How to Avoid Cryptocurrency Scams with these 24 Red Flags

Beginner’s Guide / 20.07.2019

For a much-maligned product, the cryptocurrency has grown to hold its own. As of January 2021, CoinMarketCap estimated that there were around 8300 cryptos in circulation. Their proliferation is affording users options in both payments and investments. Whereas this growth is welcome, it has come with its fair share of risks. Chief among them is the rise of scam projects. The number of coins on offer is taxing to pick the authentic projects from the dubious ones. 

Luckily though, there are telltale signs that help separate the solid from the uncertain projects. This article will focus on 24 red flags that highlight risky assets for a more painless evaluation process. It’s important to note that not all coins exhibiting these signs are a scam. However, their presence creates uncertainty pointing to the possibility of losing one’s funds. 

The Repository

Several glaring anomalies continue to plague the cryptosphere. Their obviousness makes them easy to avoid.

1. No Public Code Repository

The prevalence of scams in the crypto space makes a case for public code repositories. The repository provides proof that the product’s code does exist. Additionally, they assure the public of the presence of a development team and product. It follows, therefore, that any authentic project would have one. An absence of one is a strong cue to give a coin a wide berth.

2. Low to No Activity

Cryptocurrencies promise to transform the financial sector enormously. While this is welcome, many coins do not inspire confidence that they’ll see their visions to fruition. For a currency to achieve success, it must continually develop. Coins that take ages before pushing updates to their repositories dampen users’ confidence in them. 

The Team

The team is the project’s face. Their reputation precedes that of the coin they’re championing.

3. Lean Team

Any project worth it’s salt will have adequate staff. Making one’s imprint in any industry requires a brigade of dedicated people. As such, look for projects composed of more than two members.

4. No Advisers

The presence of advisers assures the team’s commitment to the project. On the flip side, a lack of advisers shows the inability to convince market influencers on the project’s viability.  The same goes for single adviser teams.

5. No Diversity in Positions

For any firm to succeed, it needs highly specialized staff. In the crypto space, successful projects are more than the engineering teams. It also employs individuals with other specializations, including business people, marketers, designers, community coordinators, and many others.

6. Anonymous Team

Days when anonymous teams would front cryptos are long gone. Back then, the mystery surrounding Bitcoin made that possible even standard. However, the increased incidences of scam ventures and ineptitude have changed this.

Today, an anonymous team is a massive red flag. Anonymity implies that the team is uncomfortable with its qualifications. By staying in the shadows, they hope to keep the public in the dark about this. It would help if you didn’t accept their anonymity reasons outside of overwhelming proof, no matter how plausible they may seem.

7. Low Team Engagement

Developers ought to engage the public through other fora besides their repository activity. Active blogging and tweeting connect the founders with the market. The developers must-attend conferences and the team needs to interact with the crypto community. A lack of engagement signifies a team’s waning momentum. They may have run out of the impetus to drive their venture.

8. Public Team Infighting

It’s a given that teams may disagree. However, the team should amicably resolve these internally. Pursuing internal issues in public doesn’t augur well for all involved with the venture. The spillage of internal wrangles to the open is indicative of a worsening of relationships. Small startups rarely weather such storms. Often public spats lead to the separation of teams and the death of their vision.

The Funding

Funding is critical to any project’s health. It follows that any serious project will have stable funding

9. No Funding

Projects that demonstrated long term team dedication exempts them from the requirement to have substantial financial backing. Examples include Bitcoin and Litecoin. Away from these exceptional cases, the greater majority of coins need adequate funding for their development. Inadequate funding discourages development leading to team exits.

10. Who are The Backers?

At times coins claim to have the backing of famed venture capitalists or influential funds. It isn’t difficult verifying these claims. Therefore it should be disconcerting if investors don’t conduct their due diligence.

Besides announcing fictional investors, dubious ICOs would pronounce colossal investments from shady groups. Overdoing themselves to gain public trust could indicate falsification of their funding history. Every team should be able to account for its funding.

The WhitePaper

The white paper is an essential document in the crypto space. It details the team’s mission. It opens our understanding of the team’s objectives and their means of achieving them.

11. Absent WhitePaper

The absence of a WhitePaper denies investors the opportunity to share in the coin’s vision. Cryptocurrencies are inherently disruptive. You’d therefore expect that such projects would let their investors in on what they’re about. It would be unsettling to think that a project wouldn’t know its intentions.

A missing white paper depicts a rudderless project. The team could be pursuing goals detached from its target market.  

