Finnish Study Reveals Trends Amongst Failed Cryptocurrencies
Finnish researchers have revealed a number of factors at play that can be used to determine the success or failure of a cryptocurrency.
Members of the crypto community have long bought or avoided new coins based on a handful of factors. For example, the ‘pre-mine scam’ idea is often enough to put a trader off a coin for good. Now, Finnish researchers have conducted a study into a number of proof-of-work coins and pinpointed a number of variables that appear to increase a cryptocurrency’s long-term chances of success – where ‘long-term’ here means 4 years.
The original paper by researchers at the University of Vaasa in Finland is currently unavailable, but Forbes has published a summary. The writer uses the unusual term ‘default’ of cryptos that do not stay the distance – an odd term for a decentralised PoW coin with no assets or formal structure to back it. Relevant factors include:
- Day 1 trading. A strong first day, with high volatility and volumes, is a positive indicator for the future. Greater stability over the course of the first month after day one is also associated with success.
- Pre-mine. A high pre-mine is unsurprisingly associated with lower chances of success – possibly because heavily pre-mined coins are more likely to be scams anyway. However, the size of pre-mine that should prove a red flag may come as a surprise: 1.5%. Ideally, pre-mines should be as low as 0.5% or less.
- Founder anonymity. This is another factor that suggests long-term failure. As with a pre-mine, it is likely more associated with scam coins, and the lack of real-world consequences may mean that anonymous developers are happier to leave the project without notice for various reasons. Bitcoin is, of course, the notable exception here.
- Low rewards. Curiously, a low level of (block) rewards is associated with a higher chance of success. This may be because the developers prioritised the long-term future rather than pleasing miners with a short-term outlook – and high inflation is ultimately detrimental to a coin acting as a store of value.
Together, these factors may help select coins that are less likely to ‘default’ as Forbes puts it.
Disclaimer: this article does not constitute investment or trading advice. Bitcoin Bulletin will never tell you what to do with your money.