Crypto Scams: How to Evaluate and Identify Fake Tokens

Analysts anticipate that a bull run could happen after the Bitcoin halving. During that time, several tokens will be created. However, not all will be genuine. Bad actors will attempt to take advantage of the hype to scam crypto investors. This guide is intended to demonstrate how to evaluate and spot fraudulent cryptocurrency projects to help you invest safely.

How to Identify Red Flags in a Crypto Project

Here are the red flags that you should look out for when evaluating a project:

Unrealistic Promises and Guarantees: Many failed cryptocurrency projects have lofty promises, usually made by their leaders. For instance, the now-fallen exchange FTX promised a “safe haven for crypto users” before going bankrupt in 2022 under the leader of Sam Bankman-Fried, who is now convicted.

Pressure Tactics: Some crypto influencers are paid by scammy token creators to create FOMO around newly launched cryptocurrencies. They mostly do so through Telegram channels.

How to Evaluate Crypto Projects Quickly

There are numerous factors you can consider when evaluating the credibility of a crypto project. Some of them include:

Expertise

To determine whether a crypto project is credible, you need to check the team behind it. Take a look at the team members and their expertise in the financial or crypto sector. Ensure that half the members have the relevant skills to run a crypto project. Also, one of the members should be among the 200 most popular crypto gurus.

Further, it is important to know the roles played by each team member. Also, check the availability of social media accounts and confirm that they are active.

VC Backing

If you’re still interested in the project after checking the team credentials, you can look at the venture capitalists backing it. One thing to note is that a project does not become reliable if it is backed by a bunch of unknown venture capitalists. Therefore, confirm if there is any Tier 1 investor who has injected funds into the project.

Project Tokenomics

While VC backing and good team credentials are vital elements, tokenomics tends to give better clarity about a particular crypto project. Tokenomics has numerous components. One of them that you should look at is supply and distribution.

If you discover that 5% of the total holders control more than 50% of the token supply, then this should serve as a massive red flag. You can use platforms like CoinMarketCap and CoinGecko to analyze the tokenomics of any cryptocurrency.

Utility

Utility is one of the elements that you need to take into consideration when evaluating a token. So, check if the crypto asset you are interested in has use cases and whether there are any benefits of holding it. For example, if you choose to invest in BNB, you will be able to stake it in Binance’s launch pool and trade at discounted fees on the exchange.

Pricing

Token pricing can be used to gauge a project’s credibility. The initial price of a token is usually determined by the development team. After that, market forces (demand and supply) dictate the prices. A good crypto project should not fall 20% or more from its initial price even after holders sell their airdropped tokens.

Issuance mechanism

Checking the issuance mechanism of a project is crucial. There are two types of tokens: deflationary and inflationary. The former means that the token supply reduces over time, while the latter means more tokens get added to the circulating supply through mining or minting.

Inflationary tokens tend to decline in value if demand remains constant, while deflationary ones surge in value over time.

Smart Contract Analysis

Smart contracts contain vital elements you need to analyze to ascertain the credibility of a token. In some cases, token creators may include scammy codes that limit various functions, such as selling. If you are unable to sell your tokens, then you can deem the project a scam. Before investing in any crypto, copy its smart contract address on platforms like Tokensniffer to check audit reports.