Everyone is brilliant in a bull market, but how do you invest in long-term downtrends? Here are five things to consider before taking on any crypto project.
Cryptocurrency bear markets are destroying portfolio value and have a dangerous tendency to drag on longer than anyone expects. Fortunately, one of the benefits of general market pullbacks is that they give investors time to refocus and spend time exploring projects that could flourish when the trend turns bullish again.
Here are five areas to focus on when deciding whether to invest in a crypto project during a bear market.
Is there a use case?
The crypto sector is not lacking in flashy promises and sly protocols, but when it comes to it, there are only a few projects that have created a product that is in demand and in demand.
When it comes to deciding whether or not to continue holding a token, one of the most important questions is “why does this project exist?”
If there is no simple answer to this question, or if the solutions offered by the protocol do not really solve the immediate problem, there is a good chance that it will not find the acceptance it needs to survive in the long run.
Define your competitive advantage
Where there is a viable use case, it is important to consider how the protocol compares to other projects offering solutions to the same problem.
Does it offer a better or simpler solution than its competitors, or is it more of a redundant protocol that doesn’t really bring anything new?
A good example of unnecessary redundancy is the oracle market sector, where several protocols have emerged over the past three years. Despite the growing number of options, Chainlink (LINK) is Oracle’s oldest and most integrated solution and remains the strongest competitor in this area.
Does the magazine generate income and how?
“If you create it, they will come” is a cliché common in tech circles, but it doesn’t always lead to actual adoption of cryptocurrencies.
Launching a blockchain protocol takes time and money, which means that only protocols with revenue or sufficient funding will be able to survive in a bear market.
Determining whether a project is viable and where the revenue is coming from can help investors interested in buying decentralized finance (DeFi) tokens.
Projects with the highest logarithmic income. Source: Token terminal
If a project has limited activity and income, it might be a good time to consider whether it is an undervalued investment or an investment to avoid.
Are there liquidity reserves?
Every startup should have an emergency fund, a treasury or a runway, as it is important to determine if a project has enough funds to weather downturns before investing, especially when making a profit on locked assets is the main incentive to increase liquidity.
As mentioned earlier, using a blockchain protocol does not come cheap, and most existing protocols may not be liquid enough to survive an extended bear market.
Ideally, a DeFi-style project should have a large treasury containing various assets such as Bitcoin (BTC), Ether (ETH) and more reliable stablecoins such as USD Coin (USDC) and Tether (USDT).
Having a well-funded and diversified treasury that can be tapped into during difficult times is critical, and as $trawberry Sith suggests, projects need to learn when to lock in profits, rather than having the bulk of the treasury in ether or a native token. .
Related: Major crypto firms reportedly laid off up to 10% of their staff amid bear market
Are the roadmap deadlines respected?
While past performance is not necessarily indicative of future performance, the history of a project on how it followed its roadmap and met important deadlines can provide valuable insight into whether it is prepared to weather difficult times.
In addition to tracking roadmap milestones, sites such as CryptoMiso and GitHub can help investors look behind the scenes to see development frequency and developer activity for a protocol.
If a team shows little to no signs of activity, and deadlines come and go, it might be in Z.