Key points to remember
- Investors new to crypto are more susceptible to scams. Keeping abreast of the latest forms of fraud and manipulation is important to avoid financial loss.
- Following a set of simple due diligence routines will help users tell bad projects from legitimate ones.
- Phemex, a well-established cryptocurrency exchange, periodically reviews its listed assets to ensure that users are protected against sweepstakes or exit scams.
Share this article
The crypto industry is known for constant innovation. Projects offer 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 be left with the bag
Scammers also come up with more sophisticated schemes to take advantage of the less experienced, from traditional price manipulation to inserting bugs into apps 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 ploy in which scammers create a new coin and aggressively promote it, relying on false or exaggerated claims.
The intention is to increase the price of the token by promising easy gains. The scammers are cautious enough to generate a fictitious trading volume for a given period and make the project appear viable in the long run (a factor that differentiates a carpet pull from a “pump and dump.“)
When the project gets big enough, the “team”, which is usually the biggest bag holder, walks past the crowd selling everything, pocketing big profits and letting investors hold worthless tokens.
The following is a list of things that suggest a project could be a potential scam or sweepstakes, trying to promote a totally worthless token:
Documentation (white paper)
The white paper explains the technology purpose of a project. Users should be skeptical of a whitepaper that only outlines what will drive the price of the token up rather than explaining the code, economics, business model, and other important aspects of the project.
Serious projects tend to have comprehensive white papers and research that backs up their goal.
There are classic red flags regarding a project team’s identity, work history, and relationships.
It’s a good sign if the team is doxxed. Doxing occurs when members of a project’s team have publicly disclosed personally identifiable information about themselves, contributing to the overall credibility of the project.
Beware of premature partnership announcements. Especially if the project does not last for so long. Build a strong reputation with businesses such as venture capitalists, the media, or a great exchange takes time and effort.
Doubtful endorsements or celebrities “shilling” a token can also help make a project seem bigger than it is. Remember that the fraudster’s goal is to increase the project’s sense of importance, which then translates into positive price action, which then produces “fear of missing out” (FOMO) in its potential victims. .
A roadmap is a display or diagram that explains the protocol’s technology adoption plan. It looks a lot like a simplified version of the white paper summarizing the project’s long-term strategy. The roadmap also includes relevant past achievements. If the roadmap isn’t realistic or doesn’t exist, it’s likely an exit scam.
Check token lists. If it is traded on very few exchanges, centralized and/or decentralized, chances are it is a scam.
Determining how much liquidity there is behind a token is equally 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 that a crypto project is nascent or very little used.
DEX Tools is a great site to find out how liquid the trading pools of decentralized exchanges are. Users can filter the token search by blockchain and exchange. Meanwhile, knowing the transaction volumes and the number of active addresses interacting with a project’s smart contracts will also provide speculators with valuable insights.
Website and social media activity
A poor website that looks like it was made from a template and looks amateurish is a bad sign. A useful tip is to search for the domain on who is. Some jurisdictions are known to host fraudulent websites.
If the site looks good at first glance, examining external links to sites with project-related content, such as a blog, will uncover valuable information. Broken links or poor, outdated external content can tell us how much the team cares about the project’s long-term plans.
False references like 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 testimonies should also arouse suspicion.
If social media users are complaining about some flawed aspect of the token or protocol and the team is unresponsive or vague about the complaints, walk away from this project. Reading in forums like Reddit or Twitter is a great way to find out the general community sentiment of a project.
The crypto has offered many early investors lucrative gains, leading many others to false expectations, falling prey to scammers promising the next 10x. Due diligence and rigorous research are essential if you want to avoid losing your assets to a draw. Especially in an industry that is constantly innovating, recognizing the latest forms of fraud is not always so simple.
Have you found your next 10x? Why not buy it on Phemex? With over 298 pairs of tokens available for trading, Phemex performs periodic in-depth reviews of each listed asset to ensure it meets a high level of standards. When a coin no longer meets this standard, or industry changes, Phemex may potentially remove the token in an effort to protect its users. Phemex is a platform that offers great liquidity, allowing users to trade effortlessly.