Why Due Diligence is Essential Before Investing in Crypto Funds

• Blockchain Council
• March 12, 2025

Cryptocurrency funds can provide significant profits, but they also carry major risks. Before putting any money into these funds, careful evaluation is needed. Taking time to conduct proper due diligence in crypto funds helps prevent losses and protects investments. 

What Does Due Diligence Mean in Crypto Funds?

Due diligence refers to researching and verifying every detail about an investment before making a decision. In crypto audit terms, it means checking whether a fund is legitimate, what assets it holds, who runs it and if it follows financial laws. Skipping this process can result in falling victim to fraud or making poor investment choices.

Why Is It Risky to Skip Due Diligence?

Since cryptocurrencies operate with less regulation than traditional finance, scams are widespread. Many projects claim to offer high returns but lack proper safeguards. Investors who fail to investigate thoroughly might invest in schemes that collapse, lose funds due to bad management, or face unexpected legal trouble.

Real-Life Examples of Why Crypto Due Diligence Matters

What Happened With the $LIBRA Crypto Collapse?

In 2025, Argentina’s President Javier Milei publicly supported a new cryptocurrency called $LIBRA, describing it as an initiative to boost private sector growth. Investors rushed to buy, causing prices to skyrocket. But just hours later, the value collapsed. Investigations revealed that the project’s founders controlled 70% of the tokens and sold them at peak value, leading to a classic “rug pull” scam. Many investors lost their money in a single day. This case highlights why checking who controls a project is essential before investing.

How Do “Pig Butchering” Scams Work?

A growing crypto scam known as “pig butchering” targets people through social media or dating platforms. Scammers slowly build trust, convincing victims to invest in fake crypto platforms. Once the victims deposit large amounts, the scammers disappear with the funds. A warning from Michigan’s Attorney General outlined multiple cases where investors lost money after believing they were dealing with legitimate opportunities. These scams show why verifying crypto platforms before investing is a must.

What Went Wrong With SafeMoon?

SafeMoon gained massive popularity in 2021, but later faced accusations of financial misconduct. Reports revealed that large amounts of money were removed from its liquidity pool by insiders. This led to concerns about whether investors were misled. The controversy surrounding SafeMoon proves that investors should always check how a project’s funds are managed before buying in.

How Did the HAWK Token Crash So Fast?

In early 2025, influencer Hailey Welch, also known as “Hawk Tuah,” promoted a new token called HAWK. It quickly reached a market value of $490 million. However, the token lost over 90% of its value shortly after launch. Blockchain records showed that just ten wallets controlled 96% of the supply, leading to a massive price drop when they sold their holdings. This highlights the danger of trusting celebrity-endorsed tokens without checking who owns most of the supply.

How to Perform Due Diligence Before Investing in a Crypto Fund

How Can You Verify If a Crypto Fund Is Legit?

• Check registration and licenses – Ensure the fund is registered with financial authorities and holds necessary permits.
• Look into the fund’s operations – Reliable funds provide details about their investment approach and financial performance.
• Beware of secrecy – If a fund avoids sharing clear information, it could be a warning sign.

Who Runs the Fund?

• Research the leadership team – A strong background in crypto and finance is a good sign.
• Check past projects – If managers were involved in failed or fraudulent ventures, that’s a red flag.
• Verify online profiles – LinkedIn and industry reports can provide insights into their experience. Professionals with certifications like Certified Cryptocurrency Trader™ (CCT) demonstrate a deeper knowledge of crypto markets, making them more reliable.

What Investment Strategies Are Being Used?

• Understand how returns are generated – A legitimate fund should have a clear investment strategy.
• Look for risk management plans – Funds should explain how they handle market volatility.
• Avoid vague promises – If returns sound too good to be true, the project might not be safe.

Is the Fund Following Regulations?

• Check for compliance – Funds operating within legal frameworks provide more security.
• Confirm legal status – Unregulated funds might face shutdowns or legal issues, putting investments at risk.

What Steps Should You Take for Crypto Due Diligence?

1. How Do You Check if a Fund is Safe?

• Look into the leadership team – Verify their track record and credentials.
• Check for regulatory approval – If the fund is not following regulations, it could be a scam.

2. What Assets Does the Fund Hold?

• Understand the investments – Learn what cryptocurrencies or tokens the fund owns.
• Check asset legitimacy – Verify if these assets have actual value or are just hype.

3. What About the Fund’s Performance and Fees?

• Look at past performance – Even though history doesn’t guarantee future success, it helps in evaluating stability.
• Understand all costs – High fees can reduce overall earnings from investments.

4. Should You Trust Reviews?

• Seek independent opinions – Unbiased sources provide a clearer picture.
• Be cautious of fake testimonials – Many scam projects use fake investor reviews to seem legitimate.

5. How to Spot Unrealistic Promises?

• Be skeptical of huge returns with no risk – No investment is risk-free.
• Avoid celebrity hype – Many influencers endorse projects without knowing their true risks.

Final Thoughts

Investing in cryptocurrency funds offers profit potential, but taking precautions is necessary. By conducting a crypto audit, checking past incidents and verifying all details, investors can make smarter choices. Learning from past mistakes and using careful research can prevent losses and protect assets in this unpredictable market. Consider audits performed by a professional holding the Certified Cryptocurrency Auditor™ (CCA) certification. A CCA-certified auditor thoroughly reviews a fund’s financial health, compliance, and risk management strategies, giving investors greater confidence in the investment’s safety.