Top 4 reasons why a crypto will go bust

Not all cryptocurrencies are meant to last. According to a study by the University of Vaasa in Finland, more than 743 coins defaulted in 2018. We take a look at the top 4 reasons why a crypto will go bust and hopefully save you from losing money.

Default rate

There are more than 2 000 cryptocurrencies and only a small portion have actually succeeded. According to the report issued by the University in Finland, 6 out of 10 cryptos that were launched prior to 2014, defaulted by end of 2018. From 2009 to 2019, 8 out of 19 cryptos defaulted. It is important to remember that whilst there are thousands of cryptocurrencies, Bitcoin still represents half of the total market cap. Bitcoin is still going strong and has not been dethroned as the King of Cryptos. This is cause for celebration.

Please note that the study was based on Proof-of-Work cryptos and not Proof-of-Stake coins. The researcher also highlighted in the paper that it is not a definitive study in cryptos and that there are many variables that could determine the success of a crypto project. The probability of coins defaulting has been calculated over a period of 4 years.

Top 4 reasons why a crypto will go bust

Reason 1 – Anonymity of the project’s founder

Whilst the true identity of Bitcoin founder Satoshi Nakamoto may have worked for Bitcoin, it certainly does not work for other cryptos. According to the study, 58% of crypto founders remain anonymous and 79% of crypto project that default has anonymous founders. Best to check out who the team behind a project is to determine if they have what it takes to see the project through.

Reason 2 – High Pre-mining

Pre-mining is when developers mine coins before they’ve been released and by doing so, they have a larger share of the coin. Whilst, not all pre-mining is bad news, high pre-mining is definitely not good. The report suggests that this could be a sign of a get rich quick scheme as opposed to the developers being in it for the long-run.

Reason 3 – Day 1 performance

The report suggests that coins that had a strong day one in terms of performance and associated higher volatility are likely to stay strong. However, another clear sign of a coin’s sustainability is also if it stabilized in its first month.

Reason 4 – Low rewards

It is a common misconception that coins with high rewards are most likely to survive. The study suggested that it is, in fact, those coins that offer lower minimum rewards per block that last.

In conclusion, look out for coins that have a good performance on day one followed by a calm month one. Stay away from coins with high pre-mining and large rewards.

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