The cryptocurrency market has been practically a space since its inception, which various scammers have used to their advantage. Their primary tactic is to misuse users' poor awareness and to entice them to be fabulously rich. They focus in particular on new and inexperienced investors and traders who are unable to distinguish whether it is a relevant project or a scam. We have encountered a number of similar scams, and some even operate to this day.
Is there a guaranteed way to detect these unfair practices and thus avoid unnecessary problems or loss of funds? It's not as easy as it might seem. There is certainly no flawless scam detection tool, and some projects may not be scams and are only poorly managed. However, we can look at common features (red flags), which inform you quite reliably about the condition of the project and whether it could be a scam.
Scammers often abuse the fact that creating your own cryptocurrency is literally a matter of hours. They simply create a cryptocurrency, come up with a (often fictitious) project around it, and go sale. Fortunately, we can find out relatively quickly whether there is real interest in cryptocurrency. Just look at the activity associated with its trading in the market.
Therefore, as one of the first things, you should look at where the cryptocurrency is traded. If they are only decentralized exchanges (DEX) like Uniswap and PancakeSwap, we can consider it a red flag. Due to their decentralized nature, there are essentially no requirements for listing a cryptocurrency on such an exchange. Decentralized exchanges do not have sophisticated ways of verifying projects and it can be said that they rely on the market itself to make the best decisions as a result.
Some new projects start with the fact that their cryptocurrency is traded first on DEX and then, after gaining some relevance, they are also listed on reputable centralized exchanges (CEX). However, even the fact that a cryptocurrency is traded on a large centralized exchange does not 100% guarantee that you cannot get burned on it. A good example is a cryptocurrency SHIBA INU, which is listed on the Coinbase and Binance exchanges, despite the fact that the project has not yet presented anything valuable. Exchanges are companies whose main goal is, of course, to make a profit, and if they see the potential of large trading volumes, they are probably willing to lower their demands on the quality of the project. It is equally important to monitor whether the cryptocurrency is listed on a "quality exchange" (FTX, Binance, Coinbase) or on an exchange that is known for a weaker level of project screening (HitBTC, Latoken).
Another metric we should definitely note is the volumes of cryptocurrency trades. Low trading volumes are a very bad sign of virtually any cryptocurrency. If these project volumes have dropped significantly over time, it usually means that interest from investors and traders is declining, and there is certainly a reason for this. At the same time, of course, it reduces the level of liquidity of a given cryptocurrency, and it can be much more difficult for investors to buy or sell.
We certainly do not claim that projects and cryptocurrencies that are not listed on any exchange or are currently only traded on decentralized platforms must be fraudulent. Every project started somewhere and a similar investment in the early stages can bring an interesting value to the investor when made the right choice. However, it is a much riskier investment and as such the investor should approach it.
An important thing to look at when examining a project is the market capitalization of cryptocurrency. It is the outcome of the total offer in circulation and the current price of the asset. It is according to this metric that cryptocurrencies are also listed on known crypto-analytical portals (for example, CoinMarketCap and CoinGecko). Market capitalization can show you whether a cryptocurrency is within the range that indicates further potential growth or can be considered overestimated. A sign of overvaluation can be, for example, a market ceiling that far exceeds all similar projects. On the other hand, projects with lower market capitalization combined with high trading volumes may seem to be the right choice. However, a number of other factors need to be considered.
Most cryptocurrencies have a pre-defined and fixed maximum quantity, which means that new ones can be created/mined until this number is reached. For example, on Bitcoin, it is 21 million units and we know with the certainty guaranteed by its code that there will never be more. This finite number gives Bitcoin a level of a rarity - limited supply is pushing up prices. The second-largest cryptocurrency, Ether works differently and has no finite number of units. However, Ethereum has implemented mechanisms in its ecosystem that ensure the regular burning of ETH, and these should ensure a gradual reduction in the level of inflation (until deflation in the future). Thus, cryptocurrencies with an unlimited supply do not have to be downright bad if they have the correct tools set up. It is important for the investor that the market is not overwhelmed by a new offer, which has a negative impact on the price.
One of the key factors is the amount of cryptocurrency in circulation. Many projects have this metric at low levels, and this may mean that the market is constantly flooded with new supply, which is pushing down prices. The pace at which this number is increasing every year is symbolic inflation of supply. Higher supply inflation could lead to the slower price growth as supply quickly "dilutes".
A large number of projects have their private investors, who supported them in the initial stages in exchange for cheaper tokens. They often have their tokens locked for a certain period during which they cannot freely dispose of them (sell). As an investor, you should definitely focus on obtaining information on the future unlocking of these volumes, as this is another factor that increases supply and may slower price growth. If the token unlock curve were too steep, it could cause a supply shock and the price could fall quite sharply. This happens especially in a situation where private investors have very large profits, which push them to sell and they can see the project only as a quick way to get rich.
