Cryptocurrency bear markets destroy portfolio value and they have a dangerous tendency to drag on for longer than one would expect. Fortunately, one of the silver linings of a market-wide pullback is that it gives investors time to refocus and research projects that could thrive if the trend picks up again.
Here are five areas to focus on when deciding to invest in a crypto project during a bear market.
Is there a use case?
There is no shortage of flashy promises and gimmicky protocols in the cryptocurrency sector, but when it comes down to it there are only a handful of projects that have delivered a product that has demand and utility.
When it comes down to determining whether the token should continue, one of the main questions to ask is “why does this project exist?”
If there’s no simple answer to that question or the solutions offered by the protocol don’t really address a serious problem, there’s a good chance it doesn’t need to survive long enough to be adopted.
Identify Competitive Advantage
In cases where a viable use case exists, it is important to consider how the protocol compares against other projects that offer solutions to the same problem.
Does it offer a better or simpler solution than its competitors, or is it a redundant protocol that doesn’t really bring anything new to the table?
A good example of redundant redundancy is the Oracle sector of the market, which has launched a handful of protocols over the past three years. Despite the growing number of alternatives, Chainlink (LINK) is the oldest and most widely integrated Oracle solution and remains the strongest competitor in the space.
Does the protocol generate revenue, and how?
“If you build it, they will come,” is a clichéd expression tossed around in tech circles, but it doesn’t always translate into real-world adoption in the cryptocurrency space.
Blockchain protocols take time and money to operate, which means that only protocols with revenue or sufficient funds will survive the bear market.
Identifying whether a project is profitable and where the revenue comes from can help guide investors interested in purchasing DeFi tokens.
If a project shows limited activity and revenue, this may be a good time to start evaluating whether it is undervalued or the investment should be avoided.
Are there cash reserves?
Every startup has a war chest, treasury or runway and before investing it is important to identify whether the project has enough funds to survive a downtrend, especially if providing a yield on locked assets to attract liquidity. is the primary incentive.
As mentioned earlier, running a blockchain protocol is not cheap, and most protocols may not be liquid enough to survive a prolonged bear market.
Every successful NFT project should bring in a crypto financial manager/treasurer to properly diversify/hedge in their war chest, not just keep everything in ETH.
A project also needs to know how to reap the benefits.
— $StrawberrySith (@strawberrySith) 10 May 2022
Ideally, a DeFi-style project should have a large treasury containing a variety of assets such as Bitcoin (BTC), Ether (ETH) and more reliable stablecoins such as USD Coin (USDC) and Tether (USDT).
Having a well-funded and diverse treasury that can be pulled in during touch time is critical and as suggested by $traberySith, projects need to know when to take profits, and most protocols Treasuries must not be left in Ether or the platform’s native token. ,
related: Major crypto firms reportedly cut up to 10% of staff amid bear market
Is the roadmap set and met?
While past performance is not necessarily an indicator of future results, a project’s history of following a roadmap and meeting important deadlines can provide valuable insight into whether it is prepared to endure tough times.
In addition to tracking roadmap milestones, sites like Cryptomiso and GitHub can help investors peer behind the scenes to see the frequency of development and developer activity for a protocol.
If a team is showing little or no signs of activity as the roadmap deadline comes and goes, it may be time to consider the possibility that the slow rugs are pulling up and realizing the damage ahead. It might be time to get out before it happens.
This article does not contain investment advice or recommendations. Every investment and trading move involves risk, and readers should do their own research when making a decision.
The views, opinions and opinions expressed here are those of the author alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.
