due diligence

When it comes to cryptocurrency investments, one of the biggest challenges for investors without a professional trading background, is not getting caught up in the hype. Cryptocurrencies have quickly risen in market cap and public attention, even as analysts have cautioned investors about their volatile nature and unpredictability.

Cryptocurrencies investments are a new asset class with extreme volatility, high chances combined with high risk. We prepare you for your first cryptocurrency investment.

First Step: Get a Feeling for the Crypto Industry

This is particularly important for those investors who are new cryptocurrencies, it’s essential that one develop a sense for how the crypto industry works before investing.

Take time to learn about the different cryptocurrencies available. With over 3,000 different coins and tokens available, it’s crucial to look beyond the biggest names like Bitcoin, Ether, Ripple, EOS, and Litecoin. Different coins have different dynamics.

Also, explore the blockchain technology basics, to get a sense for how this aspect of the cryptocurrency world works and why it is important.

Like every start, it might be challenging at the beginning, if you don’t have a computer science or coding background. Don’t give up if some aspects of blockchain technology will be a challenge to understand and might sound too technical for you.

Once you got some basics and you’ve identified potential cryptocurrencies for investment, look into how those coins make use of blockchain and what they provide that is different from the rest of the field.

Main questions are:

• Why are these coins really useful?
• What are the token economics that will ensure the growth in value?

By better understanding cryptocurrencies as an investment class and blockchain in general, you’ll be better equipped to determine whether a potential investment opportunity is worthwhile.

Second Step: Check Social Media Channels and Word of Mouth

Because cryptocurrencies are new and in an exploration phase, things tend to develop very quickly. Crypto is trendy for millennials and there are robust and very active communities of cryptocurrencies investors and enthusiasts in communication with one another around the clock.

Get plugged into this community to learn about the buzz going on in the cryptocurrency world. Twitter, Reddit, Telegram Groups, Slack have become a central hub for digital currency enthusiasts, but there are also many other communities online with active discussions going at all times, 24/7.

Third Step: Check the Whitepaper

While word of mouth and the community support is important, the specifics of a cryptocurrency project and details regarding the technical side, business model, coin / token usability, governance of the project, etc.are more important.

When you’re considering an investment, take the time to read the project’s white paper. Every crypto project should have one, and it should be easily accessible.

General advice: No white paper, no investment in cryptocurrencies.

Study the white paper very carefully; it should tell you everything about what the developers of the project intend in their work, including a roadmap and timeline, a general overview of the token mechanics, etc.

If something in the white paper is missing or feels incomplete, if the white paper consist of marketing descriptions only, consider it a serious red flag.

Checklist for Cryptocurrency Investments 

Following data points are important when you buy cryptocurrencies:

• Market capitalization
• Exchange volume
• Trusted exchanges that listed the coin
• The total available supply of coins
• Total future supply of coins
• Transaction volumes on a chain (Does someone use the blockchain?)
• Hash power, decentralization of mining for PoW (Proof of Work)
• Distribution of coins (Do a few people, e.g. the management/team, own biggest part of available supply?)
• Events coming up, roadmap
• Community activity (Twitter, Facebook, Reddit)
• Google trends for keywords

Before you invest in cryptocurrencies: Always DoYourResearch and DoYourDiligence

Due diligence is always advised for investors. In the world of cryptocurrencies, it is an absolute must! The level of research required, given the industry and the fast changes in the early stages, is exponentially higher and more difficult.

Investments in cryptocurrencies are not comparable to investments in stock, not even in penny stocks! Investments recommendations in stocks are based on the fundamentals of a business and financial figures, P&L, balance sheet, KPI metrics. For cryptocurrency, this is not possible and does not make sense in most cases.

Therefore a mindset change is required in research and due diligence for crypto, not only from the requirements of a considerably more volatile and illiquid market but given its extraordinary speed of evolution in the early stage.

Given the unpredictability of risk and the potential for high returns, the most prudent approach for new investors in crypto might be to hold just a very small proportion of their portfolio in cryptocurrencies. This would give some exposure without excessive risk as the market continues to mature.

There is ultimately little downside from investing 1%-3% of the portfolio in cryptocurrencies, but the potential upside is almost unlimited.

Again: Invest only what you can afford to lose in crypto and DoYourDiligence! OR check the Investment Reports from Cryptocurrency Investment on this website.