Does this cryptocurrency have something that actually works? And are you able to use it right now? This shouldn’t be too hard to figure out.
Now, here’s the important part. Seeing a functional product is pretty easy to figure out. But, if there is a functional product, is it competing with another project that already does it?
Just having a functional product isn’t good enough. Most cryptocurrencies are open source. Meaning that anyone can create their own version. All they’d have to do is change some details and launch it. Then, they could sucker people in by claiming it’s better than the original. This is partly why there are so many scammers.
Let’s look at a real example for a moment.
Litecoin has been a popular cryptocurrency for a while. It was one of the first coins listed on Coinbase. And it has a functional product. But what is it really trying to do? It’s trying to replace Bitcoin. It wants to be the internet of money. But there’s just one problem… it can’t.
Litecoin prides itself on 2 improvements to Bitcoin. The transactions are faster, and the fees are lower. That’s it. But it doesn’t fundamentally change anything. It wasn’t first. Bitcoin has the first-mover advantage. Bitcoin is going to be the safer investment. Every single time.
If you sent me Litecoin, I would trade it for Bitcoin without thinking about it.
Getting people to actually use new technology is difficult. It will be a long time before most people start using Bitcoin in the first place. Do you think you’re going to get all those stubborn folks to switch over again to Litecoin just for slightly faster transactions and lower fees? Of course not. It wouldn’t be worth it.
Even the founder sold all his Litecoin at the peak of the 2017 Bull Run. Imagine a company whose founder & CEO didn’t own any shares. Would you invest in that company?
Having a working product is important. One of the most important aspects to any cryptocurrency. Because most cryptocurrencies don’t.
But let’s not bet the horse on a project that only makes subtle improvements. Bitcoin’s market cap is nearly 80x larger than Litecoin’s. And that probably won’t change. Ever. And there are plenty of other examples of this dynamic playing out throughout the space.
Your challenge as an investor will be to spot the difference between revolutionary improvements and little fixes. And I’ll warn you… it isn’t always easy.
Another example is the Protocol wars going on between Ethereum, Binance Coin, and Cardano. Each project wants to power the decentralized web. But only one can do it. Do these smaller projects make a big enough improvement to dethrone Ethereum? That’s the hard part. And you have to make up your mind for yourself.
Do real people actually care about this project?
Community faces a similar problem Product does. The answer can seem obvious. But the devil is in the details.
This can be difficult to tell one way or the other. Cryptocurrencies have an internet bias. And internet communities can be faked & inflated. Have you ever heard of astroturfing?
Astroturfing is when you drum up support for a cause and make it appear to be grassroots. Astroturfing has been extremely effective in politics, finance, and business in the last century. And it already infected the cryptocurrency space.
Let’s start with a real-world example. My favorite is the National Smokers Alliance. It highlights how financial incentives can lead people to do terrible things.
Imagine being the business owner of a tobacco company. You sell cigarettes & chewing tobacco. You make a lot of money doing this for one big reason. It’s addictive. Those profits are predictable. Something business-people really like.
It’s 3:00 AM. You awake from a cold sweat with a vision. You want to be a billionaire. Your heart is pounding. The idea scares you. But some part of you thinks it’s possible.
The next morning, you put all of your money into your business and double down on working. You work well beyond 80 hours a week. You do it for years. You don’t just want a handful of smokers addicted to your product. You want the whole nation. Or, at least as many as possible.
Years go by. It’s a steady grind. But year after year, you profit. Everything goes great.
And one day, you check your net worth. You realize you did it. You’re a billionaire! You buy every expensive thing your heart desires. Your entire family is pampered like British royalty. You finance politicians and can literally dictate how they vote in Congress. Life is good.
But there’s one Achilles heel in your empire. Your product is killing your customers. Lung cancer. It doesn’t happen quickly. It takes years. Making the connection to your product takes scientific research which also takes years.
But one day, after generations of fighting, the public has become aware of your scheme. They know your product is killing them. They’re blasting public service announcements condemning you and your product on the daily.
You panic. Everything you worked so hard to build is being taken away from you. People are creating products to quit yours! They’re preventing kids from being exposed to your product! Everything is on fire!
One night, you lay in your Alaskan king bed in the fetal position. As the fear crashes down on you like a tidal wave, you brainstorm ways to fight back. Four… five… six hours go by. You finally give up and accept your company’s inevitable downturn.
The next morning, a new idea smacks you on the head. It sounds stupid at first. But it’s so crazy… that it might just work. You run it by some of your friends, and they all come to a consensus. It’s a shot in the dark. But worth it if it means saving the dying ship.
The next day, you sink millions of dollars into newspapers, television stations, and magazines. You need to get the word out. You’re starting your very own movement. The National Smokers Alliance.
The NSA argues for smokers’ rights. After all, they’re practically discriminated against in this “politically correct anti-smoking culture.” Whatever happened to enjoying a cigarette like the good old days?
Your PR stunt goes viral. There are protests against anti-smoking laws. People are tearing down no-smoking signs. News outlets can’t stop talking about it.
Finally! You found your way to fight back and keep people using your product. Real people start buying into your movement. And just like that, you’ve successfully astroturfed the nation for a financial profit.
A similar scenario is playing out in the cryptocurrency space all the time. And it’s only worse because it’s all online. Half the people in these chatrooms, forums, and subreddits might not even be real. It could be a bunch of bots. All designed to make the community appear to be real.
There is a strong incentive for scammers to do this. Launching your own cryptocurrency is easy. You could do it without knowing how to code, and then all you have to do is convince suckers that your project is the next big thing. With enough time & effort, they can create entire fake communities.
Unfortunately, a lot of folks have been burnt this way. Myself included. You need to develop a strong BS detector. It could be the difference between making the best investment of your life and losing your entire portfolio.
I’m no expert in identifying astroturfing. But here are some things to look out for.
- Dramatic writing
- Highly centralized community — communities organically spread to different platforms. One community hub is fishy
- Celebrity/influencer endorsement — there are lots of shady folks in this industry… trust no one
- Explosive growth — Most communities grow slowly and organically, but there are many examples of spikes in growth — again, up to you to spot the difference
Are good people working on this product?
I saved the easiest for last. Because this really is as simple as it gets. A good project needs to be built by a good team. I’d start with the project developer and founder. These will be the high-profile folks on the team. They should at least have one (hopefully all) of these.
- Background in big tech (check their LinkedIn)
- Established presence in open source (check their Github)
- A good overall reputation(Google their name with words like “scam” and “fraud”)
The larger the reputation, the more you can trust them. At the end of the day, we’re taking a leap of faith that these people don’t destroy the project or community. Intentionally or not. All it takes is a single mistake.
People with good reputations don’t risk their entire careers on something they don’t personally believe in. They’ll have skin in the game. The more, the better. And when they have a lot of skin in the game, you can bet they will use their best judgment when making decisions.
It’s not necessary to inspect every single team-member. The more, the merrier if you’re paranoid. But the 3–5 most important members will tell you most of what you need to know. These are the folks leading the team. The truly important ones.
But there are faults any good team can have. Some things to look out for:
- Clashing with community
- Unclear direction (no roadmap)
- Little or no progress in the last year — it was a horrible bear-market last year. The hype just wasn’t there. Good teams are building regardless of the hype.
This one is limited to software developers. But it can make a big difference in your investment strategy. Cryptocurrencies are difficult to understand. But their code is open source. So, you can look for loopholes, bugs, and backdoors.
Generally, the larger projects will be more secure. Anything with over a billion-dollar market-cap has probably been combed over with a fine brush. But it never hurts to triple-check. That way you know for sure. One security flaw can crash a project in an hour.