Problems in evaluating and selecting projects in the crypto world

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Crypto projects have the potential to change the business world.

They can challenge the existence of traditional centralized infrastructure by creating and building a decentralized database of distributed ledgers (Distributed Ledger Technology DLT) using blockchain technology. However, it is worth considering the problems that arise when making decisions about which cryptographic assets to observe and consider for future investment.

The first problem is the correct classification of new and existing crypto projects that arise in different cryptographic ecosystems and are subject to different legal jurisdictions. 

Different legal jurisdictions result in either a lack of regulation or a complete ban on the use of some blockchain network utilities.
(...) Sometimes the technology can self-regulate, and just as in the case of the Internet, there is a huge opportunity to create regulations that will help innovation (...). 

(...) However, the potential investor is already facing the problem of adapting regulations.

(...) Legislative and executive regulations are mandatory; they contain many implementation details that relate to the "old world," but should not be easily applied to the "new" (...)...

Another problem is the market itself.

The crypto market is very dynamic, and cryptocurrencies are considered to be high-risk assets due to their high volatility.
The arrival of crypto exchanges has created a whole ecosystem of services and a place for new participants, trying to provide liquidity, initiate new crypto projects, and support investors with new utilities.
While in the case of traditional assets where economic factors play a role in the pricing and shaping of their exchange rates, the crypto market breaks away from this pattern.
It is difficult to interpret the behavior of investors in a unambiguous way mainly due to two reasons: the technology is quite complex and opaque, and the fundamental value of cryptocurrencies is unclear.

James Dow and Sergio Ribeiro Da Costa Werlang suggest that although conditions of pessimism (aversion to ambiguity) and uncertainty about the fundamentals lead to zero trading/movement on financial markets, it does not necessarily apply to cryptocurrencies.
Vinogradov argues that the lack of trade is dependent not only on the degree of optimism and pessimism, which may vary, but also occurs only in a high risk environment (in the standard sense).
It shows that, although the fluctuations of cryptocurrencies exhibit high volatility, transaction volumes still remain significant. 
Caballero and Krishnamurthy indicate that when it comes to traditional asset markets, uncertainty leads to "flight to quality." If appropriately interpreted and applied to cryptocurrencies, it may also explain recently experienced collapses.
The crypto market is still young and cryptocurrencies are subject to larger fluctuations in exchange rates compared to stocks on major exchanges, although even the latter have recently shown high volatility. 

The cryptocurrency market is highly susceptible to manipulation, which is another problem.

One of the most common types is "information manipulation," also known as "fake news."
It can cause rapid increases or decreases, strongly manipulating the market, or be a source of euphorically accepted reactions of well-known, widely observed individuals.

A good example is Elon Musk, who needed only a few tweets on Twitter to spark the market with the information that Tesla will accept payments in BTC. "You can now buy a Tesla with Bitcoin."
After that, he knocked down (lifted) the price of Doge memecoin with more information: "Tesla will make some merch buyable with Doge and see how it goes."
At the end, after a few months, he stated that BTC was actually not ecological and a panic began on the stock exchanges.

The second most common type of manipulation can be related to so-called "whales," the big players with significant capital who significantly impact the price chart of a given crypto asset. 
Price manipulation is a very common practice in traditional stock market assets.

Social learning and reinforcement

As the cryptocurrency markets were created, the era of social media also developed.
This led to the creation of a strong social media culture, cryptocurrency advisors, speakers/influencers, and more experienced advisors on platforms such as Youtube/Tiktok/Instagram/Meta, as well as various crypto expos and events, both online and offline.

This has resulted in the creation of many channels where influencers "promote" investing into new projects or cryptocurrency.

Online searches quickly show that one can find at least one positive recommendation for at least one major coin, yet the merit behind such commentary needs to be verified.

Some recommendations come from more experienced and well-informed sources, but there are many that are completely speculative, poorly informed, and potentially misleading, as they omit key information for potential investors.

The methods for evaluating projects are also based on strongly subjective premises.
The euphoria from podcasts and accompanying FOMO (fear of missing out) often has little to do with the actual evaluation of projects or cryptocurrencies, but is a way to make money for those who promote by providing information that investors are looking for.

Unfortunately, the information does not have an agnostic (faith) or diagnostic (experiment) character, but will appear in later market movements.

It is difficult to assess a given asset in the information noise without reviewing many indicators, which is time-consuming and complicated.
FOMO seems to be especially intense in the cryptocurrency market.
Every day investors are faced with a large number of new projects or those that already have active cryptocurrencies.
These are accompanied by information, comments, predictions, and ratings.

If the price of the cryptocurrency they bought rises sharply, they may regret not making a larger investment, but if the cryptocurrency, which they previously considered (but didn't buy) goes up, they feel frustrated that they missed the opportunity.
Perhaps the most problematic of all is the situation where they see the market going up and feel compelled to be part of the action.
They buy cryptocurrency when it reaches a short-term peak, only to watch the price drop soon after.

FOMO also applies to selling decisions. 
When altcoins have rapidly risen in price, there is always the prospect of continued growth. 
Instead of taking profits, the person starts dreaming about what they could buy if the price increases, but in fact they are unprepared when the bull run ends and disoriented when the price drops significantly within one day. 

FOMO can distract us, unnecessarily wasting time gathering useless information that contributes nothing to our lives. Nowadays we are surrounded by so much data that it is impossible to process everything and draw the right conclusions on our own. Investment decisions based on predictions of future events are highly risky and prone to errors. Social media generally tends to exaggerate the excessive growth of project values on the market or sometimes the other way around, by undervaluing them."

The next problem in this area is fraudulent projects. 

"Scam project" creators use all sorts of social engineering techniques to persuade people to invest through emotions. These projects have no utility and they disappear as soon as they collect funds from investors.

A scam project is a new type of financial fraud using methods from conventional sales techniques and speculative instruments, and most importantly, intended or unintended security system loopholes.

This is a very serious problem in cryptography projects. The frequency of this phenomenon means that when evaluating cryptography projects, the greatest emphasis should be placed on its solution.

In addition to the above, there are many other risk-generating problems such as errors in smart contracts, creator incompetence, manipulation, incorrect use of oracles and incorrect economic model assumptions. Most of them can be identified by using the solutions described below.


1 Belcher, J. i Narula, N. (2018). Inne spojrzenie na kryptowaluty i regulacje.
2 Belcher, J. i Narula, N. (2018). Inne spojrzenie na kryptowaluty i regulacje.
3 Przybylski, A., Murayama, K., DeHaan, C. R., & Gladwell, V. (2013). Motivational, emotional, and behavioral correlates of fear of missing out. Computers in Human Behavior, 29(4), 1841–1848.

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