12. Plagiarized White Paper

Plagiarism is the height of intellectual dishonesty. It portrays a lack of understanding of the technology’s working and the reasons for using solutions chosen. Regardless of who does it, it paints the organization in a bad light. It reeks of incompetence through and through.

13. No Technical Details

In addition to illustrating the team’s vision, the white paper should also lay bare some technical assertions demonstrating their capacity to actualize it. Granted, the technical details will change with time; however, it’s unreasonable to cut out all technical details. Lack of a technical outline implies the absence of technical members on the team during the ICO.  

14. No Timeline

Any team without a timeline is directionless. Providing investors with the product iterations raises hope in the project. Providing project iterations raises investors’ expectations. These expectations increase the team’s accountability. 

The Market & Hype

Crucial as marketing may be to the business, it shouldn’t overshadow the actual product building. Publicity campaigns shilling a coin are an obvious red flag. Such indicate underhand schemes behind the scenes. 

15. Over-Hype

The crypto space is crawling with projects that are more of hot air than substance. Over-hyped projects target those with limited technical know-how or are quickly sold on blindly promoting coins. Consequently, the coins skyrocket without a solid reason. One needs to carefully evaluate the basis for a coin’s rise in value. If it’s because of increased hype, then instability is on the horizon.

16. Misleading Features

A common hyping technique involves teams marketing features that don’t exist. This amounts to promoting a hollow product.

17. Grand Vision

The team should show the goods for its word. A grand vision remains just that until there’s substantial proof of their capabilities. The proof is in the form of technical details on how they’ll accomplish their objectives. Without the technical details, the team could be selling a pipe dream.

18. Publicity Stunts

It’s crucial to look beyond the publicity fanfare. You should ask yourself if there’s substance behind the marketing frenzy. Does the project stand for something gainful, or is it more concerned with announcing new features, marketing campaigns, and partnerships? Avoid getting sucked into such announcements.

19. Market Size

Many underrate market size when evaluating a cryptocurrency’s viability. At the moment, there’s a proliferation of niche coins. Although this isn’t an issue, a more general currency is preferable. The market will readily adopt a coin with broader application. Such a coin mitigates the need to have many coins catering to different needs. Holding niche coins is cumbersome and unsustainable.

The Purpose

The philosophy behind the coin gives insights into its utility. It’s important to query the particular need the coin serves. The cryptoverse is lucrative and does attract creators that would build something for the sake of building, not that they’d have a pain point to serve.

20. Need

A coin needs to justify its existence. Additionally, it doesn’t need a convoluted explanation to justify its usefulness. A Blockchain that doesn’t solve any problem need not host a coin. 

21. Complexity

A coin should simplify situations. Any coin that complicates transactions lacks a definite purpose. Again cryptocurrencies are moving towards a unified future. One needs to be wary of a  coin that’s working to the contrary. 

22. Ponzi Schemes

Any whiff of a Ponzi scheme always turns out to be so. There are no guarantees in the crypto space. Again there’re no freebies; everything has an attached cost. Flee from projects that portray their coins to be only appreciating.

The closest you’d get to a freebie in crypto are airdrops and forks. Despite that fact, they’re also susceptible to different risks and sets of scams. 

The Premine

A good grasp of the ICO/IEO/STO offering is central to selecting the coins to purchase.

23. No Hard Cap

Apart from the very few exceptions to this rule, for example, Tether, you should be wary of projects without hard caps. Given free reign to mint coins, teams could do so, resulting in a decline in the coin’s value. Consequently, there will be a dilution of every coin holder’s value. 

24. Distribution of Funds

It is the norm for teams to allocate themselves a portion of the coins or tokens arising from the ICO. Be that as it may, it’s unacceptable for the team to give itself the lion’s share. A 10% allocation is fair to contextualize this, not so for 40-50% of the total supply. Huge team allocations centralize the project running counter to the fundamental principles of crypto development. Concentrating the coin’s ownership within a small clique turns off would-be investors. 

Final Thoughts

The ballooning of cryptos has provided a fertile breeding ground for scam projects. As such, navigating the cryptosphere is a daunting task. One needs discernment to avoid the many pitfalls that dot this space. This article has identified 24 red flags that point to potentially risky projects. While acknowledging that not all coins exhibiting these characteristics are a scam, it nevertheless shows the uncertainty that comes with them. Approaching crypto investments with this knowledge helps save time and notably investor’s funds.

Adam is an outgoing young lad who likes adventures and discovering new things. Despite his boring life, he loves writing about cryptocurrencies and exploring what blockchain technology can do for the coming digital world where all adventures will be virtual.