Crypto-investing 101: advice for beginners
We’ve all heard tales of investors taking a chance on a little-known cryptocurrency, only to watch their meager crypto-savings spiral into a full-blown fiat fortune.
Take, for example, Erik Finman, who famously invested in Bitcoin when he was 12 years old back in 2011, at a time when they were selling for $12 per token. Within a few short years, Finman had become a multi-millionaire. Meanwhile, Tyler and Cameron Winklevoss, famed for their legal battles with Facebook and two of the earliest celebrity cryptocurrency investors, recently became the first Bitcoin billionaires.
There are countless tales of success where those came from.
But promising though this investment vehicle may be, it’s also incredibly daunting – shrouded in unusual vocabulary, and built on a series of seemingly murky, abstract ideas. Add to that the widespread media coverage of investors losing money as a result of hacks or human error, and one could be forgiven for shying away.
The mystery surrounding cryptocurrencies and blockchain technology more broadly have driven away many potential investors.
I’m here to assure you that becoming a crypto-investor is well within your reach. But as is the case with any investment, due diligence is imperative. Here are ten tips that will help you avoid common pitfalls like investing in a project run by inexperienced rookies, supporting projects that are immune to publicity, and investing in technologically precarious cryptocurrencies.
Consider these factors as you contemplate your leap into the rewarding world of crypto-investing:
- Focus on the team
When considering which cryptocurrency to invest in, take into account the team that created it. Research who all the key players are, what sorts of skills and backgrounds they bring to the table, and how long they’ve been immerse in the cryptocurrency market.
At the moment, it seems like just about everyone wants to cash in on the success of giants like Bitcoin. Far too many people looking to make a quick buck are launching initial coin offerings (ICOs) for the sake of launching ICOs, rather than trying to solve the problems unique to the end user. To avoid falling into a trap like this, make sure the cryptocurrency you choose to invest in is backed by a solid team of professionals guided by a specific mission.
Beyond protecting you from a bad investment, doing your due diligence with respect to the crypto team can help prevent you from fraud; The Independent reported in January that UK authorities had sounded the alarm over fraudsters increasingly using promises of wealth in exchange for cryptocurrency investments to lure unsuspecting victims into fraud.
- A social media footprint
Beyond closely reading their website and doing some basic internet searches, a good way to monitor a project team’s prowess in the world of cryptocurrencies is by perusing their social media presence. Any team with true crypto-experience to boast about will have been active on most of the major social networks for at least a few years.
Take it as a good sign if you find that the team has been active across a range of social networks. Look for accounts on sites like Bitcointalk, Facebook and Reddit, as well as personal blogs on sites like Medium. They should also have an active real-time presence on messenger services like Slack and Telegram.
If they claim to have a presence on the Asian markets, check out KakaoTalk as well.
For a more corporate audience, check if they have active accounts on sites liked LinkedIn and YouTube.
In February, crypto news site Bitcoin.com reported that 113 ICOs had “semi-failed,” a term that in many cases was associated with the teams’ disappearance from social media. These statistics convey the importance of a social media presence in the crypto sphere.
- Take a deeper look at the project
If you’ve done your due diligence and determined that the team has been immersed in the crypto-community for quite some time, go ahead and dive into their product itself.
At this point, you’ll want to identify the essence of their cryptocurrency, determine whether it bears any unique qualities that set it apart from its peers, and assess how the product or service will change as the project unfolds.
We recommend you delve deeper than the marketing materials available on the cryptocurrency’s website. Any cryptocurrency worth its salt that’s nearing or past the ICO stage will have a publicly available white paper. Read this carefully before making any investment decisions in order to gain comprehensive insights into the mission underpinning the cryptocurrency.
To get a sense of what you should look for in a white paper, take a look at the “progenitor: the Bitcoin white paper”. If the cryptocurrency you’re eyeing is missing any of the components included in the Bitcoin paper, ask the team why and reevaluate your investment intentions on the basis of their answers.
- Reaching a broader audience
As no brilliant idea can exist in a vacuum, PR is an integral component of any promising crypto-project. The team should actively publish content about updates and new developments, and external media coverage should be largely favorable, or at very least, neutral.
