Good practice in a nutshell
The next example is one (of many) good practices. Good is never perfect, but it’s one way to set-up your own research and minimize risk along the way.
// Audit Level 1: the basics
1. The project is unique and necessary: there is use and/or market for it.
2. Fits your own philosophy and goals.
3. The project is from a company; legally incorporated business.
— Google the projects company ID or address, and see if it’s listed with an official authority.
If you can’t find this company ID or address, contact the project. If the project has not been incorporated properly don’t be bothered.
4. The project has a clean track record
— Google the project for possible negative feedback (e.g. enter: “name of project” scam);
— Check social media channels for reviews and activity;
A good project has many updates, and recent updates. If a project has not updated the community for over a month, don’t be bothered.
— Cross-check some major updates to see if they are true (e.g. walletdownloads, exchange listings)
— Google the team members (e.g. check LinkedIn channels if possible — note: not all profiles are visible for non-premium members)
5. Supply check (underestimated!)
— Does the coin have a blockchain explorer?
It’s important the project is transparent.
— Does the coin have a circulating and total supply listed on a third party data overview website like Coinmarketcap.com or Coingecko.com?
Some projects display a ‘?’ where it should display an exact amount of circulating or total supply. It’s advised not to invest in such project. If it’s unknown how many coins or tokens are circulating or what the total supply is, it’s unknown if the recent price is fair.
— Does the coin have a maximum supply?
Don’t bother investing in projects with no maximum supply. Infinite supply means hyperinflation which leads to worthless coins or tokens.
Woooosh! Probably you’ve narrowed down the amount of projects to around 1% of the total market. Great job!
// Audit level 2: looking under the hood
6. Coin or token?
This might not seem interesting, but is.
A token is a cryptocurrency created on a platform of a coin (some coins offer this functionality others don’t). For instance: ERC-20 tokens are created on the Ethereum blockchain. Thus are dependent of Ethereum. Coins, like Ethereum, Stellar and Auxilium, have their own independent blockchainand network. Plus offer token creation.
Some projects start out as a token and develop further towards a MainNet swap to become a coin. In general coins are already MainNet, thus further in development.
7. Technological advantages
Pick what you think is most important and will make a difference in the future.
Examples of things you might want to check:
— Cost-efficient (low transaction costs)
— Environmentally friendly
— Transaction speed
— Smart contracts
— Token creation
Some projects show comparison tables on their website. Besides a list of technological advantages (example: Auxilium (AUX) ) or compare their technology to other types of technology (example: Auxilium (AUX) ).
// Audit level 3: price potential
Has the project published concrete goals for the future that, in your opinion, will make a difference?
Are these use cases that can support mass adoption, or at the very least make the coin or token useful?
9. Market sentiment
You want to buy low and sell high.
Like every market there are market cycles: bullish (positive, price going up) and bearish (negative, price going down).
In which cycle are we?
Don’t buy, when:
— Bullish for a while, many new people have already joined: the project might already be at the highest price point for this cycle.
— Bearish: the project might not be at the lowest price point yet.
— Bullish: the market just turned bullish, and is confirmed to be bullish, the price is heading to higher points.
10. Historical data
All-time high : normally shows what a project is (at least) capable of when performing under the best possible circumstances. If a project continues developing, both technological fundamentals and through business (e.g. major exchange listings, partnerships), it’s possible a next bull run will result into a similar price or higher. Please take into consideration the market cycles (bullish vs bearish) can take as long as a few years. Patience is key.
The potential price of projects that not yet have experienced a bull run and/or are not yet listed on a top-listed cryptocurrency exchange are harder to predict. In general these younger projects are more volatile. If time is not of the essence it’s certainly worth exploring these younger projects. History shows the biggest “gains” are made when investing at the very beginning. Take for example Bitcoin that was worth around $0.007 USD at the very beginning…it took 8 years to get to $20,000 USD. Again: patience is key.