It might be difficult to decide whether or how to invest in cryptocurrencies because there are hundreds of tokens circulating around the internet. Thankfully, Quartz has spent years sorting through a firehose of cryptocurrency proposals, so we’ve picked up a few tips. Hunter Horsley, the creator of cryptocurrency and CEO of the index fund provider Bitwise Asset Management, was also contacted as backup.
Here are some pointers and items to look out for.
It’s usually true if something looks too wonderful to be true
This advice holds true for pretty much anything that has a dollar sign next to it, including equities, Manhattan rent, and yes, digital assets. Or, to put it in the words of the UK financial watchdog: While some businesses offer huge profits, investors should be aware that virtual tokens tend to be high-risk and may not be regulated.
Analyze the management
Do the founders have any background in finance, computer science, or technology? Can you confirm the validity of their credentials?
Of course, this standard isn’t a given; many of the most well-known technology innovators in the world, from Stripe to ethereum to Apple, are high school dropouts. Similarly, some of the most promising startups in the cryptocurrency space are international and in their late teens. According to Horsley, some venture capital firms scour social media sites like Twitter, Telegram, or GitHub, a place where programmers may collaborate on code, to find chances.
Crypto is influencing how each of us views what is credible, claims Horsley. “Many of the more interesting cryptocurrency ventures have suddenly appeared out of nowhere. They originate from folks who are simple to discard.
Examine the code
According to Horsley, some venture capital organizations that are staffed with software engineers look out the code itself whether they are computer science ninjas. (And perhaps it should warn you something if you lack the necessary technical skills to comprehend the software. Return to suggestion #1.) These investors can assess a founder’s expertise by looking at their coding skills and checking for hack-vulnerabilities and other coding flaws by going straight to the source code.
Find out whether a regulator has registered the token or exchange
Tokens in the US may very likely be considered securities, which are intended to be registered with the Securities and Exchange Commission. Securities are financial assets like stocks, bonds, and options. Additionally, trading platforms have a variety of licenses and registries all around the world, including the UK’s Financial Services Register and New York’s BitLicense. While clearing such regulatory hurdles does not ensure anything is secure or will appreciate in value, it does indicate that the organization is being watched by the authorities.
What is the asset’s market value
According to Horsley, his company examines where and how frequently a given token changes hands. You get a sense of fluidity from that (how easy it is to buy or sell something). Make sure the sources of those trade volume statistics are reliable; for example, directly from a respected exchange rather than a website whose approach could be deceptive (or worse).
How big is the community for the project
Initial coin offers (ICO) and other kinds of cryptocurrency initiatives frequently have a fan base. Are those supporters real people or robots? Are they discussing the technical challenge’s merits or are they only trying to increase interest and the cost?
Who owns it and how much is being created
One or two persons controlling nearly all of a specific asset might be a warning sign, according to Horsley. It’s also helpful to check to determine whether a new cryptocurrency is oversaturating the market and perhaps undermining investor demand.
Finding a good cryptocurrency business is sometimes more art than science. When in doubt, simply go to rule No. 1: If something seems too good to be true, it probably is.