It’s vital to pay attention to where you see external media coverage of the product. If mentions are primarily limited to news aggregators, you might want to take a closer look. On the other hand, if a project has been mentioned in news articles, features and columns, this is a good indicator that journalists have considerable trust in the project and/or its team.
Take for example TRON, a cryptocurrency that broke into the crypto creme de la creme, only to fall from grace due to an onslaught of bad press, including allegations ranging from plagiarism to misrepresentation of announced partnerships, according to The Next Web.
- Open communications
One key point to consider is the level of connectedness between the cryptocurrency’s various stakeholders.
Assess the level of community participation in various areas, from coding, to carrying out opinion polls, to reaching out to members of the community. In all matters related to the cryptocurrency, integration should be close, and communication should be consistent, thorough, and frequent, both from the side of the investors who can offer ideas and help spread information about updates, and from the side of the developers who contribute to coding and integrating their own projects into the greater structure.
Plexcoin is an extreme example of the sort of communication gaps that can tear a crypto community apart, US authorities froze the cryptocurrency’s assets and filed charges ahead of an impending ICO after finding that the company had raised up to $15 million as a result of false promises to investors that they would earn 13-fold profits in less than a month’s time.
- Jurisdictional issues
When selecting a cryptocurrency to invest in, it’s important to consider where it’s being developed: Was it born and raised in a city or region that’s known as bastion of innovation, or in a remote town, hours from the nearest tech hub?
In epicenters of innovation, like Singapore, Moscow, Silicon Valley and Berlin, innovators and startups have bountiful opportunities to network with likeminded companies and individuals – a fact that gives rise to invaluable partnerships and alliances that can spell the difference between a run-of-the-mill cryptocurrency, and one that truly has what it takes to change the game.
- Engaging the target audience
In the world of cryptocurrencies, as in life, it’s important to find people who walk their talk. If you’re considering investing in a particular currency, consider its target demographic. Let’s say it’s a cryptocurrency geared toward university students. What do they do to engage with their target community, and to ensure that they’re truly aware of the needs of today’s college kid?
At Humaniq, for example, we pride ourselves in having a large ambassadorial programme that directly engages the geographical locations where our product is used. For example, African clients comprise a key portion of our target demographic, so we partner with researchers and developers across the continent.
- Making an impact
A key indicator of a project’s promise is whether it has attracted the interest – for better or for worse – of independent experts. If the project idea hasn’t made any sort of splash, this may be cause for concern.
When the popular messenger app Telegram was first introduced, its white paper drew praise from some experts and criticism from others, but in any event, it created fodder for conversation, thus hurling itself into public knowledge.
- Getting into the nitty gritty part 1: coding
I’m not going to tell you the next two parts will be the easiest when it comes to making an investment decision, particularly for the novice, but they’re essential to making an educated investment decision nonetheless.
First, take a closer look at the coding underlying the product. The software development platform GitHub is a great resource for this. There, you can check out how fresh the cryptocurrency’s commits are and get a sense of how much attention has been paid to their coding – not just by the project’s own developers, but by other developers from around the globe.
- Getting into the nitty gritty part 2: blockchain technology
Next, it’s time to peer into the technology at the core of the cryptocurrency. We recommend that you do some in-depth research of your own about the basics of blockchain technology before investing, but we’ll provide you with a brief cheat sheet based on our own experience.
Many cryptocurrencies these days are Ethereum-based, but plenty of other platforms have emerged in recent years. If we were to prioritise investment platforms, this is how we would rate the various options:
a) cryptocurrencies based on independent blockchains, which offer specific types of motivation for users, as well as proof of work and proof of stake;
b) Ethereum-based cryptocurrencies;
c) forks of existing blockchains;
d) platforms such as waves, Rootstock and colored coin;
e) that said, we don’t believe that Bitcoin forks are worth taking seriously.
Now that you’ve learned how to sidestep lackluster projects, unsuitable teams and questionable technologies, you’re well on your way to becoming a confident, self-assured cryptocurrency investor. Welcome to the club.
By Alex Fork, founder and CEO of Humaniq