As someone who is still in the beginning phase of understanding Defi, The 5 factors I consider when evaluating a cryptocurrency investment in my view are as follows,
The first factor to consider is whether the cryptocurrency is primarily based on Ethereum. While Ethereum is a popular cryptocurrency, it is considered an “also ran” to Bitcoin and lacks the same market share and amount of “real money” stored via an exchange. This can result in a lack of liquidity for investors, and it may be more beneficial to be the exchange rather than the exchange user.
Secondly, I look at whether a cryptocurrency is part of the Distributed Finance (DeFi) space. While DeFi has the potential to provide many benefits, it also means that there is no centralized control to approach when problems need to be resolved. This lack of technical support can be a significant downside for investors who encounter issues.
Thirdly, it is important to consider whether a cryptocurrency is largely unregulated by the government. Since there are no central points of control for a regulator to approach, it can be challenging for government agencies to police illegal activities that occur within these markets. As a result, investors who enter these markets should be aware that there may be little to no legal recourse for any illegal activities they may face.
Fourthly, it is important to consider whether any individual or group controls more than 22.5% of a given DeFi market. This is because, in the same way that controlling more than 22.5% of Bitcoin can allow one to manipulate the exchange rate between Bitcoin and dollars, controlling a significant portion of a DeFi market can allow for value manipulation. This has already occurred several times with Bitcoin in the past.
Finally, it is important to consider the security precautions of the exchanges that offer the cryptocurrency. Unfortunately, many of the exchange security precautions are not as robust as they should be. For example, rate limiting is often inadequate, which means that market manipulation can be extremely profitable in terms of arbitrage. This lack of consequences for illegal activity can create a significant incentive for investors to engage in such practices, making it important for investors to be vigilant and cautious when investing in these markets.