Estimating a small cap ‘s chance of success is an enormously complicated task.
In fact, in the crypto world, there are no financial statements to analyze. There is no audit requirement as there is in the stock market. So it is very difficult to make decisions based on numbers.
In the stock market, the balance sheet is a crucial element in figuring out how much of the budget is allocated to research and how much is allocated to repaying debts. How much debt does a company have, how many assets does it have, and how many liabilities?
Apple’s income statement published by Yahoo Finance
Suppose a company does not have its financial statement in order or has losses in the last three quarters. In that case, it is unlikely to have a good performance unless those losses are attributable to significant investments (think Amazon in its early years).
Unfortunately, in the crypto world, it is impossible to know the project’s conditions as clearly as it is in the stock market since there is no balance sheet. This is especially true for a small cap project.
The government will probably solve this problem in the future because this very absence of transparency is the cause of many scams.
To analyze a small crypto cap, you must look at four elements.
1) The community (On Telegram or Discord)
The most important thing is to check whether the community is active. Since we cannot analyze the financial statement, we need to know if there is an investor base. In cryptocurrencies, community support is critical.
You need to check when the last post was made and how many posts were made in the previous few days. The number of posts is more important than the number of users. It would be best if you got an idea of how many users are participating in the group. The amount and frequency of the messages are the keys. Less than ten posts per day are worrisome.
The community is full of bots
If most users in the community do not have profile photos, they are probably bots.
In the GIF below, a group of scammers copied one of the best projects I have invested in (Game of Dragons). They created a fake parallel group to scam people. The members are all bots, as they do not have profile photos. The real Game of Dragons telegram group, where I am also present, is at this link: https://t.me/GameOfDragons (This is legit)
2) Customer care
Ask a few questions in the community to test the team’s responsiveness. Indeed responsiveness reveals much about the commitment the team is pouring into the project. A team that does not respond immediately indicates little commitment. Make sure the moderator answers your questions. Every small cap project should have an active customer care.
3) The idea of the small cap project
Is the project idea good, or is it a copy of other projects? Developing an original idea takes time and dedication. If the team has hatched a trivial concept, they probably have not put much effort and will not commit to the later stages of the project.
So evaluate the originality of the project. No one falls in love with a trivial project.
4) The effort put into the small cap project
If the team has already realized something, for example, a Minimal Viable Product (MVP), it is a good sign. Otherwise, they may never realize anything. If the team has accomplished something even before launching the token, it means it is very serious.
5) Budget
The team has a budget to implement the project. It is good to check the market wallet via BscScan or EtherScan and see if they have budget. If the team intends to conquer the world without budget, they are a bunch of deluded people who should not be trusted.
You can ask for the marketing wallet address directly in the telegram group. Anyway, this is an uncommon question. The project owners may not answer, considering the request weird or suspicious.
It is not necessary to ask. Just go to BscScan or EtherScan and look directly within the contract for the marketing wallet. It is normally specified and can be retrieved easily.
6) Whale group
The most ambitious projects do things right and establish a whale group. The whale group is a bunch of people who hold a large portion of the tokens (at least 1 percent of the entire market cap). These are the people most interested in the project’s success, so they are also the most trustworthy ( warning: paper hands are everywhere).
If the funders are smart, they can involve the whale group and use it as a base for shilling and maintaining the floor. Not all successful projects have a whale group, but this is an essential factor in assessing the project’s seriousness.
7) Github
The presence of the project on Github might indicate that there are developers on the team. This is an indicator that the project is serious. Teams that want to publish information about their project also use Gitbook (powered by Github). Perfect to start a new small cap project.
The Game of Dragons page on Gitbook with all the information about the project:
8) Small cap Project Life
If the small cap project is over two months old, it is unlikely to be a scam. Generally, the lifespan of a scam project is 1-month maximum.
Projects can fail even after 6 months, but not because they are scams, for other reasons (the team breaks up, they run out of funds, the market becomes bearish…).
Conclusion
You have to be careful when investing in a small cap. If you analyze correctly, the chances of gain are huge, but the risks are just as high.
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