How Can I Tell If It's A Scam Coin?

Despite the efforts of many good actors in the cryptocurrency industry, there are still a good deal of nefarious individuals out there who wish to play unsuspecting traders as fools. 

Key Takeaways:

• The source of your leads is important - random DM’s and high-pressure chat rooms are not good sources.
• If the idea for the project seems unreasonable or unimpressive, or if it seems too good to be true, it’s best to avoid it.
• Crypto projects should share contract addresses and team info for transparency.
• It is illegal and impossible to guarantee returns on an investment.
• If something seems too good to be true, it is.

Scams have become far too common in the market, especially when the market as a whole becomes bullish. Scammers prey on the naivete of new entrants and greed of experienced traders in the markets, who let their guard down for the chance of a few extra multiples of return on their seed investment.

With all the different ways that cryptocurrency scams can occur, how is one supposed to protect oneself from getting bitten? Here are a few key tips that you can use to protect yourself against suspicious ICO, private sales, and various other early offerings in crypto - no matter what kind of fomo floats around it.

There are now over 7000 different cryptocurrencies to choose from, with many more projects in the early stages of development. While it would be nice to presume that every one of these offerings improves the industry in some way, that is unfortunately not the case. 

Time and time again, unsuspecting investors invest in sub-par projects that make impossible promises. With the emergence of DeFi and BSC, preplanned rugpulls increased in frequency. Both situations have the same result: investors lose their money. 

How Did You Find It?

The first thing that happens when you, a crypto investor, consider going in on a new coin, is finding it. This is how it all begins. This is also the first step in avoiding scams.

The source of your information is critical in determining if your new tip is a scam. 

You should look for communities online where conversation is healthy. Healthy conversation is amicable, informative, and supportive. Such a community will have members who genuinely want to help others make money in return for actionable information sometime down the line. Furthermore, these communities will present new opportunities as a mere option for you to consider, rather than pressure you to invest.

If you got your new info from a chat that looks something like the following, be aware  that much of the banter here is paid for. This means that some folks go into these chats only to shill coins they just bought or work for. Most of their insights are invalid, based on the fact that they are guided entirely by that bias.

Another source to ignore just about 100% of the time, are the direct messages from complete strangers. These messages will come at random times, totally unexpectedly. Often the sender will claim that you have been chosen out of a large group of people, or that you won some sort of lottery granting you access to a new deal. These tactics are not dissimilar from the classic Nigerian Prince email meme from years past. If you trade crypto and you receive a personal message from a stranger who offers you anything crypto-related, block and report the account - and most importantly: do not take their advice!

Fundamentals

Let’s assume you got a good tip about a cryptocurrency from a solid group or knowledgeable friend. Great! The tip passed the first test for reliability. The next thing to look into are the project’s fundamentals. This includes basic things like whether you think the idea for the project is a good market fit, if implementation makes sense, and if the team has the right credentials to get the job done. 

Sometimes projects come too soon for a good market fit, despite being a good idea. More commonly, a project is just too late to be able to make a real mark. Knowing where a nascent project fits on this timeline usually requires consultation with a knowledgeable community - maybe the one you can get reliable tips from.

More important than just its time horizon is whether the project is being transparent. Transparency is a very important quality in any business raising private and public funds. That importance is enhanced for blockchain startups, due to the nature of the technology. 

You may be the type that likes to take in as much literature as you can about an investment before making a decision. While this strategy works well for more traditional investments like stocks and real estate, it is not quite as dependable for cryptocurrency. For example, many people may recommend knowing a whitepaper inside out  before deciding to invest in a crypto project. While a whitepaper’s absence is a serious red flag, the whitepaper itself is not the crux to knowing what a project is about and the status of its development.

There are far too many cases of whitepapers from scam projects just being copied word for word from other projects. Most new investors will not recognize the similarities. Furthermore, DeFi project teams may be so small that they cannot allocate resources towards updating their whitepaper for every new product being released. To that point, if you cannot find any information on the team or the use of project funds, then it is likely not a great project to invest in. 

Transparency

Blockchain makes funds-tracing easier than ever, so such transparency should come naturally. Tracking funds via blockchain can be done quite easily on block explorers. The most commonly used network these days is the Ethereum network, which boasts more IDO and DeFi projects than any other blockchain network. You can easily paste a project’s contract address into the main search bar on Etherscan and see all the movements of tokens to and from that address. BSCscan works exactly the same way as Etherscan, and in fact was designed by the same team! 

Adding credence to the focus on a crypto project’s team is how the company handles team income. This can be discerned from the tokenomics of the project, which can often be found in the whitepaper, project website, or pitch deck. Here you’ll find out how funds are allocated by the project. A team allocation of over 10% is a red flag! Unusual expenditures of funds, like the 50% allocation of Shiba Inu to Vitalik Buterin is also a red flag! Invest in projects that have sensible token allocations - all of which you can track via blockchain.

To sum up this section, make sure you keep track of what the team is doing with funds on-chain. If the project you are eyeing does not yet have a cryptocurrency, you must be able to rely on a helpful and knowledgeable community. Don’t be afraid to ask hard questions!

Impossible Promises

The final step in protecting yourself against most scams in crypto is avoiding empty promises. This might seem all too obvious for most readers, but crypto scams have their own niche promises that newcomers may not be aware of. 

The most common promise that project teams make is guaranteeing a high rate of return on your investment. In years past, ICO promoters would belittle you for failing to pay more ETH into their vaporware. These days, DeFi and doggie coin promoters belittle you for underspending on a coin that is guaranteed to moon at launch.

These promoters will speak with great confidence of the exact amount of return you can expect. No one can guarantee returns, and if they try to, they are most likely deceiving you! You should also know that such claims of guaranteed returns are illegal. Though if the team is anonymous, and there is little to no documentation on the project, chances are that they don’t care.