Risks of investing in crypto projects and their minimisation

Risks of investing in new crypto projects and how to minimise them

According to the U.S. National Venture Capital Association, only 10-15% of startups that receive early-stage funding make it to market. The vast majority of projects remain at the level of unrealized ideas and buried team ambitions. Investors suffer accordingly.

Still, they know what they are getting into. The risks of investing in early stage crypto projects are as high as the potential rewards. Investing in a new startup gives you the opportunity to buy a stake in a promising company for pennies on the dollar. Moreover, if all goes well, the project will grow in value tens or hundreds of times, and with it, the profit of investors.

By the way, to measure the return on investment in cryptocurrencies or blockchain technologies, the word “Xs” is often used. This is an indicator of the multiplication of the increase in the initial capital as a result of investment activity. For example, invested a certain amount of money, received 50-fold profit — made x50 (or fifty Xs). Yield “in Xs” is a perfectly applicable indicator when investing in successful crypto-projects at the early stage. Moreover, these are mostly short-term investments (up to one year). So, early investment is a very profitable tool. It brings returns many times higher than investments in mature and stable projects. As a result, early investors consciously take higher risks in anticipation of impressive returns.

Let’s take a look at what risks should be considered when planning investment strategies in crypto and blockchain projects and how to minimize them.

Basic Risks of Investing in Crypto Projects

Investing in crypto startups involves risks inherent to the entire digital asset segment:

Cryptocurrency Market Volatility

The cryptocurrency market is known for its volatility. Cryptocurrency prices are characterized by volatility and are subject to significant fluctuations. The overall volatility of crypto projects cannot help but affect the valuation of early-stage startups and the return on investment.

Cryptocurrency Fraud

Fraudsters skillfully manipulate human weaknesses and actively apply their skills in the cryptocurrency segment, which is known for great opportunities for fast and dizzying returns. This can be the creation of artificial hype around a cryptocurrency by buying it up and then immediately draining it and devaluing it (pump-and-dump scheme). Or a good old-fashioned pyramid scheme (Ponzi scheme), where early investors “profit” at the expense of newcomers’ investments. Phishing and simple embezzlement are also rampant, where money is transferred in exchange for empty assurances of a profitable investment. Fraud prevention is therefore an issue that requires close attention from the entire crypto industry.

Regulatory Risks of Cryptocurrencies

Regulatory changes and the crypto industry have been in constant interaction since the inception of cryptocurrencies. Governments and international organizations are developing optimal methods and mechanisms to integrate the world of digital assets into the global economic systеm. Currently, global cryptocurrency legislation is not fully developed and is still in the process of approval and testing. And the market expects that proper regulation will optimize the risk management of crypto investments by implementing mechanisms to protect cryptocurrency investments and strictly respect investors’ rights.

Key requirements for projects in the early stages of investment

After all the risks of ICOs were exposed in 2017-2018, and the segment started testing STOs and IDOs, the market was far from immediately renewing interest in crypto startups. According to the analytics company Satis Group, during this hype, 78% of crypto projects entered the market with a flashy offering, while being completely unprofitable. In other words, they simply misled investors. Significant financial losses made investors more demanding of new projects in the future. And startups now have to work hard to earn the image of a reliable crypto project and get a positive funding decision. What investors are demanding today:

A top-notch team with successfully implemented profile cases. Information about team members and their achievements should be publicly available.

A clear vision of the concept and the goals that are detailed in a white paper. A plan to achieve the set goals described in the roadmap with a record of the current status of the project (level of fulfillment of plan items).

Portrait of the product’s target audience and competitive advantages.

Technical presentation (prototype or MVP).

Tokenomics, according to which the issuance, distribution and management of the token circulation will take place. It should take into account deflation mechanisms as a preventive defense against a fall in the value of the asset and all the basic parameters commonly used in the risk assessment of cryptocurrencies.

Community. A credible demonstration that users are responding positively to the new product is required. Live discussion of the crypto project on Discord or Telegram, potential willingness of the community to interact with the product during the testing phase will be a significant plus when considering funding.

