Red Flags to Look for When Buying Cryptocurrency

With inflation on the rise, you may be looking for ways to pay your rent and other bills. If you are considering increasing your savings with cryptocurrencies, be careful. According to the FTC, more than 46,000 people have claimed to have lost more than $1 billion in cryptocurrency scams since the beginning of 2021. The average reported loss is $2,600 per person.

Cryptocurrency is not regulated by any government agency and investments are not protected like a checking or savings account. With so much money at stake, it’s vital to spot the signs of a crypto scam.

Here are 10 red flags that your investment may be a scam.

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1. Unrealistic claims

A common sign of a crypto scam is unrealistic claims. If a website that sells cryptocurrency claims to do something that sounds too good to be true, it probably is. Beware of any offer that makes grandiose promises without being able to back them up.

For example, if an ad claims that you can earn 10 times the return on your investment in a short period of time, that should be a major red flag. Be skeptical of any project that claims to offer guaranteed returns, regardless of the amount of investment.

Another example is a project that claims to have developed a “new and improved” blockchain technology that is much better than anything else. Unless the team can provide solid evidence to back up their claims, you should be careful when investing.

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2. Not listed on the main stock exchanges

If you want to invest in cryptocurrency, check to see if it is on major exchanges such as Coinbase or Gemini. If not, you should reconsider the investment.

Cryptocurrencies that are not on major exchanges are often scams. Listing on an exchange requires paperwork for registration, which scammers are generally unwilling to do.

3. Lack of detail in the ICO document

If an initial coin offering (ICO) document is sparse in detail, it may be wise to avoid putting your money up. A well-crafted whitepaper should provide clear and concise information about the project, the team, and the cryptography. If crucial information is missing, the ICO is likely not a good investment.

Do your due diligence and thoroughly research an ICO before investing. You want to be sure that you are entering a project with a solid foundation.

4. Lack of a complete ICO document

An ICO without a white paper is usually a sign that the project is not well thought out, the team is inexperienced, or that it is a scam. Before investing in an ICO, request and review the white paper. If the group can’t provide one, walk away.

5. Pumping and discharging behavior

If an ICO is showing signs of pump and dump behavior, you may want to look elsewhere. Pump and dump schemes artificially inflate the price of cryptocurrencies to increase their price. When the price rises and attracts new investors, the original owners are sold, leaving the new investors with much lower value cryptocurrencies.

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In the stock market, pump and dump schemes are considered fraud and are illegal.

Do your research to understand who is promoting a cryptocurrency and keep track of the price to determine if it is a scam.

6. There’s a questionable celebrity endorsement

Sometimes celebrity endorsements can be tricky. For example, in 2017, Floyd Mayweather and DJ Khaled were paid to promote a crypto scam called Centra Tech, but they did not disclose these payments in their social media promotions.

Suppose you are considering investing in a cryptocurrency that has been endorsed by a celebrity. Here’s what to look for:

  1. Check to see if the celebrity has a history of scams or other questionable projects.

  2. Investigate the project itself to see if there are any red flags.

  3. Consult an investment adviser for a second opinion.

Celebrity endorsements can be a useful way to learn about new investment opportunities, but they shouldn’t be the only factor you consider when making an investment decision.

7. The community is small and inactive

When considering investing in a cryptocurrency project, it is crucial to assess the strength and activity of the community behind it. A small and inactive community might show a lack of interest or faith in the project, leading to its eventual failure.

Conversely, a large and active community shows a high level of engagement. It suggests that the project has a better chance of success. Therefore, considering the size and community activity of a project is an integral part of due diligence.

8. Minimal or no information about the founding team or the company.

A project’s website should tell you about the team behind it. If little or no information is available, the project may not be reputable. A team that isn’t willing to share information about itself could be hiding something. Therefore, it is better to avoid investing in projects with minimal details about the founding team.

9. Disorganized or inexperienced team members

A disorganized or inexperienced team may indicate that they don’t know what they are doing. You’ll want to make sure that the people running the business are competent and have a track record of success.

To help your research, look for online reviews and testimonials from other investors. You can also check out the team’s social media accounts to see how they’re interacting with the community. Are they unprofessional or don’t take the business seriously?

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10. The code is not open source

An open source project is one in which anyone can view, download, and change the code. This transparency is essential to ensure that the project is trustworthy. By contrast, a closed source project is one in which the code is kept hidden from view.

This lack of transparency can make it difficult to know if the project is legitimate. Unfortunately, scams are common in technology, and many scammers may try to hide their code to avoid detection.

As a result, you have to be careful when considering a closed source project. If you’re not sure whether to trust a project, be cautious and choose an open source alternative.

Bottom line

By knowing some of these red flags, you can protect yourself from falling victim to a crypto scam. Always do your research and never invest more than you can afford to lose.

These are just some of the things to consider when evaluating a cryptocurrency investment. If something is too good to be true, it probably is, and there are more reliable ways to boost your bank account.

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This article 10 Red Flags to Watch Out for When Buying Crypto originally appeared on FinanceBuzz.