Spotting “Scam Coins” in a World Where Coin Market Cap lists over 2,000 tokens.
Unfortunately, as I’ve spent more and more time in cryptocurrency, I’ve gotten better and better at spotting scams. The world is progressing at an alarming rate. While we look at the advancements in technology like smartphones and marvel at how far we’ve come, we’ve advanced in other areas as well.
For example, scammers.
We all know them, whether its the Ethereum giveaway bots that spam tweets under everything Vitalk Buterin says, or those strangely friendly folks who pop up in your telegram asking to speak to an admin — chances are if you’re in this industry, you’ve encountered a scammer or two.
Much like smartphones, scammer technology has made impressive leaps forward. When email was invented, it wasn’t long before we had Nigerian Princes reaching out desperately for our help. When cryptocurrency was invented, a digital form of value, it created some new options for scammers to take advantage of.
How to Know if a Cryptocurrency or ICO is a Scam
A quick note before diving into these. Trust your gut; every time I think to myself, “This might be a scam”, it ends up being a scam. If it seems to good to be true, it is. There’s no such thing as free money in this world.
If you need another reason to learn about how to avoid scams, think of it this way — being able to identify scams is a method to inversely identify good projects. If it moves in the opposite direction of scam coins — it might just be a decent coin.
“When looking at cryptocurrencies, both tokens and coins, it’s important to look beyond the hype. Disregard price talk, rumors, and other baseless information. Instead, look at the cryptocurrency’s core; the fundamentals. Is the token/coin currently used and in demand, is it centralized (and if so, what is stopping the issuer/controller from malicious activity? Is the team reputable?), is the technology itself and tokenization idea strong, or has blockchain just been attached as a buzzword? These are some of the questions you need to ask yourself, not only to spot scams, but to spot /good/ projects.” — Joakim Hjønnevåg, Co-Founder & CMO @ ERCSwap
Not all coins with anonymous teams are scams, but most scams have anonymous teams. A quick aside, I love the ideological foundation Bitcoin and blockchain were birthed from, I think that teams should be able to remain anonymous, hell no one but the CIA knows who Satoshi is and Bitcoin is (and always has been) the highest volume coin on the market. That being said, if we want mass adoption, we need compromise from all parties involved.
If a team wants to be trusted with millions or hundreds of millions of dollars, they shouldn’t choose to remain anonymous. We want to know who we’re trusting, it’s a lot harder to trust a cartoon character depiction of you than an actual picture of your face. If the “Team” page looks like the lineup from an Adult Swim show, I’m out.
When you’re identifying a cryptocurrency to invest in, it’s best practice to do extensive due diligence on their team. It’s impossible to do due diligence on a team that’s anonymous.
Half-Assed White Paper
A venture capitalist wouldn’t invest in a startup that had a business plan on loose-leaf paper, why would you invest in a cryptocurrency with a white paper that looks like it was thrown together in a few hours?
A white paper doesn’t need to be 50 pages long, but it sure as hell better be well thought out. I need to know who you are, what you’re doing, why that matters, and how you’re going to do it — at a bare minimum. If you can’t convince me that you’re well equipped to answer all of those questions and act on them, I want nothing to do with your project.
If a company doesn’t have a white paper at all, stay away from it. It doesn’t mean it’s 100% a scam, but even if it isn’t a scam, why would you invest in a team that doesn’t want to put time into a business plan and technological roadmap for their project?
Lack of Transparency
This is mainly in regards to the Initial Coin Offering, but also extends past the ICO into how the company runs the business in the long run — “long run” being as long as it takes to make an exit with their stolen funds.
Lack of Community
This is a tough one because unfortunately, scammers are really good at building community. It’s easy to get people excited around a pipe dream because it’s just that- a pipe dream. If it doesn’t seem feasible, it probably isn’t. It’s much easier to rally excitement around something that’s just barely out of the grasp of comprehension than it is around something easy to understand. If anyone can understand it then what's so revolutionary, right?
No, if it’s easy to understand then the founders have done a great job at crafting their messaging and communications. If you don’t understand how an AI-based trading platform is using AI, maybe they haven’t figured it out themselves yet.
Anything I’ve Missed?
If you have any thoughts on avoiding scammers in the space, please leave a comment below! Happy to add your thoughts in the article.