The team needs to be concise, clear and accessible, clearly expressing the essence of the project and its key components. This will be a positive signal to the investor that the startup team has thoroughly developed its product and is fully prepared to finalize and launch it.

Strategies for Minimizing Risk in Early Stage Investments

The main risk of early-stage investing is the high probability that the project will not survive and will cease to exist before the return of investment and profit.

On this basis, it is worth applying risk management strategies that either compensate for financial losses in case of negative results, or predetermine the choice of a promising and viable crypto project.

Diversification of the portfolio of cryptoprojects will allow you not to lose all your money. Regardless of the degree of passion for the idea, do not invest all the funds in one startup. And try to invest not all at once, but in stages.

A deep and thorough analysis of crypto projects will give you the opportunity to make an informed decision. In the early stages, it is quite difficult to assess the real value and potential of a startup, so require the team to provide detailed information about the product, business model and competitive environment.

Analysis of the current situation and forecasts of the crypto market by leading industry experts will orient you in the current trends. You will be able to determine whether the niche in which your startup’s ideas will be realized is a growth point. Whether the technological or marketing innovation developed by the team will be both innovative and expected.

Most experienced investors and experts agree that the key success factor for a young startup is the team and hitting the trend. A professional and well-coordinated team will be able to quickly and efficiently realize an innovative product and lead the project to success.

Market situation and future of crypto investments in young projects

The current market situation shows that startups have survived the venture capital winter and are now on the rise.

In 2023, the volume of investments in crypto projects fell to a record low (in the first half of the year, startups raised 76% less capital than in the same period of 2022) — $1.8 billion. Then the number of deals fell by more than half.

As for the current year, crypto startups have already managed to raise $2.4 billion in the first quarter alone (which is 40% more than in Q4 2023). According to PitchBook, more than 500 deals were closed by venture capital funds. These numbers broke a two-year downtrend, so it’s safe to say that crypto startup investors are in a positive mood.

Infrastructure projects led the way in terms of capital raised (EigenLayer’s restacking protocol received $100 million in funding, crypto startup Zama — $73 million). On average, early-stage projects received $5 million in funding, up 25% from last year. According to analysts, the trend of increasing investment volumes and rates will continue this year.

By the way, Ukrainian startup OpenDelta announced this spring that it had raised $2.15 million in a pre-seed round. The funding came from 6th Man Ventures, Boosty Venture Studio and business angels. The team is developing a revenue-generating synthetic USDO dollar based on the Runes protocol, a native stablecoin for the bitcoin network. Bitcoins will serve as collateral for the issuance of new USDO tokens, and value storage and income accrual at the funding rate will be in dollars. The peculiarity of the project is the possibility of over-the-counter settlement. The use of the new instrument will allow companies to minimize risks due to the high security of bitcoin, while maintaining access to the most liquid derivatives exchanges.

In conclusion

In addition to the risks described above, the following should also be considered:

Unpredictability of market development. Blockchain technology startups are launched in a dynamic environment. We also see active development of parallel technologies such as artificial intelligence and quantum computing. It is unclear how they will interact with the crypto segment: whether they will conflict or, on the contrary, continue to integrate with each other. In addition, the market is awaiting new regulations, and crypto investments will fall under their influence one way or another.

Funding risks. A project’s funding needs may change during the launch process. And additional rounds of funding may be needed to successfully launch the product.

Time risks. A young startup may not meet planned deadlines. As a result, the receipt of revenue by investors may be delayed indefinitely.

To sum up, in order to minimize the risks of investing in new crypto projects, it is necessary to conduct a thorough study of the investment object and the market situation, using all available methods of technical and fundamental analysis. It is categorically impossible to rely on individual recommendations and momentary decisions. Cryptocurrency itself is a high-risk instrument of income generation, and the lack of a balanced approach increases the risk of fraud, scams and, as a result, may cause financial losses.

Your own multilateral analysis will provide a deep understanding of your chosen crypto project and protect you from possible disappointments.

Try to keep abreast of market events. Legislative or technological innovations may affect the project you are considering. In any case, an investor who researches the market and its trends has undeniable advantages over others.

Thank you for your attention. Stay informed, take a comprehensive approach, diversify and make only profitable investments!

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