Ways To Know Whether The Cryptocurrency You’re About Investing In Will Crash

Home » Ways To Know Whether The Cryptocurrency You’re About Investing In Will Crash

With the hype surrounding cryptocurrency, it was just a matter of time before it draws the attention of academics to the revolutionary technology. Researchers from the University of Vaasa situated in Finland. They took a critical look at some cryptocurrencies and their chances of defaulting.

This kind of research is very important because since the inception of Bitcoin, we’ve had more than 5,000 other cryptocurrency projects with different levels of success. Just like in other fields too, only a few of those projects have succeeded. Last year alone, more than 743 cryptocoins failed trapping billions of users funds with them. With such a high number of defaults, it’s sure to harm investor confidence and credibility of the cryptocurrency industry.

Statistics show that from the cryptocurrencies that were launched before 2014, about 6 of them defaulted out of 10 before 2018 ended. The results are scarier when you increase the time frame from 2009 to 2019. The default rate is as high as 8 out of 10 cryptocurrency projects.

Academics have gathered together to do what they know how to do best by creating a model with indicators to determine how well a cryptocurrency project will perform. Here are a list of indicators that will help you make an informed decision.

It Is Very Important To Have A Strong Day One

The performance of a crypto on its first day will determine to a certain extent if it will default in the next four years or not. Taking a critical look at the coins that did well, they all had one thing in common, they had a strong day one. Another thing that was noticed is that they also had higher volatility when it was traded on the first day, the impact significantly reversed after some time.
In summary, a coin that does well on its first day and is relatively stable over the course of a month is likely to be successful in the following years.

High Pre Mining Is Not A Good Sign

Pre-mining means the ability for a developer to keep a large portion of the crypto for themselves. When you notice this, it’s definitely not a good sign. Research data shows that although pre mining itself is not bad, a high level of it shows that the coin’s developers just want to make money off it instead of setting the project up for success in the long term.

Founder Anonymity

Most coin developers are towing the path that Satoshi Nakamoto, Bitcoin founder followed. They have all chosen to remain anonymous. Research data shows that 79% of cryptocurrencies that defaulted have anonymous creators.

Lower Rewards

Research also shows that cryptocoins last longer when they have less rewards per block. This happens both in relative and absolute terms with respect to their aggregate coins. Consequently, cryptocoins with limited and controlled supply are likely to stand the test of time.
This research is a step in the right direction to help study cryptocurrencies in general better. According to the researchers, the study is just a tip of the iceberg for cryptocurrencies. The dataset used in this research does not include proof of stake, it only includes proof of work for cryptocurrencies.

Other things that the project didn’t take into consideration is the time frame as it was limited to just 4 years alone. Some variables that would have been useful to determine a crypto’s success were not consistently available throughout the dataset which could not be thoroughly utilized.

One important thing to note when analyzing a new cryptocurrency is that if the cryptocurrency is new, the odds are definitely not in your favour. If the project is promising, look out for a strong performance on the first day, a calm first month, low pre mining activities, and fairly large rewards.

Source: https://www.forbes.com/sites/simonmoore/2019/05/28/how-to-tell-if-your-cryptocurrency-will-go-bust/#1e9206623364

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