The cryptocurrency industry and the metaverse, which already includes over 16,000 projects, is rapidly expanding and attracting millions of new investors. Myriads of new cryptos and NFTs are released every month, followed by a frenzy of ICOs (Initial Coin Offerings) aimed at drawing investors. But, unsurprisingly, with the good comes the bad, and with the bad comes the scammers.
Nearly anyone can just create a website with all of those wonderful client testimonials and FOMO-related claims to make it appear real nowadays. Scammers usually target inexperienced crypto investors who are unprepared, leading to the loss of their funds.
So, in this article, we’ll show you all the factors to look out for and all the scams that take place, in order to make sure you don't become the next victim.
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Crypto Scams of 2021
According to Blockchain analytics firms Crystal Blockchain and Chainalysis, in the year 2021, hackers stole more than $4 billion in crypto and more than $7.7 billion in scams (of which 37% was accounted for rug pulls). Last year, hacks increased threefold from 2020, from $1.49 billion to $4.25 billion, with the DeFi (Decentralized Finance) sector accounting for $1.4 billion of the total. According to a research in 2018, 80 percent of 2017’s ICOs were also scams.
In August, the largest hack in DeFi history, worth $610 million, was carried out by a “white hat” hacker who claimed to have done it to highlight a security flaw in the company’s “cross-chain” smart contracts. More than 60 percent of the hacks occurred in the second half of the year.
To an amateur investor, most coins look the same, promising big profits on a tiny investment. The notion of staying protected from dubious ICOs and shady currencies may seem scary for novice investors.
Factors to look out for
In order to decide whether a crypto is worth being invested in, we need to verify many factors. Here are some of the core factors to look for in a project:
The technology
The first thing you need to keep an eye out for is their technology. It is innovation, not competition, that will determine the ultimate future. Instead of initiatives that promise to give a cheaper and better version of something that a thousand others are currently working on, look for projects that provide something new and bring innovative solutions.
After you grasp the target market, you’ll have a solid sense of all the opportunities available. Each project includes a whitepaper that outlines all of their ideas and explains why their solution is the best for that particular situation. But, before you choose, consider this – is this technology innovative enough to take the lead, or is it just another ordinary initiative out of the thousands?
White Papers and roadmaps
Analysing the whitepaper will assist us in fully comprehending the project. It gives us all of the details about the coin, including timelines and targets. If they have a solid whitepaper, it might be an excellent investment regardless of how their website or other UI seem. The first step in investing in any cryptocurrency should be to study the whitepaper and understand all of the principles. The more persuasive the whitepaper, the better the coin. But you still can’t just read the whitepaper and decide if a cryptocurrency is right for you; there are a lot of additional factors to keep in mind.
The roadmap is one of these factors. It’s just as crucial to look at the roadmap as it is to read the whitepaper. It outlines all of the development they’ll undertake as well as all of the components of the project they’ll develop. If they have a viable strategy and guarantee to create a lot of features that appear promising, the coin might be just as excellent as they say.
The founders
Find out who is behind your chosen venture. The team and developers behind it may be the most crucial success factor. Collect and analyze data on the project’s individual team members, including a review of their experience and past roles in the sector. Founders who have previously worked on popular crypto projects and have a broad understanding of the industry have a better chance than a few newcomers. If you can’t discover their profiles or if they have AI-generated photos and bogus identities, it’s a significant red flag.
Partners and investors
It is a better investment when the project’s partners are significant corporations. Examine the coin’s partners and investors. If the currency has numerous partners, such as famous coins, and large investors, such as Coinbase Ventures, then putting money in it is a wise decision. You can also invest in coins without many well-known partners and investors, although it is considered better if they do.
Their Audits
The importance of their security audit cannot be overstated. It’s critical to any project’s success. Audits should be conducted to ensure that the mechanisms are up to date and capable of dealing with the most recent risks. CertiK is the most popular audit conductor, with 1432 projects onboarded. By validating, these security auditors may also determine whether or not a project is a hoax. They employ automatic bug detection techniques to discover generally known vulnerabilities, then undertake a manual examination of the blockchain project’s code in a methodical and organised manner. Without a security audit, a project with even a 100k followers is unreliable. So, only consider projects that have been audited.
Market cap
The Market Cap is the total market value of all the coins that are circulating.
Market Cap = Current price * Circulating supply.
As a key statistic, it can indicate the growth potential of a cryptocurrency and whether it is safe to buy, compared to others. For example, if you had the chance to invest in a coin when its market cap was at $100M or $8B, you should definitely go for the first as they are more susceptible to dramatic swings based on market sentiment.
Usually, altcoins with a high market cap are said to be reliable and those with low ones are said to be unreliable. But the truth is that the high-capped coins have reached their full potential and the low market cap coins are yet to release their potential (depending on their project). It is usually those coins with a market cap of around $400M to $3B that skyrocket. Before Shiba Inu’s huge pump, its market cap was just $2B. A month later, it crossed $40B. Those coins in pages 2-4 from CoinMarketCap are the potential ones whereas page 1 is full of coins that have reached their potential. Even coins in the first page may go to the moon, but there is a higher chance for the higher-low and mid-capped coins ($400M to $3B).
The Circulating Supply
The circulating supply (all of the coins in circulation and in public hands) nearly predicts 60% of the coin’s future when we compare it to another one.