In general, if most of the volume of cryptocurrency is held by the company that issued it or its team, we consider it a big red flag. The question is - why do they need such large amounts of their own cryptocurrencies? Of course, holding a certain percentage is normal and the company is motivated to meet the set goals, as they can then use them according to their own budget needs. However, if they own a large part of the total offer from the beginning, they can do so with the intention of selling, notwithstanding the sharp drop in price (Pump and Dump).
If possible, always check the distribution of tokens directly on the blockchain and not only on the official project website. If you discover discrepancies between what they have on the web and the data on the blockchain (this is not uncommon), increase caution. Blockchain never lies, and you can find this data through the services of various blockchain explorers (for example, for Ether tokens, it's Etherscan). You can look at the wallets of all the owners of a given cryptocurrency, identify investors and the team, see if they are selling and if they have their cryptocurrencies locked in time. If the team can sell large volumes immediately, this is another red flag.
One of the popular trends this year is the charging of a "tax" on the sale of cryptocurrencies. Thus, if a user sells a cryptocurrency, a fee of, for example, 10% is deducted, which is then (proportionally by volume) distributed among the remaining holders. Similar practices are a big exclamation point, as relevant projects do not need such ridiculous mechanisms that stimulate users to hold cryptocurrencies.
Memecoins and similar "cheap" cryptocurrencies
New retail investors are often deceived into believing that low-cost cryptocurrencies (such as $ 0.0000001) are undervalued and represent a great opportunity to make a quick profit. However, this is far from true and it is necessary to realize that the market capitalization also has the total number of pieces in circulation in the equation. By issuing a cryptocurrency with a huge supply (often in billions of pieces), one can get its price to a level that gives the inexperienced investor the impression of a huge potential appreciation.
This technique is also used by popular memecoins (such as SHIBA INU and SAFEMOON), which issued literally trillions of pieces at an extremely low price. Uninformed retail investors then think that they will buy a large number of tokens for $ 10, and if its price hits $ 1, for example, they will immediately be millionaires. Beware spoiler - it won't happen! These are mostly the same investors who claim that Bitcoin is already "too expensive" solely due to the fact that they buy only a fraction of Bitcoin for $ 10. We always compare projects on the basis of market capitalization and not on the basis of the cryptocurrency price.
This is one of the key factors in the future success of the cryptocurrency project. These people are responsible for fulfilling the company's obligations and it can be assumed that they will not want to ruin their good reputation. Crypto projects often publish information about team members directly on their website, and some also offer links to their professional channels (such as LinkedIn), where you can learn about what they have done in the past and what they can do. It often happens that this information is variously embellished, or even completely untrue, which of course again represents the red flag.
It is no exception that team members were in some cases directly responsible for hacking the platform and stealing funds (so-called "inside job" ). The project with anonymous team members and developers can thus raise doubts, as they will not face any criticism and public pressure in the event of a problem. On the contrary, if well-known personalities stand in favour of the project (we are not talking about influencers, but, for example, personalities from IT and the crypto environment), it is certainly a good sign. Of course, there are also many anonymous development teams behind quality projects - the best example is Satoshi Nakamoto, who has also decided to stay anonymous.
Among other things, you can monitor other activities of team members, especially in the online space. Their behaviour can signal whether they are professionals who are serious or more interested in, for example, a short-term view of the price of their cryptocurrency. You can also analyze their communication - do they not communicate at all, do they behave unprofessionally, speculate about the price of the token? This can be a bad sign. However, if they are communicative, try to help, answer questions, are patient with new members, and try to educate, for example, you may be a little calmer.
The roadmap is a simplified project development plan that is transferred to the timeline. It is often visible on the crypto project website or is part of a whitepaper. When evaluating the roadmap of the project, several things need to be taken into account. The first step is to verify that they have been able to perform the tasks they have set up properly and on time in the past. If not, you need to try to find out why and exceptionally you don't have to be too strict. Some teams may be too optimistic at the beginning of the project about the timing of certain steps, and these may simply require a little more time. While this speaks to their ability to estimate the complexity of processes, it does not necessarily mean that it must be a scam. It is especially important that they actually deliver the planned things, and if they do it on time, it is of course even better.
Transparency is very important in this regard. Some projects regularly publish their codes in public repositories, such as Github (which is only possible with certain types of projects). However, if the project did not meet several milestones without explaining it relevantly, it is likely to be repeated in future development.
It is also important to monitor what types of plans the project has. For example, if the only project plan for a given quarter is listing on the exchange, it may mean that the team has no value-oriented plans and simply wants the community to buy their cryptocurrency in anticipation of listing on a centralized exchange, which can increase the cost. Similar goals show that the project is more interested in exposure (visibility) and not in building a useful and valuable product.
Among the types of targets, we should look for protocol innovations with added functionality, scalability improvements, or other blockchain and protocol integrations. The objectives of the individual projects are, of course, very specific and certainly different, but they must be aimed at improving the final product. Goals and plans like "We get a retweet from Elon Musk" show the team's thinking and do not look good.
