For many investors seeking portfolio diversification and more opportunities for alpha generation, investing in cryptocurrency is an attractive option. It's also a high-risk one. Since crypto assets are highly volatile and vulnerable to fraud and scams, due diligence is crucial before investing in a new project.
Due diligence for institutional crypto investments is a detailed process of evaluating everything about a crypto project, from its underlying technology to its on-chain data. This strategy helps institutional investors determine whether a crypto project is viable and worth the risk.
A Digital Asset Investment Framework
Take these steps to decide whether a crypto project is a worthwhile investment:
1. Perform a Crypto Project Evaluation
Evaluating a crypto project involves diving deep into its technology, including reading its white paper — which should explain how its protocol works — and assessing its development team. A project should provide details on specific team members' experience with developing protocols and apps that run on blockchains. If it doesn't provide information on a team's history, the project's roadmap, and whether the team is hitting milestones, which builds trust with investors, this is a red flag.
Investors must also analyze the cryptocurrency's tokenomics, or its supply, demand, and token distribution methods. For example, consider who the majority of token holders are. If they're mostly whales, there could be a risk of price manipulation. Looking at the number of circulating tokens against the total supply, along with adoption metrics, can also bring understanding about a project's tokenomics health, competitive landscape, and target market.
2. Apply Blockchain Investment Criteria
There are thousands of active cryptocurrencies in the world. To efficiently vet and select a crypto project, develop criteria to narrow the options. These standards should be tailored to your institution's risk tolerance. Criteria might include:
- On-chain data: Blockchain data like transaction histories, active addresses, and Network Value to Transaction (NVT) are fundamental in evaluating a network's health.
- Liquidity data: Consider order book depth, exchange flows, and trading volumes. Liquidity data can help you determine how easily a crypto asset can be converted into another asset without influencing price too much.
- Volatility metrics: Establish methods to monitor and quantify volatility, like metrics to measure standard deviation and beta.
3. Conduct Operational Due Diligence
Create a process to vet your institution's digital asset infrastructure to ensure it can manage assets securely. This involves auditing the security of your trading platforms and the systems that store wallets. If you use third-party custodians for wallet management, confirm they're vetted for security and financial stability.
Consider your partnerships with data providers, as well. Data providers should be SOC 2 Type II compliant. They should also continually monitor their security controls to ensure compliance with industry regulations.
Why Trust Amberdata for Institutional Due Diligence?
Amberdata provides reliable digital asset data and analytics to meet the risk management needs of institutional investors. Our robust data infrastructure empowers investors to deep-dive into crypto projects with actionable real-time and historic market data as well as granular on-chain intelligence. With us, you can obtain all the data you need for confident due diligence from a single trusted source.
Simplify Risk Management With Amberdata
Investing in a new crypto project can bring advantages like portfolio diversification and growth potential. As a highly volatile market, crypto investing must be paired with reliable data to drive decisions and mitigate risks. This is where Amberdata can help.
Partner with Amberdata to invest in a new asset class with greater visibility and peace of mind. Request a demo and learn more about our risk and portfolio management solutions.
