You never know what the tides might bring. And, although they might seem obvious in retrospect, red flags (in crypto and in life) have a way to be where you less think to look for them.

Through the many eras of our industry, we’ve seen the top ten, top twenty, and even top fifty currencies change drastically. Interesting crypto projects come and go, but the realities of the market have shown that, in the long term, nothing is set in stone.

Therefore, it’s all about finding resources for success.

You will not find articles like “the best DeFi coins in 2021” in our blog. This is because (counterintuitively) the extraordinary volatility of cryptocurrencies makes even a memetic wonder like Shiba Inu look like a dwarf next to the gains a crypto project with the potential to become a true disruptor over time can render.

Indeed, projects that manage to stay alive and get network effects working in their favor can register impressive growths. Some examples of this are:

Ethereum: A game-changer still on the rise

If there is such a thing as a formula for cryptocurrency success, Ethereum’s leadership seems to have found it. With a mixture of talent, great technology, and industry legitimacy backed by a strong community, Ethereum proved a more than worthy investment. After all these years, ETH is still the #2 cryptocurrency, registering gains against Bitcoin time and time again.

Ethereum ICO’d at $0.311 per token. At the time of writing, it has registered all-time-highs of almost $4,400.

BNB: Binance’s diamond token.

Binance launched its cryptocurrency with a simple use case (helping users save money on fees) at a price of only $0.10 per token. In 2021, BNB reached an all-time-high of almost $670.

Through this time, even while facing pressure from regulators, the centralized exchange has found more use cases for its token, launched it’s own chain, helped multiple projects launch and survive, and became the #1 CEX. There is no wonder that Binance users see holding BNB as a way to participate in the platform’s wild success.

Cardano: Meeting one price prediction after the other

Cardano, a project spun by Charles Hoskinson, one of Ethereum’s founders, has always espoused a similar vision to Ethereum while upholding a different philosophy. As opposed to the first’s pragmatic, trial-and-error approach, Cardano aims to move through stages of development slowly but surely. In this process, the project’s core organization, IOHK, has established partnerships with governments and authored several scientific papers.

Cardano ICO’d at $ 0.0024 per token. It found its current ATH at $2.73

However, there’s a plot twist: Predictions in cryptocurrency seldom work, therefore you need to look for red flags

What do you do when you can’t predict the future? You try to protect yourself from negative outcomes.

It is true that cryptocurrencies aren’t entirely safe financial instruments and should be handled with care (never invest more than you can afford to lose!) Because of this, the best thing you can do is hedge your bets, making plenty of them based on factual information, and avoiding projects that might seem dangerous.

There are plenty of statistics showcasing that, no matter how good you think you are at finding the best crypto projects, trading to try and time the markets is a bad strategy. Therefore, you need to spot red flags and go for projects you can back in the long term. It’s worth noting that public data shows that:

• Only 16% of traders achieve profits.
• The average loss of a trader is of 48.5%, the median of 54.7%
• More trades than not are completed at a profit, but losses are often big enough to offset this. This creates a curious phenomenon showcasing traders with high success rates but overall losses.

Happily, cryptocurrency investment and disruption go hand in hand

The best way to understand if a cryptocurrency is worth your time over the long term is to conduct fundamental analysis, a technique borrowed from securities trading. This is done by examining economic and financial factors. These range from macroeconomic factors, such as the state of the world’s economy, the crypto market, and the industry conditions of the project’s speciality area and blockchain as a whole. There are, then, more grounded factors to keep in mind, such as the project’s team.

Now, if you’re in the crypto ecosystem at all, you might have a sense that, as a whole, the industry will continue to grow over the following years. Therefore, this puts you at the task of finding whether a project’s tokens will retain or increase their value.

Some areas to evaluate for this (and their respective red flags) are:

Factor #1: Tokenomics (and their evil cousin, which we’ll call Dog Tokenomics)

Memecoins are a reflection of the crypto market’s unpredictability: Hundreds have been launched with minimum differences, but only a few become successful. (Source)

Tokenomics refers to the aspects of a project that directly entail their coins’ creation, management, and even demise.

Tokenomics start with the issuance of a coin. For example, the decision of having a set vs an infinite number of coins to issue is in itself a tokenomics decision. The way tokens are then distributed, how, and to whom also refers to tokenomics. Two straightforward ways to exemplify this would be:

1. Projects that have a ‘fair launch’. Currencies like Bitcoin and Monero launched by rewarding users ONLY for contributing to the network, which means that solely users who collaborated in some way have received coins.
2. Projects that issue rewards somehow else. This area represents a grayscale with no ultimate answers, but users can easily spot red flags once they know to look for them. For example, some people consider what’s called a pre-mine (an allocation of coins printed for the project at launch) as a shady tactic, and others, like Ethereum itself, defend it. Some consider that a team’s allocation of tokens, even if they’re locked over time, should not be too high. Others would take offence if a project sells a high number of their coins to institutional investors to fund the project but then does not keep an allocation for the public.

Since judging the tokenomics of a distribution of tokens is often a matter of values and perception of justice (with some obvious exceptions), we can go straight to one of the best tokenomics indicators: Governance.

