With the rise in the use of cryptocurrencies around the world, there has also been a rise of fraudulent cases regarding crypto. If you’re a crypto newbie, it’s easy to fall for these scams as they promise returns that are similar to legitimate cryptocurrency investments. Old crypto traders can also fall for these scams due to oversight. It’s become quite difficult to find out if a cryptocurrency offering is a scam or not so we’ve made this checklist you can use when next you see a new exchange, ICO or token sale.
1. Research the team
The first step is to find out who owns the exchange you’re about to buy crypto from. For ICOs and token sales, you should also carry out research on the members of the team. If you can’t find a team page or about us page on the site, it is very likely to be a fraudulent enterprise. However, if you do find a team page, make sure you Google the names of the major members of the team. Many crypto scams create fake identities so be careful to ensure the information you find on Google isn’t new. A real person would at least have some social media activity dating back a few years.
2. Read the whitepaper
Understand what exactly they’re trying to do. An ICO’s whitepaper not only contains info on the token sale but explains stages in the fundraising process as well as explaining what problems the token is going to solve. A whitepaper could also include the market proposition of the token i.e how much solving the problem is worth.
3. Too good to be true?
Are you about to purchase a token that’s promising you 10,000% return monthly? Or is it a ‘Bitcoin investment scheme’ promising similar amounts? If the return on investment is too good to be true, you should probably run. The crypto market has seen several ups and downs in the last 5 years and no one can guarantee such returns.
4. Token Monopoly
A token monopoly occurs when the developer(s) behind an ICO project keep or intend to keep a majority of tokens before the token sale(say between 70 and 80%). It’s also sometimes referred to as ‘pre-mining’. Why is this a bad sign? It’s a bad sign because it means the developer is trying very hard to enrich themselves. What usually happens in these cases is that the ICO ends, the token gets listed on exchanges and the developer sells almost all his holdings in the token. This causes the price to drop sharply, leaving you the investor with nothing.
5. Project Feasibility
When investing in ICOs, you need to ask yourself, ‘is this possible’? Some blockchain developers try to solve already existing problems by slapping a token on it. Some of these problems are issues hundreds of people have tried to solve but haven’t been successful. You need to ask why it’ll be successful just because there’s a token for it. If anyone is promising to purchase land for you on Mars or raising tokens for teleportation? It’s probably not that feasible if you really think about it.
6. Pyramid or Multi-level marketing schemes
A pyramid or Ponzi scheme is one where the manager of the funds(in this case tokens), doesn’t trade or invest in the funds but promises huge returns to investors. In a pyramid scheme, the manager typically pays older investors with money from newer investors. At some point, the pyramid collapses because there isn’t enough money to sustain the operation. If you’re Nigerian, you’re familiar with the MMM craze a few years back. All ponzi schemes must fail.
Multi-level marketing schemes act like pyramid schemes but sometimes there’s an actual product being purchased or sold by investors. In the cryptocurrency age, all of these schemes trade nothing to provide returns for the investor. They rely on foolhardy investors to keep sustaining the organisations.
7. Beware of Malware
Is anyone asking you to download some software so you can have access to their token or altcoin? This is a shady move. You should ensure the project is popular enough and well-backed before you download any piece of software to your phone or laptop. You should also run away from apps that promise to mine you Bitcoin or other cryptocurrency and all you have to do is nothing.
A lot of these apps take advantage of greedy users and engaging in mining data from users’ phones or laptops. This could include email addresses, passwords and even debit/credit card numbers from several people.
Those are 7 ways you can spot cryptocurrency scams. The important thing to note is to be satisfied and not act greedy before making any cryptocurrency investments. As a rule of thumb, you should invest only what you’re willing to lose.