How To Distinguish The Hype From The Reality Crypto Quartz

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With thousands of tokens floating around the internet, it’s not always easy to determine whether or how to invest in cryptocurrency. Thankfully, Quartz has spent years wiping out a fire hose from crypto slots, so we’ve learned a thing or two. And as a backup, we also called crypto founder Hunter Horsley, CEO of index fund manager Bitwise Asset Management.

Here is a list of tips and things to watch out for.

If it sounds too good to be true, it probably is.

This suggestion applies to just about anything that has a dollar sign attached to stocks, Manhattan rent, and, yes, digital assets. Or, as the UK financial watchdog says: While some companies promise high returns, virtual tokens tend to be high risk, may not be regulated, and investors should be prepared to lose all of their money.

Consult the management.

Do the founders have a background in technology, finance or IT? Can you verify that their credentials are real?

Of course, this benchmark isn’t a sure thing, a number of the world’s most famous tech founders, from Stripe to Ethereum to Apple, are college dropouts. Likewise, some of the most promising crypto founders are in their late teens and come from all over the world. Horsley says some venture capitalists look for opportunities by determining who ranks on social media platforms like Twitter, Telegram or GitHub, a place where software developers can collaborate on code.

Crypto pushes us all into the way we think about what is believable, Horsley says. A lot of the most compelling crypto projects just came out of nowhere. They come from people who would be easy to dismiss.

Check the code.

If you’re a computer ninja, you can check out the code itself, which some venture capitalists with software engineers do, according to Horsley. (And if you’re not technical enough to understand the software maybe this should tell you something? Go back to tip # 1.) By going straight to the code, these investors can judge if a founder knows their stuff. by examining their programming chops while looking for a hack’s weaknesses and other coding vulnerabilities.

Find out if the token or exchange is registered with a regulator.

In the United States, a token may well be a security (a financial asset such as a stock, bond, or option) that is supposed to be registered with the Securities and Exchange Commission. Trading platforms also have various types of licenses and registers around the world, such as New Yorks BitLicense or the UKs Financial Services Register. Jumping through these regulatory hoops doesn’t guarantee that something is safe or will increase in value, but it does at least signal that the entity is on the radar of government watchdogs.

Where are the assets kept?

In the US securities market, financial assets are usually held in a large, well-known and highly regulated bank like JPMorgan or Bank of New York Mellon, also known as the custodian. Crypto tokens, because they are based on a different technology which does not always allow transactions to be reversed (in the event of fraud for example), add another wrinkle to this service. Bitwise has a short list of custodians that it believes meet its criteria, which include insurance and regulation, to securely hold digital assets:

AnchorageBakkt WarehouseBitGoCoinbase CustodyFidelity Digital AssetsGemeni CustodyHow much does it cost to trade assets?

Horsley says his company examines how often a particular token changes hands and where it changes hands. It gives you a feeling of liquidity (how easy it is to buy or sell something). It is wise to ensure that these trading volume figures come from a reputable location, such as directly from an established exchange, for example, rather than from a website whose methodology could be misleading (or worse).

What is the size of the project community?

Initial Coin Offerings (ICOs) and other types of crypto projects usually have an enthusiastic following. Are these supporters humans or robots? Are they talking about the merits of the engineering challenge or are they just hoping to increase the interest and the price?

Who owns it and how much is it created?

It can be a red flag if one or two people own almost all of a particular asset, Horsley says. Likewise, it helps to see if the market is inundated with a new token, potentially flooding investor demand.

Detecting a promising crypto company is often more of an art than a science. If in doubt, just go back to Rule # 1: If it sounds too good to be true, then it just might be.

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