How To Tell if a Crypto Project Is a Scam
The central theses
- Crypto newbies are more prone to scams. It is important to keep up to date with the latest forms of scams and manipulations to avoid financial loss.
- Following a set of simple due diligence routines will help users distinguish bad projects from legitimate ones.
- Phemex, a well-established cryptocurrency exchange, regularly reviews their listed assets to ensure users are protected from rug pulls or exit scams.
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The crypto industry is known for continuous innovation. Projects develop different ways to solve real-world problems. Very often these solutions reach a level of complexity that can be confusing for the average user.
Don’t hold the bag
Scammers are also developing more sophisticated schemes to take advantage of the less experienced, from traditional price manipulation to injecting bugs into applications that manage and store digital assets.
In crypto, a classic way of tricking users is what is commonly known as “rug pull,” a scheme through which scammers create a new coin and aggressively promote it, relying on fake or exaggerated claims.
The intention is to increase the price of the token by promising easy profits. Scammers are cautious enough to generate fictitious trading volume over a period of time and give the impression that the project is sustainable in the long term (a factor that distinguishes a rug pull from a pump and dump.“)
When the project gets big enough, the “team”, which is usually the biggest bag holder, gets ahead of the crowd by selling everything, reaping hefty profits, and investors holding worthless tokens.
What follows is a list of items that suggest a project could be a potential scam or carpet-pulling attempting to promote an entirely 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 hints at what is driving up the price of the token instead of explaining the code, economics, business model, and other important aspects of the project.
Serious projects tend to have extensive white papers and research that justify their purpose.
The team
There are some classic red flags regarding a project team’s identity, professional background, and relationships.
It’s a good sign when the team is doxxed. doxing is when team members on a project have publicly disclosed personally identifiable information about themselves, which adds to the overall credibility of the project.
Be wary of premature partnership announcements. Especially if the project hasn’t been running that long. Building a solid reputation with companies such as venture capital firms, the media or a big exchange takes time and effort.
Dubious notes or celebrities shilling a token can also help make a project look more important than it is. Keep in mind that the scammer’s goal is to increase the sense of importance of the project, which then translates into positive price action that subsequently creates Fear of Missing Out (FOMO) among their potential victims.
timetable
A roadmap is a display or chart that explains the protocol’s technology adoption plan. It’s like a highly simplified version of the white paper that summarizes the project’s long-term strategy. The roadmap also includes past relevant achievements. If the roadmap is unrealistic or doesn’t exist, it’s probably an exit scam.
liquidity
Check the token lists. If it is traded on very few exchanges, centralized and/or decentralized, there is a high possibility that it is a scam.
Finding out how much liquidity is behind a token is just as important. In DeFi, as in traditional finance, liquidity is the total value of assets available for trading in a given market or pool. Low liquidity usually means a crypto project is nascent — or has very little use.
DEX Tools is an excellent site for finding out how liquid the trading pools of the decentralized exchange are. Users can filter token search by blockchain and exchange. Identifying transaction volume and the number of active addresses interacting with a project’s smart contracts will also provide valuable information to speculators.
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 who is. Some jurisdictions are well known for hosting fraudulent websites.
If the site looks good at first glance, checking external links to sites with project-related content, such as B. a blog, valuable information exposed. Broken links or bad and outdated external content can tell us how much the team cares about the long-term plans of the project.
Fake references like mentioning that the project had related content on sites like Crypto Briefing, Yahoo Finance, or CNBC when it didn’t is definitely not a good sign. False or exaggerated statements and testimonials should also arouse suspicion.
If users on social media are complaining about a flawed aspect of the token or protocol and the team is unresponsive to the claims or is vague, stay away from this project. Reading on forums like Reddit or Twitter is a great way to discover the overall community vibe of a project.
Crypto has brought lucrative gains to many early investors, leading many others to misguided expectations and falling prey to scammers promising the next 10x. Due diligence and thorough research are a must if you want to avoid losing your assets to a carpet pull. Especially in an industry with constant innovation, it is not always easy to recognize the latest forms of fraud.
Have you found your next 10x? Why not buy from Phemex? With more than 298 available token pairs for trading, Phemex regularly conducts in-depth reviews of each listed asset to ensure it is held to a high standard. If a coin no longer meets this standard, or the industry changes, Phemex may delist the token to protect its users. Phemex is a platform that offers excellent liquidity and allows users to trade effortlessly.