Bear markets in cryptocurrency can destroy portfolio value and have a tendency to drag out for longer than anyone anticipates. One of the positive aspects of market-wide pullbacks, however, is that investors have time to focus and research projects that might be able to thrive when the trend turns bullish.
These are the five key areas to consider when investing in crypto projects during bear markets.
Is there a case for it?
There are many flashy promises in the cryptocurrency industry, but only a few projects have actually delivered something that has utility and demand.
When it comes to deciding if a token should be continued to be held, one key question to ask is “Why did this project exist?”
There is a high chance that the protocol won’t be adopted if there isn’t a clear answer or it doesn’t solve the pressing problem.
Find a competitive advantage
It is important to compare the protocol with other projects solving the same problem in cases where there is a viable use case.
Is it simpler or better than the other solutions? Or is it more redundant and doesn’t really offer anything new?
The market’s oracle sector is a good example of redundancy. It has seen only a few protocols launch in the last three years. Despite all the options available, Chainlink (LINK), the oldest and most integrated oracle solution, is still the best and most popular.
Is the protocol generating revenue?
Although the cliche phrase “If you build it they will come” is popular in tech circles, it doesn’t always translate to real-world adoption in cryptocurrency.
It takes time and money to operate a blockchain protocol. This means that only protocols with sufficient revenue or funding will be able survive a bearish market.
Investors who are interested in DeFi tokens can identify whether the project is financially viable and where the revenue is coming from.
The highest revenue projects Source: Token Terminal
It’s a good idea to evaluate if a project is undervalued or should be avoided if it shows little activity and generates very little revenue.
Are there cash reserves?
Every startup should have a runway, war chest, or treasury. Before investing, it is important to determine if the project has enough funds to survive downtrends. This is especially true if the primary incentive to attract liquidity is yielding locked assets.
As we have already mentioned, it is expensive to run a blockchain protocol. Additionally, many protocols are not liquid enough for a long bear market.
To properly diversify and hedge their war chests, every NFT project must hire a crypto financial manager/treasurer. Not just to keep all of their ETH in ETH. Projects must also know how to make profit.
— $trawberry Sith, @StrawberrySith, May 10, 2022
A DeFi-style project should contain a large treasury that contains a range of assets such as Bitcoin (BTC), Ether(ETH), and more reliable stablecoins such as USD Coin (USDC), and Tether (USDT).
It is essential to have a well-funded, diverse treasury that you can pull from during touch times. $trawberry Sith suggests that projects should learn when to profit and not leave most of the protocol’s treasury in Ether.
Related: Major crypto companies reportedly reduce staff by up to 10% in bear market
Reroad deadlines met and kept?
Although past performance does not always indicate future results, the history of a project following its plan and meeting deadlines can provide valuable information about whether or not it is ready to handle difficult times.
Sites like CryptoMiso or GitHub allow investors to look behind the curtain and see the frequency and developer activity of a protocol.
It might be time for a team to stop displaying activity when roadmap deadlines approach.
This article is not intended to provide investment advice. Every trade and investment involves risk. Readers should do their research before making any decision.
These views, thoughts, and opinions are solely the author’s and do not necessarily reflect the views or opinions of Cointelegraph.
Eileen Wilson –Technology and Energy
My Name is Eileen Wilson with more than 5 years of experience in the Stock market industry, I am energetic about Technology news, started my career as an author then, later climbing my way up towards success into senior positions. I can consider myself as the backbone behind the success and growth of topmagazinewire.com with a dream to expand the reach out of the industry on a global scale. I am also a contributor and an editor of the Technology and Energy category. I experienced a critical analysis of companies and extracted the most noteworthy information for our vibrant investor network.