How to Conduct Proper Due Diligence in Crypto

In the fast-paced world of crypto we’ll need to focus on the most critical areas.

Understanding the Challenges:

• Speed of the Market: Crypto projects and trends move incredibly fast. Missing a window of opportunity is a real concern.
• Information Overload: The crypto space is flooded with information, making it hard to distinguish between credible sources and noise.
• Scam Risks: Unfortunately, scams and rug pulls are common. Rigorous diligence is essential to protect your investment.
• Complexity: Many crypto projects are technically complex, requiring some understanding of blockchain, tokenomics, and smart contracts.

Key Areas to Focus On & How to Be Efficient:

Here’s a structured approach that prioritizes speed without sacrificing essential checks:

1. Initial Assessment (Quick Filter):

• The Problem & Solution:
  • Quickly understand: What problem does the project aim to solve? Is the solution innovative, necessary, and realistically achievable?
  • Red Flags: If the problem is vague, overhyped, or already solved by a better project, it’s a warning sign.
• The Team (Crucial):
  • Look for: Do they have verifiable experience in blockchain, tech, business? Are they public or anonymous? (Anonymity isn’t always bad, but raises caution).
  • Utilize: LinkedIn, company websites, and project communication channels. Search for team members’ past projects and reputation.
  • Quick Check: If the team is unverifiable or has a history of failed projects, move on.
• Whitepaper/Lightpaper (Speed Read):
  • Focus on: Tokenomics (how the tokens are distributed and used), technology overview, and roadmap.
  • Look for: Clear, concise language, realistic goals, and a well-defined plan.
  • Red Flags: Vague promises, unrealistic timelines, or unclear tokenomics.
• Community Sentiment:
  • Quick Glance: Check social media channels (Twitter, Discord, Telegram) for community size, engagement, and general sentiment.
  • Look for: Genuine enthusiasm and intelligent questions.
  • Red Flags: Bots, inflated numbers, or constant hype without substance.

2. Deep Dive (If the Initial Assessment Passes):

• Tokenomics Analysis:
  • Distribution: Is the token supply fair? Do insiders hold a large percentage? Is there a clear vesting schedule?
  • Utility: How is the token used within the ecosystem? Is it necessary? Does it create value for holders?
  • Inflation: Understand the token’s emission schedule. Is it inflationary or deflationary?
  • Quick Calculation: Use tools like CoinGecko or CoinMarketCap to analyze token distribution and supply.
• Technology & Code:
  • GitHub: Check for active development, code commits, and open-source repositories.
  • Smart Contracts: Look for audits by reputable firms (e.g., Certik).
  • Quick Analysis: Does the code appear well-structured and maintained? If a contract audit is missing or the code is inactive, be wary.
• Partnerships & Backers:
  • Legitimate Partners: Are the partnerships with reputable companies or projects?
  • VCs: Are they backed by well-known venture capital firms?
  • Verification: Search for news articles and announcements about partnerships.
  • Quick Judgement: Strong partners and VCs can lend credibility.
• Roadmap & Milestones:
  • Realistic Progress: Does the team meet its goals? Are there significant delays or missed deadlines?
  • Activity: Is there consistent communication from the team on progress and development?
  • Red Flags: Repeatedly missed deadlines, vague updates, or lack of progress.
• Comparative Analysis:
  • Competitors: Are there similar projects? How does this project compare in terms of technology, team, and tokenomics?
  • Quick Research: Identify key competitors and perform a quick comparison.

3. Risk Assessment (Constant Monitoring):

• Market Conditions: Understand the current market sentiment and how it might affect the project’s price.
• Regulatory Risks: Be aware of potential regulatory changes that could impact the project or the industry.
• Security Risks: Is the project vulnerable to hacks or exploits?
• Personal Risk Tolerance: How much are you comfortable potentially losing?

Tools for Speed & Efficiency:

• CoinGecko/CoinMarketCap: Quick token data, market charts, and basic analysis.
• Twitter/Discord/Telegram: Community sentiment, project updates, and team interactions.
• GitHub: Code repositories and development activity.
• Etherscan/Block Explorers: Transaction history, smart contract verification.
• Messari: In-depth research reports and data analysis.
• Token Sniffer: Quick checks for potential rug pulls.

Key Principles for Fast Due Diligence:

• Prioritize: Focus on the most crucial areas first: Team, Tokenomics, and Technology.
• Be Skeptical: Approach everything with a healthy dose of skepticism. Don’t believe everything you read.
• Trust Your Gut: If something feels off, trust your instinct.
• Don’t Rush: While speed is important, don’t skip essential steps.
• Diversify: Don’t put all your eggs in one basket.
• Start Small: Invest only what you can afford to lose.

Final Thoughts:

Performing fast and proper due diligence in crypto is challenging but essential. By prioritizing key areas, utilizing the right tools, and maintaining a healthy dose of skepticism, you can significantly improve your chances of making informed decisions and protecting your investments. Remember, this is not an exhaustive list, and continuous learning and refinement of your research process is crucial for success in the crypto space. Stay vigilant and always do your own research (DYOR).