What To Look For When Investing in a Crypto Project
Crypto projects are no longer the fringe, unconventional investments that only the select few know about. Investing in projects built on the blockchain is starting to enter the mainstream business culture but as one of the most acclaimed investors of our time, Warren Buffet, famously said, “Never invest in a business you cannot understand.”
Knowledge is the most powerful tool in the hands of any entrepreneur, businessman or investor and today we’ll try to equip you with as much knowledge as we can regarding crypto investments.
Apart from learning the essential crypto and NFT terminology, there are so many questions a potential investor needs to answer before diving into this world. What makes one project better than the next one? Are there signs you should be investing? What’s your exit strategy?
Are you ready for some answers? Here are some suggestions, ideas, and things to take into consideration.
The team behind the project
In a world as new as crypto, experience comes at a premium. Before investing in a project, do your due diligence about the team behind the project. Have they coded on a blockchain before? Do they come from a tech background? Do they have success in building similar projects and are simply transferring their knowledge to the blockchain?
If anything is certain in business, it’s that you can never be certain about anything. Investing in a project built by a team of experienced professionals does not guarantee success. What it does is increase the chances of success and gives you the peace of mind that you’re not alone in this. There are people that know and can drive this forward. Ideas without execution mean nothing in the long run. What you are essentially doing here, is trusting the team's ability to execute their vision.
The actual product
Crypto whitepapers are flooding the market and information overload can sometimes confuse and misdirect. How do you make the right choice in a sea of so many options? You take your time, read and understand the project specifics.
What are you getting with your investment? If it’s a game, what are the features, the tech, the potential? Don’t invest your money based on a whitepaper. Dig deep and make sure you comprehend the present and near future of the product and the roadmap built around it. Choose projects with a Minimum Viable Product (MVP) as it’s an indication of what the product can do.
Project traction - Is there a community around it?
Timing is one of the most underrated factors when it comes to investments. All successful projects have a specific time window that’s ideal to invest in before the project blows up and everyone knows about it.
When do you know your project of choice falls within that time window? A good indicator is the project’s traction on social media and the community around it. Check channels such as Telegram, Discord, Reddit and Medium, and look for the frequency of posts by the owners of the project as well as replies, shares, and overall user engagement.
Promising projects always garner attention from insiders, experts and people who follow this space closely. Seeing the attention translate into a flourishing community is a good sign of the potential of the project. Always be wary of fake followers, and bots. Don’t just look at numbers but pay attention to what users are saying in the social media channels. Is there value? Are the comments coming from someone who has used the product? Be critical in your assessment.
Define the entry and exit strategy
Good investments always have a set exit strategy. Why? Because you avoid getting caught by greed. Knowing when to exit is crucial because it gives your investment a purpose and a predefined course of action.
By applying the DCA-Dollar cost averaging technique you divide the total amount and periodically buy the targeted asset with the purchase being done between regular intervals. Likewise, selling the asset happens at a regular interval and at a particular price point, profits coming in periodically, stopping you from being greedy and keeping the asset for too long.
Focus on a few investments
The good old principle of diversifying your portfolio and spreading risk across different investments ventures will never stop being true. In this case though, maybe a different course of action can prove to be helpful.
Instead of throwing capital on a lot of different projects, focusing on just a few can have more merit. What you have to factor in, is that there is a steep learning curve both for you, and the creators of the projects. That means that you need to invest more time in each project and every decision around it.
Make a careful, conscious decision about the project you wish to invest and then pour all your time, effort and energy into it. By keeping a small number of investments, it’s easier to follow all the updates, community, and traction to make more informed hold or exit decisions.
Trust your decision, but not blindly
Overreaction is one of the most common behavioral traits when it comes to new investments. You decide to invest, the price dumps and you immediately try to sell. Investment has a lot to do with showing trust in the project and weathering the ups and downs of the price. You will probably have to hold the investment for some time and not expect instant gratification.
The other side of the coin is the one that sees investors being stubborn, holding on to an investment forever, unwilling to accept that the project will never recover. Try to disassociate feelings of pride and ego from your investment decisions.
Investing is all about critical, timely thinking that looks at facts over feelings. If a project is showing a track-record of bad performance and challenges it can’t overcome, be bold enough to exit and cut your losses. Before making your decision on which project to invest in, you can have a look at the Polkastarter project selection criteria, and the process we go through in order to support world-class teams through Initial DEX Offerings (IDO).
The information provided in this article does not constitute investment, financial, or trading advice. Polkastarter does not recommend that any cryptocurrency should be bought, sold, or held by you. Do conduct your own due diligence and consult your financial advisor before making any investment decisions.