5 metrics to monitor before investing in crypto during a bear market


Cryptocurrency bear markets destroy portfolio value and they have a dangerous tendency to drag on for longer than anyone expects. Fortunately, one of the silver linings of market-wide pullbacks is that it gives investors time to re-focus and spend time researching projects that could thrive when the trend turns bullish again.

Here’s five areas to focus on when deciding whether to invest in a crypto project during a bear market.

Is there a use case?

The cryptocurrency sector has no shortage of flashy promises and gimmicky protocols, 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 if a token should continue to be held, one of the main questions to ask is “Why does this project exist?”

If there is not a simple answer to that question or the solutions offered by the protocol don’t really solve a pressing problem, there is a good chance it won’t gain the adoption it needs long term to survive.

Identify a competitive advantage

In the cases where a viable use case is present, it’s 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 more of a redundant protocol that doesn’t really bring anything new to the table?

A good example of unnecessary redundancy is the oracle sector of the market, which has seen a handful of protocols launched over the past three years. Despite the growing number of options, the oldest and most widely integrated oracle solution is Chainlink (LINK) and it remains the strongest competitor in the field.

Does the protocol generate revenue, and how?

“If you build it, they will come,” is a cliche expression tossed around in tech circles, but it doesn’t always translate into real-world adoption in the cryptocurrency sector.

Operating a blockchain protocol takes time and money, meaning that only protocols with revenue or sufficient funding will be able to survive a bear market.

Identifying whether a project is profitable and where the revenue comes from can help guide investors who are interested in buying decentralized finance (DeFi) tokens.

Projects with the highest protocol revenue. Source: Token Terminal

If a project shows limited activity and revenue, it may be a good time to start evaluating whether it’s undervalued or a investment that should be avoided.

Are there cash reserves?

Every startup is meant to have a war chest, treasury or runway as prior to investing, it’s important to identify whether or not the project has sufficient funds to survive downtrends, especially if providing yield on locked assets is the primary incentive for attracting liquidity.

As mentioned earlier, running a blockchain protocol isn’t cheap, and the majority of the protocols out there might not be liquid enough to survive a lengthy bear market.

Ideally, a DeFi-style undertaking ought to have a big treasury containing a wide range of belongings like Bitcoin (BTC), Ether (ETH) and extra dependable stablecoins like USD Coin (USDC) and Tether (USDT).

Having a well-funded and diversified treasury that may be pulled from throughout robust occasions is essential and as $trawberry Sith suggests, initiatives have to be taught when to take revenue, and never depart a majority of the protocol treasury in Ether or the platform’s native token.

Associated: Main crypto companies reportedly lower as much as 10% of employees amid bear market

Are roadmap deadlines stored and met?

Whereas previous efficiency shouldn’t be essentially an indicator of future outcomes, a undertaking’s historical past of following its roadmap and assembly necessary deadlines can provide invaluable perception into whether or not it’s ready to endure robust occasions.

Along with conserving monitor of roadmap milestones, websites like CryptoMiso and GitHub will help buyers peer behind the scenes to see the frequency of improvement and developer exercise for a protocol.

If a group is displaying little to no indicators of exercise as roadmap deadlines come and go, it may be time to think about the chance {that a} gradual rug pull is happening and that it might be time to get out earlier than additional losses are realized.

This text doesn’t include funding recommendation or suggestions. Each funding and buying and selling transfer includes danger, and readers ought to conduct their very own analysis when making a call.

The views, ideas and opinions expressed listed here are the creator’s alone and don’t essentially replicate or characterize the views and opinions of Cointelegraph.