Investing in early-stage startup companies, whether they are blockchain-based companies or more traditional companies, comes with inherent risks involved. When investing in startups, a total loss of capital is a highly likely outcome whence the famous quip, Never invest more than you can afford to lose. It means you should not invest any funds if you cannot bear the loss. On top of returns risk, there is also the probability that you may encounter a delay in your returns because a company delays its launch date for whatever reason. This is especially true for crypto startups that often follow the extremely volatile crypto markets when choosing when to launch their platform or product.
Investing in the highly speculative cryptocurrency market adds a whole new layer of risk to the already very risky practice of investing in startup companies. There are so many moving parts that if just one thing goes wrong, the whole process can come crashing down very quickly. Some of these risks include:
- Liquidity risk: market makers fail to add enough liquidity to support trading of the digital asset and the price quickly tanks soon after launch
- Technological risk: there are many things that can go wrong during the distribution of tokens or listing of the token on a DEX. Network congestion, issues with smart contracts, and the malfunctioning of blockchain infrastructure tools are just a few of the things that can go wrong during a token launch.
- Personnel risk: there is no way to be sure that the team behind a blockchain project actually has the requisite knowledge for launching a cryptocurrency. You can check the team’s history, but you cannot eliminate this possible risk completely.
Participating in token offerings through launchpads such as Seedling allows you to mitigate certain risks because most launchpads perform stringent due diligence before accepting a project on their platform; however, you expose yourself to some new risks as well. Most launchpads require you to hold or stake their native token in order to be able to participate in their token offerings. This exposes you to the risk that your potential returns could be dampened if the launchpad token’s price drops significantly while you are holding or staking. There is also the risk that you may not be able to secure the cryptocurrencies or tokens you desire from the launchpad because of heavy competition for the limited supply of tokens allocated to the launchpad or because of a lottery-based system for awarding allocations to participants. Finally, prospective investors may overestimate the due diligence processes of the launchpad and they may fail to do their own research. They may end up investing in projects that do not meet their risk-reward standards or they may fall victim to one of the many scams plaguing the crypto space.
Whether you are investing in startups in the traditional business world or in the cryptocurrency world through launchpads, you are advised to always do your own research (DYOR) to ensure that your investment dollars are going into startups that are right for you.