Cryptocurrency scams are a sad but frequent reality in the market. Almost every week, cases of rug pull scams (when founders “disappear” with investors’ money) or other fraudulent schemes are reported. Both new and experienced investors need to be alert to potential fraudsters and scammers. In a recent article, the Dapp Radar platform listed eight ways to identify whether a crypto project is legitimate or not. The analysis focused specifically on the Ethereum ecosystem, which is one of the largest and most important in the cryptocurrency market. However, many of the methods also apply to other networks.
Firstly, investors can conduct initial research on the project using search engines like Google or the former Twitter. This process involves searching for the token and its team and checking for any red flags. It is important to rely on reliable sources of information such as official websites, news articles, and verified social media accounts. Verified Twitter accounts can often help establish the legitimacy of a project. Additionally, investors can participate in discussions about the tokens to gain insights into the community’s views and opinions.
However, caution must be exercised with cryptocurrency projects that have a large number of social media followers but very little engagement. They may have purchased followers or be bots. As the article states, if a clear homepage, white paper, or token purpose cannot be found during an internet search, it is likely a scam.
Secondly, another way to research a crypto project is to check if its code has been verified on Etherscan. If the code is not verified, it is likely a fraud. Scanning the comments section on Etherscan is also worthwhile, as if someone is calling the cryptocurrency project a fraud, there is a 99% chance that it is.
Platforms like Dapp Radar provide listings of fraudulent cryptocurrency project addresses. Other platforms like CoinGecko and CoinMarketCap can also be useful for identifying scams. If a token is not listed on these aggregators’ websites, it is advisable to exercise caution.
Furthermore, if there are warning notifications similar to the one in the article image provided, it is best to proceed with caution. The image warns users about the possibility of the smart contract owner minting new tokens.
When it comes to cryptocurrency exchanges, the article pointed out that if a token is only traded on a few decentralized exchanges (DEX), it is almost certain to be a fraud. Another strategy involves verifying the liquidity of the protocol. If liquidity is less than $100,000 or decreasing significantly, it is possible that the crypto project is fraudulent.
Finally, the article suggests that people use third-party analysis tools to verify a project. Options include Smell Test, which conducts an automated token audit; Honeypot, a list of smart contracts with obvious programming flaws deliberately inserted; and DEXtools, which records live token prices and helps assess the true value of a token in real-time.