How to Do Due Diligence on a New Cryptocurrency

How to Do Due Diligence on a New Cryptocurrency

by September 2, 2022

Investing in a new cryptocurrency can be a promising new opportunity – or it can be a quick way to bankrupt yourself. To figure out the difference between the next great coin and the next great pyramid scheme, you need to be able to do your due diligence.

So how do you do it?

The Allure of New Cryptocurrencies

Whether you want to buy Avalanche, Bitcoin, or an entirely new coin, modern crypto exchanges make it easy to buy, sell, and hold your currency. If you want to start investing in an established coin, you can easily track historical prices and place trades in a highly liquid environment.

So why are new cryptocurrencies so alluring?

For starters, cryptocurrencies are a form of technology, and like any technology, it’s continuously advancing. Millions of cryptocurrency investors are eager to scope out new projects so they can see these technological breakthroughs in real time.

Additionally, finding a new cryptocurrency means having the potential to buy in at the ground floor. Bitcoin is currently trading around $21,000 per coin, despite the fact that it started trading at less than a dollar. If you can buy the next great cryptocurrency at less than a dollar per coin, you could potentially make an extraordinary profit.

new cryptocurrency

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Due Diligence on a New Cryptocurrency

Of course, buying a new cryptocurrency isn’t purely a good financial move. Countless cryptocurrencies have risen and fallen in the past decade, with many potentially promising coins turning out to be a scam.

So what due diligence steps can you take to determine whether your next potential acquisition is a worthwhile investment?

  • Read about the model. Every new cryptocurrency should have a published crypto model in place, usually on a main website. What exactly is this model? How does this coin operate? How is this coin different than other coins and why is that a good thing? Here, you should get a sense for whether the creators really know what they’re talking about – and you should be able to figure out whether there are significant competitive advantages associated with this coin.
  • Study the team. The developers and leaders in charge of this project should be public knowledge. Study this team and analyze whether they have the skills and experience necessary to carry out this project. Do they have years of history in blockchain development? Do they have successful projects to show off from the past?
  • Read through the ICO. Most crypto projects eventually launch an initial coin offering (ICO), formally making their currency available for purchase, sale, and trade. Read through the ICO documents to get a better feel for what this project is and how it’s going to work. Be on the lookout for any red flags, including contradictory information, ambiguous fluff, and warning signs that this might be a pyramid scheme.
  • Browse the forums. Though you should always do your own due diligence and trust your own conclusions, it’s also a good idea to supplement your available information by browsing cryptocurrency forums. Is there a significant buzz around this new coin? What do experienced, veteran cryptocurrency investors have to say about this coin? Is there a consensus about whether this is a good investment?
  • Look at feedback. Pay attention to the type of feedback being given to the developers and how that feedback is received. If users are submitting constructive criticism and developers are responding with humility and a genuine desire to improve, that’s a good sign. If users are lambasting this new cryptocurrency end developers are scrambling to hide those comments, that should be a concerning red flag.

Additional Steps to Take

There are some final steps you’ll want to take once your due diligence is complete.

  • Start small. Even if you feel relatively confident about this new coin, you should consider starting small with your investments. Don’t reallocate all your retirement savings to a coin you just heard about yesterday.
  • Diversify your portfolio. Always diversify your portfolio. If you’re going to invest in a new coin, you should also invest in established cryptocurrencies as well as other assets and currencies. A diversified portfolio is much more resilient to volatility and can shield you from major losses.
  • Analyze your losses. If and when you do lose money on new cryptocurrencies, take a moment to analyze your losses. Is there something you missed during your initial rounds of due diligence? Was there a change in momentum that should have prompted your exit?

Cryptocurrency decisions are difficult to make, in part because cryptocurrency is such a new financial institution. If you want to maximize your chances of success and minimize your losses, due diligence is an absolute must whenever you’re considering adding a new coin to your portfolio.


Featured image credit: Pexels