In just over 10 years, cryptocurrencies and blockchain technologies have gone from being an obscure and fringe concept to a world-changing technology that is reshaping almost every industry and sector on Earth.
Over the past decade, the news has reported on every self-made “Bitcoin millionaire” and billion-dollar crypto scam that they can. Investing in crypto and crypto exchanges has become a global phenomenon, it’s a rather unpredictable, volatile, risky market that can yield significant rewards or losses.
It’s an exciting new frontier that has captured the hearts and imaginations of industries, investors, and academics of every shape and size. There are thousands of cryptocurrencies circulating the markets, each offering something a little different and new, and this makes it all the harder to spot a winning project to invest in, and that only makes it harder to spot a scam.
Unfortunately, as is the case with any new technology, especially the ones that sell themselves as financial tools or investment opportunities, there are those who would seek to capitalise on the moment and create fraudulent projects just so they can steal money from investors.
In this guide, we’ll be showing you the fundamentals of crypto investing, so you know how to avoid scams and make better investment choices.
The idea is that if you can spot the negatives, then you’re going to have an easier time finding good investments.
One of the best ways to thoroughly protect yourself from potential scams is to do some research of your own. It doesn’t require any expertise or prior knowledge in finance, law, tech, or business; what you need to know is where to look and how to process that information.
Most legit crypto projects are aware of the scams and frauds in the space, and so they’ll usually do everything they can to be as transparent and open as possible.
Good projects regularly update their audiences through blogs and social media, publish the code that they are working on, build communities and partnerships across multiple channels, and most importantly, produce a whitepaper that details every single facet of the project.
So, let’s get started!
Meet the Team
The success of any project rests with the team that is creating it; if you want to check the credibility of a project, one of the first places we should look is at the team.
By taking a look at the founders, executives, developers, and advisors, we can deduce just how legitimate the project is and in some cases, how successful it may be.
A team’s collective experience and knowledge will play a huge role in their success, and so understanding the track record of key players in the team makes a world of difference to your portfolio.
Unfortunately, scammers are well aware of how to manipulate this and tend to create rather elaborate profiles for fake members of the team. This will include pictures, a LinkedIn, biographies, links, and other trinkets to make it seem legit.
Even if the profile exists, you should take the time to check their activity, see if it matches up with the number of followers they have. If they have a large following and rarely engage with their audience, this is another warning sign. If there is no team or no links to particular members, this should be taken as a rather large red flag.
Cryptocurrency projects are usually too complex for the regular, everyday person to understand, but any company that takes themselves and their project seriously, will put some serious effort into explaining their vision to you.
Simply put, companies that don’t provide a whitepaper should be avoided at all costs.
Having a publicly available whitepaper is essential for any crypto business, it details the solutions they hope to introduce, why, how it works, and what their plans are for the coming years. It provides investors and regulators with every single grain of detail about the project, their strategy, timeline for implementation, goals, concerns, and future vision are all on display.
So how can we glean value from a whitepaper? Well, be thorough, check to see if the whitepaper has any complementary resources such as a litepaper (a smaller, simpler version of the whitepaper), or blog entries, and be sure to check the references for yourself.
It’s still possible for scammers to create a fraudulent whitepaper, and some have managed to steal millions of dollars before getting caught. Smart scammers will make sure that the information in the whitepaper is hard to find and verify, and so here is a list of everything a whitepaper should include:
- A detailed explanation of the project, goals, and technology.
- The team behind it and their qualifications.
- How will they use funds raised from investors?
- What type of cryptocurrency are they making?
- How many tokens are to be issued?
If they are missing one or more of the above, then you should probably steer clear. If all of the above are featured, congratulations, you’ve most likely found a great investment!
Crypto companies have to battle for credibility in this highly-competitive industry; regular online engagement is usually a really good sign of things to come, especially when considering the credibility of the team and the project whitepaper.
Scammers are all too aware of this, and will even for so far as to impersonate other legitimate projects in existence. They do so by creating websites that are extremely flashy and professional, they also create imposter websites, fake social media channels via Twitter, Telegram, and so on.
To avoid this, compare the social media profile names against that of the company they are assuming to be. Check their social channels and look through them, question how active they are, if there’s any significant bot presence, and how many people outside of staff and admins are engaging with posts.
They will also go as far as to create fake mobile apps, and although these are shut down quite quickly, they are still hurting many people. Look for obvious misspelling, does the branding and logo look inauthentic or replicated? Use every online resource available to you, and beware before downloading.
If an offer seems too good to be true, then it probably is. It’s incredibly important to be realistic; sure, a 500% return on an investment is awesome, but just how likely is that to happen?
Fraudsters will often use the false promise of high returns to lure would-be investors, and they’ll do so without any strategy or information to back them up. Whilst there are some legit products that consider themselves to be the next revolution, and projects that seem like truly innovative efforts that are way ahead of their time, they usually aren’t.
Here we have to quell our imaginations and greed. Check the total supply of tokens there are on offer, which exchanges they’ll be listed on, partnerships, as well as odd and unconventional purchasing methods.
If a project has passed all the above checks, then it comes down to the fundamentals of how the proposed crypto works, how many tokens are to be issued, how they’ll be distributed, partnerships, and how the token is used.
Some scams can somehow manage to bypass the most cynical minds in the business, and whilst it isn’t as frequent a practice now, you can still occasionally find scammers having their products promoted across major news networks and social channels.
If the promotional rollout seems excessive within a short time frame, and that information fails to reflect any real actions or promises from their roadmap, take a moment to examine their social channels, GitHub (where developers typically post updates), as well as their blog and community.
These promotions are designed to reach the most people as quickly as possible within a very short time period. A legitimate project will not need to advertise and expand at such a rapid pace, and this is because any good enterprise scales slowly and organically.
Naturally, there will be periods where projects are marketing heavily, but this is often in the lead up to a major release, update, upgrade, and so on. Again, check the promotional content against their proposed whitepaper/roadmap timeline to get a better understanding.
With the above information, you should be well on your way to having a better understanding of what to do when searching for your next investment. There is plenty of nuance between each of the above layers, but when you put them all together, you’re more likely to make a good decision as opposed to losing money.
The crypto and blockchain space is evolving at an extremely rapid pace, and with every new innovation introduced there will always be room for scammers and fraudsters to take advantage.
But as mentioned, by using the fundamentals we’ve shown you, not even the scammers will be able to keep up with you.