Due Diligence in the Crypto Era: What Every Investor Must Know

The cryptocurrency and blockchain sector has produced extraordinary investment returns — and extraordinary fraud. For every legitimate project that has created lasting value, dozens of fraudulent schemes, rug pulls, and poorly conceived ventures have destroyed investor capital. As institutional and retail investors continue to allocate to digital assets, rigorous due diligence is not optional — it is the difference between informed investment and expensive speculation.

Why Standard Due Diligence Fails in Crypto

Traditional financial due diligence focuses on audited accounts, disclosed liabilities, and regulatory filings. In the crypto sector, these safeguards are frequently absent or unreliable. Smart contract audits can be fabricated or conducted by conflicted parties. Tokenomics structures can be designed to benefit founders while creating the appearance of fair distribution. On-chain data — which many investors never examine — often tells a different story than the project's marketing materials.

Effective due diligence in the crypto era requires a hybrid approach: conventional background investigation of the people behind a project combined with on-chain forensic analysis of the project's wallet activity and token distribution.

Investigating the Team

The single most predictive factor in a crypto project's outcome is the integrity and competence of its founding team. Key questions to investigate:

• Are team members using their real identities? Pseudonymous teams are a significant risk factor; verifiable identities create accountability
• What is their verifiable track record? Claims of prior success should be independently verified — LinkedIn profiles and personal websites are curated and unaudited
• Are there prior failed or fraudulent projects? Serial project abandonment is a documented pattern among rug pull operators
• Who are their advisors and investors? Verify advisor relationships are real — many projects list prominent names without genuine involvement

On-Chain Due Diligence

Blockchain data provides a level of financial transparency unavailable in traditional markets — but only if you know how to read it. Pre-investment on-chain checks should include:

• Token distribution analysis — what percentage of the total supply is held by the team and early investors, and are these holdings subject to vesting schedules?
• Wallet concentration risk — if a small number of wallets control a large proportion of supply, coordinated selling can devastate retail investors
• Liquidity pool integrity — has liquidity been locked, and for how long? Unlocked liquidity can be withdrawn instantly in a rug pull
• Smart contract audit status — has the contract been audited by a reputable, independent firm, and have audit findings been addressed?
• Transaction history anomalies — unusual fund flows to and from project wallets may indicate insider trading or pre-launch manipulation

Regulatory and Legal Due Diligence

The regulatory landscape for digital assets is evolving rapidly. The EU's Markets in Crypto-Assets Regulation (MiCA), which came into full effect in 2025, has introduced authorization requirements for crypto-asset service providers operating in the EU. Before investing through any platform or exchange, verify its regulatory status under MiCA or the applicable regime in its jurisdiction of operation.

Projects that issue tokens constituting financial instruments under existing securities law may be operating illegally if they have not obtained the necessary authorizations. This creates regulatory risk for investors holding such tokens, in addition to the usual investment risk.

Red Flags That Demand Withdrawal

Certain findings in due diligence should be disqualifying, regardless of how compelling the investment opportunity appears:

• Team members with prior fraud convictions or regulatory sanctions
• Claims of guaranteed returns or risk-free investment
• Pressure to invest quickly before a "closing" deadline
• Inability to explain the revenue model or token utility coherently
• Absence of verifiable code repository, smart contract address, or audit
• Requests to send funds to a personal wallet rather than an official platform address

TBSBV conducts pre-investment due diligence investigations for individuals and institutional investors considering exposure to crypto-related assets and ventures. Our reports are designed to provide a complete and accurate picture of the people, structures, and on-chain history behind any project.