How to analyze crypto tokens properly before investing

If you ask people what they know about cryptocurrency, chances are you’ll hear the words Bitcoin (BTC) or blockchain — or even both. However, what many individuals aren’t aware of is that over 5,000 cryptocurrencies exist in the market today. This huge number makes things a little confusing for investors.

With so many options to choose from, the task of choosing one to invest in can be challenging. At the same time, though, there are several potential opportunities for people to get scammed in the crypto space.

You see, some bad actors have designed tokens in a bid to scam people out of their hard-earned money. Whether you choose to move funds transparently or privately, your first priority should be to find authentic crypto assets to invest in.

In this article, we’ve compiled a list of a few precautionary techniques that can help you analyze crypto tokens — whether a utility token or asset token — properly to make a safe choice.

Carefully going through the token’s white paper

A cryptocurrency or initial coin offering’s white paper mentions the background, strategy, goals, concerns and timeline of the blockchain-related project for successful implementation.

Since white papers are supposed to be detailed, they can be very revealing. The biggest advantage here is that you can find out whether or not a company has a carefully conceived implementation plan of a company in place — something that can be very helpful for a token analysis. Hence, going through white papers can be very useful.

Here’s what a white paper should answer:

  • What is the unique selling proposition of the project, especially when compared to its competitors?
  • What is the vision and methodology of the project leaders, and how do they plan on being successful?
  • What measures will the company take to achieve its goals?
  • What are the token’s use cases?

Start any crypto or blockchain investment decision by reading the white paper thoroughly, and check if it has any complimentary resources. This can include financial models, SWOT analysis, legal concerns as well as a roadmap for implementation. You’ll also be able to determine the suitability for mass-standardized trading of the tokens.

If a company doesn’t offer a white paper, treat it as a red flag and move on to another one. At the same time, keep in mind that white papers shouldn’t be taken as the holy grail of authenticity either — it’s wholly possible for a fraudulent company to create a convincing white paper. For instance, PlexCoin managed to raise over $15 million with the help of its noteworthy white paper before the U.S. Securities and Exchange Commission shut it down.

Find out more about the team leaders

The developers and administrative team are a crucial part of the success of any tokens project, which is why you should have an idea about the people who are backing the project. Find out whether anyone has worked on reputable projects before, or are notable members of the blockchain landscape. In addition to this, their qualifications and experience should also be important considerations.

Make sure the token is backed by people who know what they are doing. This will help you move away from companies that prioritize personal profit over ethics.

Seeing this loophole, scammers have started inventing fake founders and biographies for their projects. Sometimes, they may even exploit the personal identities of unaware victims for their benefit as well.

Hence, the best protection against this fraudulent tactic is to do your research, and do it well. Skip tokens whose developers or founders you’re unable to find information about.

Even if you do find profiles, check to see whether the activities match up with the number of followers and likes, and be attentive to other similar nuances.

Determine the probability of any legal issues

Finding a great token’s ICO for investment isn’t enough. Sometimes, you may not be allowed to participate because of your jurisdiction. If you do decide to go ahead in such cases, you might end up breaking the law.

To avoid this, you need to make sure that regulators in your country haven’t restricted participation in such tokens. Despite the fact that ICOs are still unregulated, the good news here is that regulators are working on making friendlier rules that can lift most of these restrictions in a good number of regions.

Verify whether the token’s project is solving a specific problem

Ask yourself this question before investing in a token: What problem is this token solving, and how is it unique? Verification is crucial when it comes to token analysis, especially if you want to safeguard the security of your investment. People are becoming more aware of the looming online threats in cybersecurity, with the average cost of a data breach currently sitting at around $3.92 million. It’s the same caution that needs to be practiced when determining the utility of a token’s market value.

Plus, investing in blockchain projects that solve a unique problem will also see a higher demand surge, which, in turn, will boost the tradable value of its token. So, if you invest in the ICO of such projects, you’ll be more likely to score a more secure and profitable investment.

Observe the token sale process

All ICOs are dependent on a token or currency system when it comes to crowdfunding facilitation. You should always take a look for token sales figures while the ICO is on, keeping a watch on its progress over time.

In fact, companies and other endeavors consciously make it easy for potential investors to take a look at their system and token sale progress to establish legitimacy. Nowadays, with the growing popularity of cloud-based infrastructure business models, blockchain-as-a-service is also becoming prevalent, which should make transparency even easier.

In other words, there is no reason why a company shouldn’t show you its token sales progress. A company that makes it difficult for anyone to view the progress of its ICO is highly likely to be a scam. Try to avoid such companies at all costs.

Stick to people you can trust

Cryptocurrency has shown considerable maturity in terms of providing resilient custodial and noncustodial wallet solutions, but security is still a concern in the space. This is why we recommend working with trusted people whenever possible.

You see, it isn’t possible to scrutinize every project thoroughly. So when you work with and follow trusted people in the cryptocurrency landscape, you can have greater peace of mind. These industry professionals have good knowledge about the blockchain ecosystem and can deliver sound advice as well.

The bottom line

Cryptocurrency and ICO spaces can offer multiple opportunities for investment. The only catch is to have the ability to make sound investment decisions and have done their homework. At the same time, these spaces also have their own share of pitfalls, exposing people to scams and fraud, while even legitimate businesses with poor implementation strategies can cause severe financial loss. Try to stay away from low-liquidity instruments too.

There is, of course, no guarantee that a cryptocurrency or blockchain-related startup will be successful or legitimate, but following our above guidelines can certainly help you reduce the likelihood of getting scammed.

This article does not contain investment advice or recommendations. Every investment and trading move involves risk, readers should conduct their own research when making a decision.

The views, thoughts and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.

Sam Bocetta is a freelance journalist specializing in United States diplomacy and national security with an emphasis on technology trends in cyberwarfare, cyberdefense and cryptography. Previously, Sam was a contractor for the U.S. Department of Defense, working in partnership with architects and developers to mitigate controls for vulnerabilities identified across applications.