To avoid falling into the trap of scams, novice crypto traders should treat most tokens like stocks.

Some stocks are literally tokens off the blockchain, and some tokens are literally stocks on the blockchain. They both represent proportional ownership in a project or business. So what sets new crypto traders apart from new stock traders?

According to the United States Securities and Exchange Commission (SEC), an investment contract exists when money is invested in a joint venture with a reasonable expectation of profit through the efforts of others. Some coins and tokens pass the Howey test and are graded as securities.

Cryptocurrencies like Bitcoin

BTC
that serve primarily as a substitute for fiat currencies are considered commodities. In 2017, then-SEC Chairman Jay Clayton warned cryptocurrency exchanges that many of their products were likely securities and therefore required registration under federal securities laws.

It is a universally accepted principle that before committing funds to any market or asset, one must first study and understand it. What is not specified is the study approach, a full list of factors to consider and where to get the information.

Stocks are traded in mature markets that have been around for over 100 years, while crypto tokens are relatively new, having been around for just over a decade. There is a vast body of stock trading literature and best practices that has stood the test of time, while the crypto industry literature is a hunt for a rapidly changing environment full of innovation and growth.

To get started in the stock market, new investors frequently read books, take an online course, study stocks at a college or work as apprentices. There’s plenty of information to help you with the do’s and don’ts. Most novice cryptocurrency traders lack the proper structure to study and understand the world of blockchain before investing. This results in a trial-and-error learning approach in which many newbies to crypto make mistakes that novice stock traders do not make frequently.

I acknowledge that some institutions, authors, online creators, and exchanges have created blockchain-focused programs to help newcomers understand the scope and nature of cryptocurrency projects before investing. However, every two weeks, a new innovation in the blockchain world emerges, making previous educational content obsolete. It’s a good type of problem to have, but it does have some downsides.

Newcomers to the stock market will frequently study sectors, break down industries within sectors, assess the performance of those industries, and identify individual stocks with the best chance of outperforming their respective benchmarks.

The crypto market is maturing and various sectors and/or industries, such as privacy coins, DeFi (decentralized finance) tokens, exchange coins, NFTs (non-fungible tokens), metaverse tokens, fan tokens and stablecoins, quickly distinguish themselves. Before investing, new cryptocurrency traders should understand the scope and nature of these classifications.

The profitability of the business they are investing in is an important consideration for new stock traders. It is common knowledge that inexperienced crypto traders do not consider a centralized crypto project as a business and therefore overlook its profitability. For example, what is Decentraland

MANA
profitability? What value is created and how is it distributed to token holders? I may have an answer for Decentraland, but I can’t say the same for the vast majority of other coins.

The process of creating a crypto token is similar to that of registering a business or company. Its initial value is equal to the total net invested assets of the founder. The future value of the company is determined by the results of its operations and additional capital injections. This means that when a cryptocurrency founder creates a token, they create ownership blocks that they can sell or distribute to the community. The value of the token project immediately after the token launch is equal to the total value invested by the founder and new token owners.

If a token passes the Howey test, which means it involves people investing money in the token project, there is a joint enterprise, and there is a reasonable expectation of profit from the efforts of the token. other, it is considered a security and must be registered under securities laws.

If, after the initial token offering, the token founders take a large share of the total available tokens without contributing value, the value per token for new buyers will be less than the amount they purchased, which is probably a fraud. However, if the founders can back up their stipend with work done or proprietary assets contributed to the project, this cannot be considered fraud.

In my opinion, tokens should be treated the same as a new investor or angel investor would want to know the bottom line and earnings history of the company before investing. It would be appropriate to study what the crypto project does to generate value, quantify it, and speculate on the future growth of the project.

This approach would help new crypto traders avoid buying tokens designed to defraud them. Of course, there are other factors to consider, such as contract audits and the experience and background of the founders, but using the approach mentioned above would help filter many projects out of cryptography that frequently scam new investors.

I agree that not all registered businesses make or intend to make a profit. There are blockchain-based tokens whose purpose is not profit, just as there are charities, non-governmental organizations, and religious organizations, among others.

Tokens are generally divided into three types: utility tokens, asset or debt tokens, and payment tokens. Asset or debt tokens are often considered a stake in the same way as owning a stock. Utility tokens serve as a gateway to digital applications, services and ecosystems. Payment tokens serve as currency. A token can be a utility token, an asset token, or even a payment token.

When stock traders analyze a stock, they consider fundamental factors that can affect demand and supply for the stock, such as market share, competition, consumer trends, and daily user trends. assets. Newbie crypto investors should take a similar approach, considering a token’s market share, competition, and changes in the number of daily active users.

To sum up, considering a token’s business model, financial health, profitability, and user growth rate, this can go a long way in ensuring that novice token investors don’t fall for fraudulent projects. , as stock traders do.

About Troy McMiller

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