The ballooning cryptocurrency market has attracted huge interest from new investors. The rise is so promising that new coins are being added almost every month. There are now more than 16,000 crypto coins traded, according to CoinMarketCap, a market research agency. But this rapid expansion is proving to be a cause of concern as there are many coins that are launched with the sole aim of riding an existing trend or euphoria and cheat or scam investors of their money. In such a situation, how do we differentiate between the legitimate coins and the illegitimate ones?
To an amateur investor, most coins appear similar with their respective promise of returns and the function they represent. An example of a coin-related scam in the industry was the Squid Game token. Launched following the massive popularity of the Netflix show of the same name, it gained value and lost it with lightning speed. The developers vanished with tokens worth a million dollars, leaving the investors high and dry.
However, there are some red flags that all investors should keep in mind when investing in a new coin – or largely in the cryptocurrency industry. Here are some of them:
1.Verify the project
As a thumb rule, always look for the project's website and its whitepaper. It is one of the most trusted ways to ensure the crypto project is legitimate. Every project releases a whitepaper, explaining the objective, idea and design of the underlying blockchain and other technologies behind the project. The whitepaper can be found on the project's website. Read it and verify the details from other sources.
2.Promise of unrealistic returns
If a project promises high short-term returns, hold back and learn more about it. Any investment takes time to mature. Given the volatile nature of the crypto industry, it is always prudent to invest for the long term. A short-term price fluctuation is acceptable, but extreme volatility should be read as a warning. Also, scammers use phishing emails and social media handles to reach out to novice investors. Be careful with them.
Scammers typically use website URLs that appear similar to the original. If you don't see a “lock icon” in the address bar of your browser, next to a website, it's not safe to visit the website. Make sure that the URL uses “https” and not just “http”.
Look for the people behind the project, the governing body, the foundation backing it etc. Thorough research is always a useful tool against scams. If a project's creators are anonymous, it is a red flag.
Scammers often try to add legitimacy by adding the names of influential people and celebrities to their project without approval. They understand that people place trust in known voices and try to use this as a trick to cheat gullible investors. While some tech entrepreneurs and businesspersons have supported crypto, they have endorsed only a limited number of coins. Verify the claims.