How to avoid a cryptocurrency token scam?
The balance between the dark side of the force and the good side does not exist only in Stars War; cryptocurrencies also have their downsides. Token scams and DeFi projects have been on the rise in recent years. In 2019 alone, more than $4 billion was raised in ICOs, phishing, pyramid schemes, and pump and dump.
The difference between real blockchain projects and scams is sometimes imperceptible. However, some details help you unmask a fraudulent token; today, we will talk about them. We will briefly analyze what the types of cryptocurrency scams are and how to avoid them. Follow us and take note so that it doesn't happen to you like the OneCoin investors.
Rug Pull, Pump and Dump and more: the most common token scams
The list of scams from the last century here is long and continues to have new additions. Yet, today, cryptocurrencies are synonymous with wealth and financial freedom, as direct selling was in its beginnings. And yes!, they really are businesses and investments that lead you to overcome solid economic crises when you know how to put your money in the right place.
Deciphering when you're dealing with a legal token and when you're not taking study and research, but you can start with the simplest. What types of scams are going on today?
DeFi Rug Pull
A rug pull is a malicious manipulation in the cryptocurrency universe. The Defi project owners (Developers) may abandon the project and run off with investors' money, saying some software issues need to be fixed.
Nothing, they pull the rug out from under you and leave you on the floor counting miseries.
DeFi projects are a breeding ground for these types of scams. First, developers create a native token whose peer is another popular token; they inject a significant sum of money into it and invest in promotion. So basically, it's like showing a kid a chocolate cake; he will definitely want to eat it.
But, in this case, just when you think you are enjoying the cake, i.e., when the token reaches a high price, poof! The cake disappears. The Devs organize an exit by pulling out all the liquidity they can get. The action causes massive market shocks that send prices plummeting, far below what investors took, sometimes dropping to zero.
Pump and Dump
This type of scam is common, arguably one of the most popular. With the plethora of cryptocurrencies and tokens to choose from, it's hard to separate the good projects from the rotten ones. And this is what scammers take advantage of.
These are like Rug Pulls; the only difference is that there is no excuse behind the project owners. It involves a huge marketing campaign with influencers, YouTubers, and so on.
Once the value goes up (Pump), the scammers and influencers sell their coins and pocket the profits, while everyone else sees their investments lose value (Dump).
Binary Options
Binary options are essentially all-or-nothing bets on how a currency or stock will perform over a limited period.
Like the previous two, they generally rely on enticing online ads, emails, and social media to attract people, often showing investors virtual profits in their accounts.
But, this is just a magic trick; now you see it, now you don't see it. The profits don't exist, and since many of the trading platforms are offshore, it can be complicated to get your money back.
Forex Scams
Forex trading is incredibly complicated, even with professional training and highly advanced software. Because of this complexity, scammers create websites that purport to offer forex trading.
And, of course, if you don't know about trading or only know the basics about it, it will get your attention. Someone else does the work for you, and you earn while you sleep. It sounds like a dream come true, one that will eventually turn into a nightmare.
Now, upon closer inspection, all of these scams have one thing in common: promises of high returns. This, more often than not, causes us to invest without doing our research first.
How to avoid cryptocurrency scams?
There is a term widely used by experienced investors in the crypto universe: DYOR.
Do Your Own Research (DYOR), four letters that can literally save your life. Ask all the questions you need and demand satisfactory answers. Review the documents you may be presented with (Whitepaper, legal records). Find out the founders of the project, the management, and the team (doxxed team).
That's the first thing you should do, then you can follow this quick guide to identify token scams:
● Check the liquidity lock and liquidity pool: the liquidity pool is the foundation behind any Defi project, as, without sufficient liquidity, they cannot provide trading functionality. Therefore, the most respectable and reliable projects lock the combined liquidity for a certain period to safeguard the interest of investors.
● Look for the code base, Smart contract, transaction explorer: the open nature of cryptocurrencies makes them overwhelmingly open source. So projects that are closed source or do not disclose their source code have all the red flags as scams.
● Don't follow the FOMO: Fear of Missing Out; you have to be careful with these acronyms. We have already seen that an excellent marketing campaign can be the honey to catch you out. But, on the other hand, the drive and excitement to be part of a new project that can "revolutionize" decentralized finance is not always a good sign.
Influencers are people who are paid for their work, so their opinion is not to be trusted. Instead, ask for the judgment of an expert or a person who knows the minefield you are moving through.
● Ensure that the project has a launched protocol, at least on testnet: DeFi projects with an Initial Exchange Offering are more secure. A token or cryptocurrency without an actual utility, or a product to back it up, will eventually lose its value.
Scams do not possess the typical characteristics of legitimate cryptocurrency; decentralization, full transparency through a public ledger, and an open-source code that anyone can view and audit.
Like any investment or asset, cryptocurrencies require study, research, and analysis. So pay attention to the warning signs and be cautious; remember that all that glitters is not gold.