The investment space looks more diverse than ever with the rising adoption of cryptocurrency and NFTs (non-fungible tokens). According to a poll from Pew Research, 16% of Americans have invested in, traded or used cryptocurrency. The demand for it isn’t waning, as there are over 10,000 currencies. One place people are spending crypto is on NFTs. In 2021, users spent over $44 billion worth of crypto on NFTs.
With a boom in popularity and the accessibility of crypto and NFT investment, as opposed to traditional ones, that also means the propensity for scams and fake schemes. A report from the North American Securities Administration Association (NASAA) named crypto scams as the number one investor threat. The Federal Trade Commission (FTC) also released data on crypto scams, reporting that investors lost more than $80 million between October 2020 and May 2021.
Not every investor sees these losses or gets embroiled in a fake scheme. However, it’s a breeding ground for scammers and hackers. So, what can the average investor do to protect their money?
Kelly Massad, CEO of Mainstay Digital and expert in the field, shared best practices for due diligence. Mainstay Digital is a blockchain and Web3 native company. They focus on demystifying blockchain capabilities for enterprises looking to modernize efforts.
Tip One: Evaluation
The first tip from Massad is about evaluation and assessment. “Read the white papers and understand the roadmaps to make an informed decision,” he said. A crypto white paper launches at the initial coin offering (ICO). It details a project’s concept, roadmap, and future growth plans.
Massad noted there’s a lot of good information in these documents. In reviewing these, look for reasons why their solution needs blockchain.
Tip Two: Utilities
Massad’s next recommendation is to discern if the currency has utilities. “The last thing you want to do is fully rely on the hype factor. You want to understand what it does and what it solves,” he explained.
In this phase, prospective investors want to answer questions around the token’s purpose and if it has long-term sustainability. If there doesn’t appear to be anything foundational behind the currency, investors may end up in a situation where there’s a crypto pump-and-dump.
Tip Three: Vet the Team
The third part of due diligence is vetting the team. “Make sure they have the experience to market crypto and NFTs and that they’ve actually performed the work in the past,” Massad said.
Investors can get details on those behind the coin in white papers. Beyond that, research the resumes and past professional experience of those bringing the coin to market. That should provide anyone with a good sense of the expertise and credibility of leadership.
Tip Four: Tokenomics
Tokenomics refers to the math and incentives governing crypto assets. It includes the granular details of how assets work and other factors that may impact value over time. “If you understand tokenomics, you understand economics,” Massad noted.
By assessing the tokenomics, investors can dig deeper into claims around market cap and burns, which are the deflationary aspects of the coin. Depending on learnings, someone might discover that the crypto is a honey pot scheme that’s ripe for dumping on investors.
Investing in crypto and NFTs can be legitimate and a way to diversify. With any type of investment, due diligence is necessary. The excitement of crypto and NFTs shouldn’t overshadow research and assessment. By following these tips, investors can make decisions based on facts, not hype.