All investments in cryptocurrency market entities come with a high degree of security risk. Accordingly, there is also a high probability of making considerable profits.
For example, the EOS token price hovered around $0.30 on the first day of its public sale. A few days later, it traded at $8. This is a 26-times price increase in just 72 hours. However, such stellar performance also has a downside.
For instance, the price of the BCC token collapsed from $256 to just $19 in less than 24 hours. Essentially, the token demonstrated a fiftyfold drop in value in under a day.
Unfortunately, the overwhelming majority of cryptocurrencies from the 2017 to 2018 era, which were issued en-masse by countless ICOs, have dropped to the level of the ill-fated BCC token in terms of profitability or investment-worthiness.
The investors who managed to survive those troubling times and did not go bankrupt have since gained invaluable experience. Meanwhile, newcomers to the market are acting cautious and prefer not to repeat the mistakes of their forbearers.
Factors to consider
What are the factors one should examine to avoid making costly mistakes when investing in cryptocurrencies?
The determining fundamental analysis includes the visual appeal of the issuing project’s website, its application, the social networks that should be designed without any gross errors, and the availability of contact information.
In addition, the licenses and registrations, as well as the official addresses of the project, must be verifiable. Team members must be public figures or at least experts with appropriate backgrounds.
The project team is a crucial factor to consider. A project does not necessarily have to be a financial pyramid to fail. An unqualified team or insufficiently experienced employees will suffice.
Therefore, investors should always resort to social network cross-checking. In addition, they must rely on search engines when analyzing the experience of the people involved in these projects.
The importance of security audits
However, when a project inspires confidence from its outward appearance and nothing stands out like a sore thumb in its constituents, this does not mean that it is inherently safe to invest in.
Vulnerabilities in blockchain smart contracts that lie at the heart of the project’s mainframe are often the cause of financial losses.
For instance, in August of 2021 alone, the Popsicle Finance project lost $20 million. In addition, ApeRocket was bereaved of $1.26 million, and the gigantic Poly Network protocol almost saw $611 million vanish.
Basically, a project can have all the licenses and registrations, a professional team, a great idea, or even a working MVP but lose all of its funds due to a minor error in its base code.
That single vulnerability can also jeopardize the investments already made. Thus, the security of the project is the first thing investors should ascertain.
“Many cryptocurrency investors think that if a project is popular, then it is safe and proven by default. Unfortunately, this is not always so,” says Dmitry Mishunin, the CEO of HashEx, a blockchain security consulting firm.
Catching out vulnurabilities
In May, HashEx found critical vulnerabilities in the code of the popular SafeMoon project. This followed the swelling popularity of meme-coins.
The problems identified by the company could have potentially led to multimillion-dollar losses. According to the SafeMoon developers, they were aware of the problems. However, they did not have the opportunity to fix them. Meanwhile, they were reassuring their community members that the issues could be overcome.
At the time of writing, the vulnerabilities identified are not yet exploited by any hackers. However, after the end of the project’s audit, the growth of its capitalization ceased.
Since the publication of the audit results on May 25, the price of the project’s token dropped by more than 50%.
Audits conducted by experienced companies should be a starting point for making an investment decision when it comes to matters of project security.
How do security audits it work?
Every audit considers several key factors that are the bedrock for determining the security level of a project’s code.
The first is code analysis in automated or manual mode for penetration testing. This is to check how easy it is to hack a smart contract. Such checks strain the smart contract with various attacks like Reentrancy, Replay, Short Address, and others.
Next is performance validation of the code to see if it is slowed by any number of factors. This is followed by optimization via gas analysis and vulnerability or bug identification. This is a lengthy and meticulous process that requires scrutiny of every line of smart contract code.
The results of all audits are publicly available on the websites of the auditing companies that conducted them. This is to ensure that anyone willing can examine the findings and draw their own conclusions regarding the projects in question.
It is recommended that investors start their fundamental analysis by reading the blogs of the projects they want to invest in. Such materials can give invaluable insights into the true state of affairs in the project. They allow the investor to identify points of interest relating to the sales and purchases of native project tokens.
Auditing companies are far and few between. As a result, keeping tabs on the reports and updates they post is both a relatively simple and highly informative undertaking. It also pays off in the long run.
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