Your favourite crypto project is probably going to die in the next few months or years, are you prepared for that?
To account for this in your research and analysis, you need to consider how the following factors affect the project(s) you’re interested in.
In this post, we’ll discuss the various things that can kill a cryptocurrency project, and how you can protect yourself or manage the associated risks.
8 things that can kill a crypto project
1. Exploits
Aside from the reputational damage that a project sufferers as a result of hacks or exploits, it can also suffer irrecoverable loss in the value of its token.
Some cryptocurrencies like FARM (will) never return to their all-time high (ATH) value again after a hack or exploit.
And if you bought such tokens at close to their ATH price, you’ll never recover from the loss.
Furthermore, users tend to lose confidence in the security of a project that’s been hacked or exploited which makes it hard for them to gain further traction or acquire new users.
How can you manage the risk of hacks and exploits?
Though some projects try to reimburse their users who lose money due to hacks or exploits of their platform, you can’t always count on this.
Furthermore, you may never get the full amount you lost on these platforms.
However, there’re a few things you can do to manage this risk and protect your cryptocurrency investment.
- Diversification: Investing in a variety of different cryptocurrencies can help spread out the risk and reduce the impact of a hack or exploit on a single project.
- Research: You need to do thorough research on the security measures of a cryptocurrency project and how it handled any previous security incidents. This will give you an idea of how safe the platform is and what to expect if an exploit should occur.
- Cold Storage: Storing cryptocurrency in a cold wallet, rather than a hot wallet connected to the internet, can reduce the risk of funds being stolen in a hack.
- Stay informed: Staying up-to-date on the latest security news and developments related to the projects that you have invested in can help you quickly respond to potential threats.
- Use reputable platforms: Use only the major reputable platforms or protocols to be on the much safer side. Do not connect your wallet to some random new and shining DeFi protocol because they promise high returns and some easy money.
However, you must remember that no platform is completely secure or impervious to hacks and exploits.
2. Lack of runway
Cryptocurrency projects require funding to continue building and growing, and if they run out of money, they may not be able to continue operations.
Furthermore, some crypto projects are stalling due to poor or a total lack of funding and this will affect how fast you ROI on your investment.
To manage this risk, you can choose to invest mostly in well-funded projects and allocate only a small portion of your portfolio to promising projects with little to no funding.
3. Lack of revenue
Without a sustainable revenue model, any cryptocurrency project is a walking corpse and you must never invest in them except if you want to gamble.
A project that’s not generating revenue is literally unsustainable and probably a Ponzi scheme and can shut down at any time.
You want to avoid investing in such projects.
4. The team abandons it
The team is the single most important factor that determines the success or failure of a cryptocurrency project. A good team can make any project successful.
However, some get lazy, lose interest, or get too frustrated along the way and abandoned their projects.
Thus, causing the project to fail and leaving investors holding heavy bags of their worthless shitcoin.
It’s hard to tell whether a project’s team will later abandon it or not but you can see the level of passion and commitment they have for the project from what they do and how they communicate.
Is the team visibly passionate about and committed to the success of the project? If not, that’s a red flag right there.
5. Excessive token inflation
Token inflation is a double-edged sword. It’s used to attract users or liquidity to a project and it also causes the price to dump as investors harvest and sell their rewards.
To avoid causing the price of the token to fall irrecoverably, inflation should be reasonable and controlled to align with the sustainability and growth of the project.
High inflation discourages new investors from buying the token as it’s sure to dilute their returns and even cause them to lose money in the long run.
Be careful with projects with excessive inflation as they’re a poor long-term investment.
6. Treasury mismanagement
Financial mismanagement can lead to a shortage of funds and the eventual failure of a cryptocurrency project.
Some project developers are not disciplined with their spending while others simply embezzle project development funds which leave them with nothing or insufficient funding to support further development.
This can stall growth and undermine investors’ confidence in the project and if left unchecked, cause it to eventually fail.
7. Out-competed
The cryptocurrency market is highly competitive and a project can quickly become obsolete if they’re unable to innovate and keep up with the competition.
Make sure that the project you’re interested in is constantly innovating and developing new features that provide more value to investors.
For example, BurgerSwap was the first DEX on BSC but has lost almost all relevance due to the success of PancakeSwap, Biswap, and other more innovative projects.
8. Regulation
In 2020, the United States Securities and Exchange Commission (SEC) terminated the Telegram Open Network token (GRAM) sale because it considers it unregistered security.
Though Telegram disputed the allegations, it ultimately settled with the SEC by agreeing to pay an $18.5 million fine and returning the majority of the funds raised from U.S. investors in the token sale.
This is a classic example of how regulations can kill a cryptocurrency project even before it gets the chance to live.
Furthermore, some projects that are already operating will eventually be considered unregistered securities and ordered to comply with appropriate laws or risk being shut down by regulators.
An example of this is the ongoing legal battle between the SEC and Ripple over whether XRP is a security or not.
Globally, regulation is still unclear over the categorisation of cryptocurrencies and it’s hard to tell what may be considered a security or not.
However, you can follow the appropriate laws being developed within and outside your jurisdiction to keep yourself informed on the status of the projects you’re interested in.
Conclusion
In summary, a crypto project can fail due to various factors, including exploits, lack of funding and revenue, team abandonment, excessive token inflation, treasury mismanagement, being out-competed, etc.
To mitigate the associated risks, you can diversify your investments, do thorough research, store your cryptocurrency in cold storage, stay informed, and use reputable platforms.
Additionally, investing in well-funded projects, avoiding projects without a sustainable revenue model, and monitoring the level of passion and commitment from the team can help keep you safe.
Earn BUSD daily just by holding CST in your wallet. Click HERE for details.