Interesting and successful projects usually have partnerships with other well-known companies and can be a good sign. However, we often observe that scammers abuse this fact and publish fictitious information about partnerships on their websites. If the project states that they are collaborating with Ethereum or Binance, it may mean that they have actually just created their cryptocurrency on the Ethereum blockchain, or Binance Smart Chain. You should therefore be extremely careful about similar "empty" partnerships (which the other party often does not even need to know about) and you should make your own research into the real terms of the partnership.
A separate category is various awards from conferences and summits. The fact that a project has received an award does not necessarily indicate its relevance. Some of these events also go exclusively for profit, and to get an award you just need to become their partner (read; just financially contribute). Does that sound unbelievable? We can safely acknowledge and say that some even send e-mails to hundreds (maybe thousands) of crypto companies as part of their campaigns and offer them prepaid award winnings. In extreme cases, you can also come up with the name of the category and the award that you will win under their heading. Relevant projects are not interested in various fake awards, but only in the quality of their final product, which will then be appreciated by its users. Scammers will talk about such "successes" literally everywhere because that's all they have.
Extremely high yields
Unfortunately, greed is one of the strongest motivations for investors. This is one of the reasons why its abuse has probably become the most widely used technique by fraudsters. Just remember one thing here - if something seems too good to be true, it probably is. This category also includes all Ponzi schemes in which new entrants are made for the rewards of those above them and in particular for the founders' rewards.
These practices are gradually becoming more and more camouflaged, and we have recently seen their huge occurrence, especially in the DeFi industry. **Various protocols here promise huge values of APY **(annual appreciation), which, however, they try to maintain only on the basis of hyperinflation, as the market is constantly flooded with new tokens. Of course, similar systems are not sustainable in the long run, and sooner or later someone will pay for it. It is therefore more like a casino game. Fortunately, protocols that play similar dishonest games with users are relatively easy to identify. These are often absolute copies of relevant platforms (eg Pancakeswap) and the only thing that changes is the token of the given platform and the fact that APY is not fixed and change every day, for example.
Codes and audits
Most applications for cryptocurrencies are written in a code (smart contract), which is then executed on a blockchain. Developers can choose whether they want to be open-source or closed-source. The advantage of open-source software is that anyone can see and verify the code and even propose changes to eliminate "backdoors" and other exploitable bugs. Open-source is more secure because bugs and vulnerabilities are visible to everyone and can be addressed. Most open-source projects update it on the Github website. Another advantage is that you can look at the activity of the developers of the project.
Some developers choose not to let the public into their code and it may not be something that should be perceived negatively. For certain types of code, it is even a necessity that protects the company, for example, from copying the code or providing hackers with a more comprehensive view of the structure of the platform.
An interesting and important part of the development of crypto applications and platforms is a comprehensive code analysis by a third party, the so-called audit. It should be performed by a reputable and independent organization. This is a good substitution for projects where it is not possible to publish the code for various reasons (described above). In particular, projects which operate with large amounts of funds and user data - such as DeFi loan platforms or exchange platforms - should be audited. An audit from a reputable company can provide investors and users with the necessary level of confidence, but it must be said that even the audited code may not be perfect. First of all, it shows the team's willingness to provide its users with secure services. The absence of an audit may be a signal that the code is not secure.
A strong community can significantly help the project gain popularity, even if their cryptocurrency has no relevant use. Many suspicious (to put it mildly) projects try to create the illusion of a strong community and attract new buyers. Anyone can buy followers on social networks and "likes". On social networks, however, you can relatively easily distinguish whether it is a real involvement of real users or a purchased activity. For example, a page on Twitter with thousands of followers, which has only a few responses to posts, is very suspicious.
You can relatively easily verify the operation of the project yourself. Try writing them on one of the social networks and asking for help or advice. You will see if they are willing to help with the solution or if the community will be involved in the communication. If the channel is constantly memorized and no one is moderating it, this is usually not a good sign. The type of people in the community and the way they communicate will also tell you a lot about the project. If speculation about the price of cryptocurrency prevails as a topic of conversation - red flag. Members of the community of strong projects tend to really care about how the product itself succeeds and not just discuss prices.
Today, we've looked at some of the issues you should look out for when researching a cryptocurrency project. These "red flags" do not necessarily mean that it is a scam or that the project will not be successful. Rather, it is a warning signal that should stimulate you to further in-depth research. The more similar signals you find, the more cautious you should be. Even the fact that a close friend or family member recommends something to you in good faith does not mean anything. Even known scams worked for some time so that users enjoyed profits.
The increased number of scams should encourage every investor to carry out extensive research. Feel free to go through this article with each new project and then evaluate it. Be sure not to underestimate your own research and try to verify everything that is said about the project from all sides.
There are a number of promising projects in the cryptocurrency market. Choosing the right one will save you a lot of trouble and money, which you can then invest in those that have been surveyed.