Hey there, fellow crypto enthusiasts! Get ready to unlock the secrets of successful investing as we embark on another thrilling educational journey.
At Sphere, our dedicated due diligence team diligently investigates projects before they launch on our platform. But today, we’re going to show you how to do your own research.
Brace yourself to become a savvy investor by mastering the art of project diligence. It’s time to take charge of your investment decisions and dive headfirst into this empowering guide. Let’s dive in!
What is due diligence?
Due diligence in financial terms is simply the act of investigating an entity, to confirm facts and figures and to determine if this entity has future potential.
In terms of cryptocurrency, due diligence, also called research, is doing a deep dive into a project’s fundamentals.
It’s not just about crunching numbers, it’s about unraveling the story behind the project. It’s about spotting those inconsistencies, those subtle hints that may reveal the true character of a cryptocurrency venture.
Are they aligned with their mission? Do their aspirations match their capabilities? These are the questions you should have an answer to as you navigate through the vast landscape of cryptocurrencies.
As an investor, due diligence is the activity that can determine if you invest in a scam or in the next big thing that can bring a massive return on investment.
Why is doing your due diligence important?
Due diligence is what separates the gambler from the investor. A gambler is someone who invests through speculation, hype, or emotion. There are more than 10,000 Cryptocurrencies and not all of them will perform well in the long run.
The ICO boom of 2017 was a bubble that saw many projects which started with millions of dollars raised, go to zero within months, leaving those who invested in these projects with financial loss and regret.
This could have been avoided if these investors had spent some time researching to spot the gold in the dirt.
Key metrics to consider when doing your due diligence
Although every crypto project is unique, there are certain fundamentals that you shouldn’t overlook in order to determine if this project has future potential.
Here is a non-exhaustive list of things to consider when doing your research:
The project’s utility is a definition of its use and why it should exist.
What does this project aim to solve? What makes it different? What is the unique approach it has to penetrate the market? How does it stand out from its competitors? These are the questions you should ask as an investor.
Tokenomics is the token structure of a crypto project. Before looking at the token structure, you should check if a token is needed in the first place. The project should clearly define what the token is used for and how it will drive demand for the token.
For example, Ethereum uses its token ETH, as a payment system to verify transactions. All Dapps within its ecosystem use ETH. NFT marketplaces, DeFi solutions, and Exchanges. The growing ecosystem drives demand for the token. ETH is also staked as collateral in order to be a network validator.
After seeing the use of the token, you should also check to see how the token is being unlocked, its total supply, distribution, and burning mechanism if any.
The next metric to check is the team. The team is the engine behind the project and should be capable of carrying out its tasks effectively.
What are their different experiences and backgrounds? What relevant companies have they worked with? The team should be experts in their various fields which when blended leads to inevitable progress. Check the team’s LinkedIn or Twitter pages to see if what they claim to be is accurate.
Some projects keep the team anonymous. This doesn’t mean the project is a scam but proceed with caution.
When you have a goal, you create a clear plan to achieve that goal. This plan comes with action steps you have to execute along the way to reach your end goal. This is the role of a roadmap.
A project’s roadmap tells you what they have done in the past and what they plan to do in order to achieve success. A roadmap can be found on a project’s website and it should be clear and concise.
Community and socials
If you’ve been in the crypto space for a while now, then you will know the importance of community. A project should have a strong community behind them. This means more than just a high number of followers on Twitter.
After building a good product, there is a need for a supportive community to spread the word about that product.
The community should be consistently engaging with and promoting the project. How do the project’s team and community react to constructive criticism? Do they lash out or try to educate interested people on the importance of the project’s mission? These are key points to consider.
Backers and partnerships
Who are the people backing this project? How credible are they? If the project isn’t VC backed then what significant partnerships have they secured? How are these partnerships mutually beneficial to the parties involved? The crypto environment is a connected one and no project should be riding the waves alone.
Another critical thing to consider is if the project is ready to launch on the open market. Market conditions should be put into thought. Sometimes a project might have every necessary thing put in place but launching at the wrong time can be fatal.
There should also be a plan put in place to tame price volatility when the launch happens, for example, market makers. Another question to ask is if the token plans to list on a reputable exchange as this can help increase its visibility and reach to new investors.
Sphere uses these metrics and more to decide if a project has what it takes to launch with us. Our IDO launches usually perform well, some pulling 200–900% after launch. One of our recent launches sold in under 6 seconds!
A good point to note here is that cryptocurrencies are volatile and even if a project ticks every box on your checklist, it can still fail. Ensure you invest cautiously and only invest what you can afford to lose.
This document is for educational and informational purposes only. The contents of this document are not a financial promotion. None of the information or analysis presented is intended to form the basis for any investment decision and no specific recommendations are intended.