For example, take Nervos Network. It has a circulating supply of ~30B and a price of $0.02. Let’s compare it to a similar project, Polkadot, which has a circulating supply of ~1B and a price of $26. As polkadot’s circulating supply is 30 times less, let’s divide its price by 30 too. This leaves us with $0.866. Let’s do the same thing with Terra (LUNA), which has a circulating supply of 360M. 30B by 360M is 83. So Terras’ price ($77) by 83 gives $0.93. The same thing with Avalanche concludes a price of $0.79. So with this factor, we can deduce that Nervos still has a long way to go.
Token Distribution
This is an important factor to look at. Every crypto has their token distribution posted so you can just have a look at it. Usually every token has around 20% reserved for the team and foundation, 10% for public sale and around 50% for staking rewards. If you see a token with a majority of the percent just for its team directly or indirectly, or any unusual distribution, it’s a big red flag.
Spotting scam coins
Let’s have a look at the most common scams by the founders which people fall into now:
Pyramid scheme
A pyramid scheme is a type of deception in which individuals are recruited and then told that they would be paid the fees of the members they recruit. As a result, these members will recruit new members, with their fees going to the current members. The organisation will benefit from the fees paid by prior members. The members at the top of the ‘pyramid’ will earn a lot of money as more and more members are recruited. This is a hierarchical and illegal scheme that uses the promise of rewards to entice victims. All pyramid schemes eventually collapse, as they require a constant flow of new investors.
Ponzi scheme
A ponzi scheme is a sort of deceit in which the company promises high returns, without any genuine business model. In Ponzi schemes, when there are less new investors, the company won’t be able to pay previous investors, and so, the scheme will break down. The user is guaranteed a low risk factor in these schemes. They work by transferring the funds from new investors to previous investors. The company then shows previous investors that their payouts were genuine. A ponzi scheme can be used to retaliate the loss generated in a previous business.
Rug pulls
A rug pull is a scam in which the creators inflate the value of their currencies by creating a lot of hype around it. As the price of the currency rises, more individuals get interested in investing in it. The developers will then remove all liquidity, forcing the coin’s price to plummet to near zero, before taking all of the funds and abandoning the venture. The developers also disable selling the coin, so only the developers themselves can sell the coin, but the investors cannot.
Rug pull coins are frequently found in DEXes. This is due to the fact that DEXes do not need a project to be audited before being listed, which means that almost anybody may add a cryptocurrency to a DEX.
An example of a rug pull is the Squid token, based on the popular Netflix series. It’s price skyrocketed from $0.016 on 28th October to $2861 on the first of November. Then, the developers withdrew the liquidity, and its price fell down to $0.0007926 again.
Watching out for false claims
Many people will invest in a cryptocurrency if it is endorsed by Elon Musk, Google or another major name. Some coins may use this to their advantage by claiming that their coins are backed by well-known personalities and enterprises, resulting in an increase in the number of investors. This is yet another scam that you should carefully watch out for. Now, let’s see how we can protect ourselves from such scams.
Websites and URLs
Examining a coin’s website is essential before deciding whether or not it is appropriate for you. Confirm that the website is https and the url has a lock icon next to it. This guarantees the website’s security. You must also verify that their websites do not use unchanged WP templates or templates from the internet that have not been changed. How can they develop the project they claim to build if they can’t even update a template?
Tweets and other Social Media updates
One can get the gist of the project just by looking at their tweets and updates. If they constantly keep ignoring people who ask doubts that might exploit them, always say moon without any development updates, never reveal their identity or remove members accusing them of FUD, there’s a major chance that they are a scam.
In addition, in a trustworthy cryptocurrency, the developers will actively address user doubts. Rug pulls and other scam coins will have a slow response time and non-technical replies. Watching social media updates helps learn more about that project. Have a look at their followers, impressions and tweets. Take a peek at their discord server, and analyse whether their replies seem professional, or are scam.
Protecting yourself from unreliable ventures
- Keep an eye out for coins that offer big profits with little or no risk.
- Examine their whitepapers to see whether they have a solid business plan and unique concepts.
- Examine their credibility, audits, and other evaluations.
- Pyramid schemes are likely to be projects that primarily rely on paying fees to members who attract new investors.
- Avoid projects that promise good pay for people with little or no job skills.
- If the developers are anonymous or use AI-assisted photos, they might be a ruse since they don’t want their identities revealed.
- It may be a rug pull if proposals arise out of nowhere with brief whitepapers.
- Less liquidity and TVL suggest that the coin can be readily manipulated; choose coins with adequate trading volume and liquidity.
- It’s possible that a currency that’s only listed on a DEX is a spam coin.
- Check if the token’s liquidity pool is locked to guarantee that the crypto is trustworthy.
- Fan tokens, tokens based on movies and TV series, etc aren’t exactly the best investments.
- Always verify claims made by crypto ventures.
- Try to avoid coins that create a lot of FOMO, Fear Of Missing Out, for example the coins that are skyrocketing.
Conclusion
Fundamental analysis and reputability checks are important steps to do before investing in a cryptocurrency. All of the criteria in this post will help you check that your ideal crypto project is both creative and trustworthy. Make sure you’re not the next crypto victim, but the next crypto tycoon.
Disclaimer: Digital Wallets News does not recommend that any cryptocurrency should be bought, sold, or held by you. Do conduct your own due diligence and consult your financial advisor before making any investment decisions.
