Everyone is a genius during a bull market, but how does one invest during lengthy downtrends? Here are five things to consider before buying into a crypto project.
Cryptocurrency bear markets destroy portfolio value and they have a dangerous tendency to drag on for longer than anyone expects. Fortunately, one of the silver linings of a market-wide pullbacks is that it gives investors time to re-focus and spend time researching projects that could thrive when the trend turns bullish again.
Here’s a five areas to focus on when deciding whether to invest in a crypto project during a bear market.
Is there a use case?
The cryptocurrency sector has no shortage of flashy promises and gimmicky protocols, but when it comes down to it there are only a handful of projects that have delivered a product which has demand and utility.
When it comes down to determining if a token should continue to be held, one of the main questions to ask is “Why does this project exist?”
If there is not a simple answer to that question or the solutions offered by the protocol don’t really solve a pressing problem, there is a good chance it won’t gain the adoption it needs long term to survive.
Identify a competitive advantage
In the cases where a viable use case is present, it’s important to consider how the protocol compares against other projects that offer solutions to the same problem.
Does it offer a better or simple solution than its competitors, or is it more of a redundant protocol that doesn’t really bring anything new to the table?
A good example of unnecessary redundancy is the oracle sector of the market, which has seen a handful of protocols launched over the past three years. Despite the growing number of options, the oldest and most widely integrated oracle solution Chainlink (LINK) and it remains the strongest competitor in the field.
Does the protocol generate revenue, and how?
“If you build it, they will come,” is a cliche expression tossed around in tech circles, but it doesn’t always translate into real-world adoption in the cryptocurrency sector.
Operating a blockchain protocol takes time and money, meaning that only protocols with revenue or sufficient funding will be able to survive a bear market.
Identifying whether a project is profitable and where the revenue comes from can help guide investors who are interested in buying DeFi tokens.
If a project shows limited activity and revenue, it may be a good time to start evaluating whether it’s undervalued or a investment that should be avoided.
Are there cash reserves?
Every startup is meant to have a war chest, treasury or runway and prior to investing it’s important to identify whether or not the project has sufficient funds to survive downtrends, especially if providing yield on locked assets is the primary incentive for attracting liquidity.
As mentioned earlier, running a blockchain protocol isn’t cheap, and a majority of the protocols out there might not be liquid enough to survive a lengthy bear market.
Every successful NFT project should bring in a crypto financial manager/treasurer to properly diversify/hedge their war chest, not just keep everything in ETH.
A project needs to know how to take profit too.
— $trawberry Sith (@StrawberrySith) May 10, 2022
Ideally, a DeFi-style project should have a large treasury containing a variety of assets like Bitcoin (BTC), Ether (ETH) and more reliable stablecoins like USD Coin (USDC) and Tether (USDT).
Having a well-funded and diversified treasury that can be pulled from during touch times is crucial and as $trawberry Sith suggests, projects need to learn when to take profit, and not leave a majority of the protocol treasury in Ether or the platform’s native token.
Related: Major crypto firms reportedly cut up to 10% of staff amid bear market
Are roadmap deadlines kept and met?
While past performance is not necessarily an indicator of future results, a project’s history of following its roadmap and meeting important deadlines can offer valuable insight into whether it is prepared to endure tough times.
In addition to keeping track of roadmap milestones, sites like CryptoMiso and GitHub can help investors peer behind the curtain to see the frequency of development and developer activity for a protocol.
If a team is displaying little to no signs of activity as roadmap deadlines come and go, it might be time to consider the possibility that a slow rug pull is occurring and that it may be time to get out before further losses are realized.
This article does not contain investment advice or recommendations. Every investment and trading move involves risk, and readers should conduct their own research when making a decision.
The views, thoughts and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.