The crypto industry is in its nascent years and, therefore, prone to scammers who trick investors and try to steal from them. So, how do you avoid these frauds? Here are some expert suggestions:
What Makes Crypto Industry Attractive, also Makes it Vulnerable
When investors talk about cryptos, many are those who say they do not trust them because they are scams. The industry does not inspire confidence.
Many are the times when investors let down their caution, especially during periods of high crypto prices. This was the case in 2021 when most people were buying cryptos for the fear of missing out (FOMO). However, the trust levels plummet when the price of cryptos nosedives.
In November 2021, the view taken by most people was that cryptos meant Bitcoin. However, the truth is that the industry is large and has a lot more coins, including Dogecoin and XRP. Other assets in the industry include non-fungible tokens and other decentralised finance (DeFi) products.
The factors that make DeFi products and crypto assets irresistible are the same ones that make them vulnerable. According to the Federal Trade Commission, about 46,000 people reported a loss of over one billion to crypto scammers. The recent collapse of the Luna and UST coins swept off over USD55 billion, leaving many retail investors with huge losses.
How to Identify and Avoid Crypto Scams
The following red flags can help you to assess specific crypto projects or assets and determine if they are likely to be scams. Note that no matter the crypto asset or project you are interested in, research and due diligence are the best tools.
Who is Behind the Crypto Project
Anonymity was probably a big thing when the first crypto was developed, but not any longer. Before you can pump funds into any project, check closely to determine who is behind it. Verify the identity of the people, and dig further to know the background of the board members driving it.
Check for successes with previous projects, audit the applied smart contracts, and analyze the accountability around the team. Most scams are perpetrated by anonymous teams. So, if you establish the desire to hide any detail from investors, it might be a scam!
Analyse the Project’s Purpose
The viability of a project in the long term is in understanding the problem it aims to solve. Simply ask, “What is the value that the crypto is bringing into the economy?”
Every project should have a clear social impact plus potential financial risks to investors. Therefore, do not stop at the rewards. The project should also make full financial disclosures and open its system to complete scrutiny.
If you notice that the project has no use case, and well-defined road map, treat that as a major red flag!
Audit and Security
If a crypto project is not audited, this should be a red signal. Audits by independent third-party experts provide deep insights, allowing you to check what might have skipped your eye. They also help to detect security issues that you can use to make the decision to join a crypto project or avoid danger.
A good crypto or related project is all about the team, utility, community, tech, and roadmap, according to Nicholas Donarski, the founder of ORE System. “People invest in fully [identified] teams with great visions for their tech and how to solve big problems,” emphasised Donarski.