Crypto governance (or management) in a tokenomics sense refers to decisions that concern the coin, such as proposed new utilities, rules, issuances, distributions, behaviors, etc. Since few projects set in stone the rules for the behavior of their currencies and teams from the time they launch, this becomes critical. A lousy decision can break a project, and a well-timed steer of the wheel can save it.

Note that at the title of this section, we used the term Dog tokenomics to jokingly refer to the economics of projects that, either with evil intentions or parodic effect, aim to be deceptive. This solid red flag, typical in ‘memecoins’ can be summarized as follows:

1. A project issues a staggeringly high supply of tokens with an extremely low value per coin.
2. The low price of each coin prompts novel investors to think that it’d be easy for the token to reach a price of, say, 1 cent.
3. Several investors, not understanding tokenomics (or the basic math behind the fact that such a coin reaching high prices would entail an astronomical market capitalization), pour money into it.
4. The team then amplifies this effect either by burning tokens (making them more scarce) or by changing the behavior of their coin.
5. The steep growth in value attracts even more novel investors, with communities forming around the promise of great returns and entertained by the communities’ memes.

Volatility and price behavior can also be considered within tokenomics. Nonetheless, because of this kind of analysis’ speculative nature, we can leave it out of this article.

Factor #2: A project’s use cases (plus, the difference between a crypto dream team and another rug pull!)

There are legendary stories of rug pulls, or exit scams, in the crypto world. Let’s take a look at two of the most famous ones: OneCoin and Bitcoinnect.

The first, OneCoin, had a founder that went by the names of “Crypto Queen” and “Dr. Asia”. The project hosted flashy events all over the world, including one in the U.K.’s Wembley Arena. In them, she constantly repeated the fact that OneCoin was to be a “Bitcoin Killer.” Dr. Asia then disappeared into thin air, holding over $4 billion in users’ funds.

The second one, BitConnect (BCC), launched in 2016. The project’s coin registered all-time-highs in December 2017, becoming one of the best-performing ones of the year… only to be worth $0 soon thereafter. This was after the pyramid scheme upon which BCC was based got exposed and exploded in the faces of investors.

What did both of these projects have in common? Their coins didn’t have a use case.

Both OneCoin and Bitconnect had something in common, and that was the fact that they were devoid of real value and use cases. They succeeded in the first place through what game theorists know as “greater fool dynamics“. The mechanics behind greater fool theory start once an asset gets passed from one hand to another, with each seller expecting to profit with no particular addition of value. This, of course, is doomed to end in disaster as the number of people to scam gets progressively smaller.

Since there was nothing to invest in within these projects (no special technology, no use cases, no mission outside of making money), their systems relied on their ability to promise returns. With nothing to hold on to once the scams got exposed, it’s no wonder people started jumping the boat once the promise of immediate returns was gone.

So, what do crypto projects with potential look like? How can you tell those without red flags in crypto-land?

To illustrate the opposite of the huge red flag of lack of utility, let us look at a project with demonstrated use cases, value and a thriving performance in the markets: Chainlink. Chainlink was one of the first projects to recognize the lack of oracles in the blockchain ecosystem, the limitations it posed, and start working on it.

To help you understand this value, let’s look at Chainlink’s oracle technology. In short, oracles are systems in charge of taking external data and feeding it into blockchains through smart contracts. This has many applications to enable Web 3.0, from telecommunications to economics, healthcare, finance, education, insurance, governance, and more. Thanks to oracles, a blockchain system can, for example, determine whether a region received enough rain to enable its agricultural production, or whether the local farmers should receive insurance in compensation.

Thanks to the great utility of oracles, Chainlink has gained tremendous traction in the blockchain world and has a special place in it. The firm’s advances have positioned it as the leader of its sector, a trend that doesn’t seem to be about to change. Chainlink currently has a market capitalization of $24.2 billion.

As you might imagine, the teams of any project serious about building game-changing technologies are hardly in a hurry to demonstrate the possibility of earnings for investors. You can be sure that investing in crypto projects (in 2021 or 2040) can rarely render good results when there are no real-world applications or technologies at hand.

This leads us to…

Factor #3: Technology and decentralization

If you lived through the ICO madness, your first question when thinking about any project is probably (but, does it need a blockchain?)

Indeed, a huge red flag in the early eras of our industry was that, thanks to a combination of factors, a surprising number of projects with no fundamental need for blockchain technology managed to raise millions of dollars. This is different from our previous point in the sense that, although a project might be useful in the real world, their introduction of cryptocurrencies and blockchains might not. In many cases, projects might be utilizing these terms only as buzzwords to attract capital.

Another meaningful part of projects succeeding in the blockchain field is (apart from using the technology at all) is using it correctly to achieve a desirable degree of decentralization. This can vary depending on the project’s scope, goals, and applications, but is something that users should keep in mind.

And, of course, when possible, one should make sure that the technology behind a project is solid. If you, like most everyday users, cannot check the code of a project yourself, it’s essential to become familiar with auditors and their basic requirements to make sure that third parties have checked those for you. A good project would often request third-party audits from demanding firms and make them public in their blogs or website for you to see. Anything else should be a red flag. You do not want to end up one of the multiple victims of protocols being hacked or exploited!

And, since we’re mentioning third-party advice…

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