Investors Ignored

3. Find Out Where You Buy and Use the Cryptocurrency

Unless you’re a miner (or an investor with serious acumen), you probably shouldn’t buy cryptocurrency outside of a proper cryptocurrency exchange. Exchanges allow you to buy and sell cryptocurrencies, and while different exchanges require coins to jump through different hoops to get listed, you’ll be safer sticking to these exchanges.

Related: The Most Popular Cryptocurrency Exchanges Right Now

This approach has the same pitfalls as the first tip: it will take time for a new cryptocurrency to be listed on a legitimate exchange. However, we are talking about exchanges that let you buy coins, not apps that let you buy “interest” in a coin, as PayPal does. These platforms are even more cautious than exchanges, and you can miss out on a good thing waiting that long.

In some cases, the blockchain itself will make a scam coin difficult to circulate in legitimate ways because wide circulation in legitimate circles could expose the coin more quickly. For example, we again turn to the infamous Squid Game token, which had strange caps on who could trade the token, where, and under what circumstances.

4. Find Out Who Makes the Coin

Right now, decentralization is the name of the game. However, most legitimate cryptocurrency projects will have a publicly listed board of directors or even partner organizations supporting and developing the currency.

You don’t have to know the names of all of the board members, but you should at least recognize the names of the companies enabling or using the blockchain. Even if you don’t, you should be able to research those individuals and organizations to find out whether they are real and really involved.

Depending on how rigorous you are, you may or may not think that Bitcoin fits this list. We don’t know who started the ball rolling after all. However, a lot of the people who are currently pushing that ball are less than anonymous and Bitcoin.org does have ways for you to learn more about the community of developers keeping Bitcoin alive.

5. Find Out if the Coin Seems Sustainable

This is a combination and reconsideration of some of the red flags covered in the introductory paragraphs. A coin worth investing in should solve a problem and solving that problem should be the goal of the coin’s creators, not making money.

For example, IOTA is one of the most technologically ambitious coins out there, and it’s trading at fractions of the going rates of better-known tokens. Why? In part because IOTA is built for long-term scale rather than as a get-rich-quick scheme or even as a conventional store of value. It’s meant to do a job, and the financial rewards come second.

Research Your Crypto Before Making Any Investments

The tech world, and particularly the blockchain and crypto worlds, move pretty fast these days. It’s easy to get swept away in the feeling that if you spend too much time looking into an opportunity it will pass you by. However, anything worth investing in today will still be there tomorrow.

It’s better to wait and gain less than you could have than to jump into something early and lose more than you needed to.


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