How to find out if a crypto project is a scam

The crypto industry is known for continuous innovation. Projects come up with different ways to solve real-world problems. Quite often these solutions achieve a level of complexity that can be confusing to the average user.

Do not stand holding the bag

Fraudsters are also coming up with more sophisticated schemes to take advantage of the less experienced, from traditional price manipulation to inserting flaws into applications that manage and store digital assets.

In crypto, a classic way to trick users is through what is commonly known as a “rug pull,” a scheme where fraudsters create a new coin and aggressively market it, based on false or exaggerated claims.

The purpose is to increase the token’s price by promising easy wins. Fraudsters are careful enough to generate fictitious trading volume during a certain period of time and give the impression that the project is sustainable in the long run (a factor that distinguishes a carpet cover from a “pump and dump”.“)

When the project gets big enough, the “team”, which is usually the biggest purse holder, leads the crowd in front by selling everything, pocketing huge profits and letting investors hold worthless tokens.

What follows is a list of elements that suggest that a project may be a potential scam or scam, trying to promote a completely worthless token:

Documentation (White Paper)

The white paper explains the purpose of a project’s technology. Users should be skeptical of a white paper that only points out what will drive the token’s price higher rather than explaining the code, economics, business model and other important aspects of the project.

Serious projects tend to have exhaustive white papers and research justifying their purpose.

The team

There are some classic red flags regarding identity, professional background and relationships with a project’s team.

It’s a good sign if the team is doxxed. Doxing is when a project’s team members have publicly disclosed personally identifiable information about themselves, which contributes to the project’s overall credibility.

Be wary of premature partnership announcements. Especially if the project has not been going on for that long. Build a solid reputation with businesses such as venture capital firms, media or a great exchange takes time and effort.

Questionable endorsements or celebrities who “shiller” a token can also help make a project look more important than it is. Remember, the scammer’s goal is to increase the sense of importance of the project, which then translates into positive price action, which then produces “fear of missing out” (FOMO) in its potential victims.

Road map

A roadmap is a view or diagram that explains the protocol’s technology adoption plan. It is much like a simplified version of the white paper that summarizes the project’s long-term strategy. The roadmap also includes previous relevant achievements. If the roadmap is unrealistic or non-existent, it’s probably an exit scam.

Liquidity

Check the token entries. If it is traded on very few exchanges, centralized and/or decentralized, there is a high chance that it is a scam.

Finding out how much liquidity is behind a token is equally important. In DeFi as in traditional finance, liquidity is the total value of the assets available for trading in a given market, or pool. Low liquidity usually means that a crypto project is nascent – ​​or very little used.

DEXTools is an excellent site to find out how liquid decentralized exchange trading pools are. Users can filter the token search by blockchain and exchange. While you’re at it, finding out the transaction volumes and number of active addresses interacting with a project’s smart contracts will also provide speculators with valuable information.

Website and social media activity

A bad website that looks like it was made from a template and looks amateurish is a bad sign. A useful tip is to look up the domain on Who is. Some jurisdictions are known to host fraudulent websites.

If the site looks good at first glance, reviewing external links to sites that contain project-related content, such as a blog, will reveal valuable information. Broken links or bad and outdated external content can tell us how much the team cares about the long-term plans for the project.

Fake references such as mentioning that the project has included related content on sites like Crypto Briefing, Yahoo Finance or CNBC when they haven’t is definitely not a good sign. False or exaggerated statements and testimonials should also arouse suspicion.

If users on social media complain about a flawed aspect of the token or protocol and the team doesn’t respond or is vague about the claims, stay away from that project. Perusing forums like Reddit or Twitter is an excellent way to discover the general feel of a project’s community.

Crypto has given many early investors lucrative gains, causing many others to have false expectations, falling prey to scammers promising the next 10x. Due diligence and rigorous research is a must if you want to avoid losing your possessions due to a carpet leak. Especially in an industry with constant innovation, it is not always easy to recognize the latest forms of fraud.

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