The 5 red flags to spot before investing in a crypto project

Vadym Synegin of WeWay share with us the 5 warning signs that should not be overlooked before investing in a crypto project.

Demand for crypto projects has reached record highs in 2021, and despite the current bear market, it shows no signs of slowing down. Leading companies, including crypto exchanges like Binance and FTX, are creating new products to attract both average users and experienced investors to the crypto and blockchain worlds.

From decentralized financing protocols (DeFi) to metaverse projects, non-fungible tokens (NFTs) and GameFi, the choices available to investors are endless.

But often investors take the plunge without having sufficient knowledge, which poses a risk to them. In fact, even for the most experienced retailers, the sheer amount of options and information can sometimes be confusing. In addition, the crypto market is plagued by scammers who do not hesitate to trap newcomers.

What do you need to know before investing in a crypto project?

In this section, we share some tips on how to identify profitable projects and crypto scams. First of all, investors need to carefully choose the projects they want to invest in because the risks are numerous.

As the name suggests, the decentralized financial ecosystem is unregulated. Therefore, anyone can start a crypto project by creating a token in a decentralized exchange (DEX) like Uniswap and then selling it to the community. Although the project has no real value, ie. it does not offer anything unique to the market, its token can serve as a speculative asset, making it a risky investment and a simple pump and dump system (market manipulation technique that consists of massively buying an asset to artificially increase the price).

In addition, we have very few lawyers specializing in crypto, because the sector is still very young in contrast to, for example, the stock market. Thus, it is more difficult for investors to get the right crypto investment advice.

In fact, investing in a crypto project is not that different from other types of investing. Investors should always have a certain level of financial knowledge and do their own research to see if the project is worth it or not. However, there are a few key factors we need to consider.

How to ensure the reliability of a crypto project?

Before investing, one must decide if the crypto project offers a valuable product / service to its target audience. Or if it’s more like a marketing campaign to raise money. Stories of investors who have lost fortunes in crypto fraud count in the hundreds. From phishing to carpet dragging, to worthless tokens, scam techniques are becoming more and more sophisticated.

Red flags to look for before investing in a crypto project

Do your research

Examine the developers / founders thoroughly. Do the founders of Project X have a solid reputation in the industry? Do they use pseudonyms? Have they worked on successful projects before or are they backed by reputable companies in the market? If the project has an experienced strategist, ie someone who wants to lead it to success, this is an additional advantage. If the team and project managers are hiding behind masks, it is better to turn to other projects.

The white paper

See the project white paper or white paper. Is it confusing, difficult to read or just unclear? Does it look more like a marketing game than a useful product / service to society? Very often people underestimate this document, but its role is crucial because it provides an explanation of how the project works.

Liquidity

Does the project have enough liquidity? If the project offers an intervention service or has a similar mechanism to provide liquidity, check its Total Locked Value (TVL). This indicator shows you how much money has been invested / locked in the platform. The higher the numbers, the more people trust the project.

Do not forget the legal aspect

The legal basis for the project is just as important as the other aspects. Many governments are now introducing measures to regulate cryptocurrencies and therefore cryptocurrencies. This helps clean up the market for illegal projects while combating money laundering. Nevertheless, the investor must also be aware of the legal aspect of the project in order to avoid legal problems and protect his capital.

Returns

The higher the return, the greater the risk. The investor must therefore ask himself the following questions: where does the money come from that makes it possible for the platform to pay the interest?

Is it a good idea to invest in a crypto project?

Above we have seen some key factors that people should consider before investing in any crypto project.

The crypto ecosystem is a risky investment, but it is also a sector full of opportunities. People just need to know how and where to see them.

The demand for crypto projects is very high right now. Due to the rapid growth of the sector, we have very few investment proposals and many crypto projects. This growing demand is also amplified by the ease of use of cryptocurrencies, thanks to which investors can easily follow the development of the project and its profitability. This by focusing on its products, such as its tokens.

All these factors indicate that in the coming years the world will see a large influx of investments in crypto projects. It is a wonderful symbiosis: the money grows the industry, and the industry makes more money for its investors.

About the author

Vadym Synegin is VP of Investor Relations at WeWay, a 100% blockchain-based company that provides influencers and their audiences with innovative solutions to maximize their creative potential.

Disclaimer

All information on our website is published in good faith and for general information purposes only. Any action taken by the reader based on information found on our website is entirely at your own risk.

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