As the days come by, crypto trading is gradually becoming a part of our financial landscape we can no longer shy away from. With more and more tech giants investing in and incorporating features of the nascent sector, financial market traders continue to catch the crypto trading fever.
However, it is essential not to throw caution to the wind while investing in crypto projects. According to a Chainalysis report last week, crypto investors spent $4.6 billion buying ‘pump and dump’ tokens last year.
This says investors spent hard-earned money on over 9,900 fraudulent projects in 2022, with their creators stealing $30 million from the victims.
A pump and dump scheme, synonymous with rug pull, is a crypto fraud. The illicit scheme involves artificially increasing the price of a token before selling, leading to sharp price declines and causing significant losses for other buyers. Recently, such scams have increased due to the anonymous nature of digital assets.
Nevertheless, by looking at the right set of factors, traders can determine the fundamental value of an underlying project before investing. There are details to check in a project to determine its legality and viability. This article will discuss three things to look out for in a crypto project to avoid falling victim to pump-and-dump schemes.
Check out the whitepaper
A whitepaper is a document that gives an intentional and detailed overview of a particular crypto project. Whether for temporary trading, buy-and-hold or long-term investment, reading a crypto project’s white paper is critical.
Scrutinizing a project’s white paper reveals the use case the digital asset is targeting and the problem it is trying to solve. It is now left to a crypto enthusiast to determine whether that use case is viable and wanted.
A good white paper explains the project’s goals, use cases and distribution, the team’s vision, the technology behind the token, plans for upgrades and new features, and how the token provides value to users.
It’s important to ask these hard questions and get complete answers before putting money into a project. If a project’s whitepaper cannot answer those questions in clear, in-depth and realistic terms, then there’s something fishy about it.
Look at the people behind the project
A project is only as good as the team behind it. A white paper should have information about each member of the team. It is also important to do independent research to know if the people offering the project have the right skills to make it work.
You should ask if the people behind the project have previously worked on other reputable, successful projects. Their credentials and experience and if they are reputable members of the crypto community and blockchain ecosystem. You should also check if they have been involved in questionable projects, scams, or fraud.
Additionally, one should see if the project has an active community. An active community indicates that there is interest in the project. The project has little or no support if the community is small or inactive.
It is important to know that any crypto project with anonymous or pseudonymous names behind it has a high probability of being illegitimate.
Is the project over-promising?
If you’re conversant with the crypto space, you wouldn’t be surprised by the ‘to-the-moon’ chants that characterise the community even when a project has no utility.
So many projects overpromise and give unrealistic targets; you should beware of them. Projects that promise high returns or easy gains without considering the risks are largely scams.
A considerable number of projects have unattainable road plans in their whitepapers. Any project that seeks to build or solve a problem within a few years without a proper and viable pathway is a red flag.
It is pertinent to know that investing in crypto is risky, and there are no 100% guarantees of gains. Additionally, many scams are in the space, so check the project’s credibility before investing. If something seems too good to be true, it probably is.
In a nutshell, to identify a potential pump and dump scheme, understand the project through its whitepaper, check out the team behind it and see if the project has an active community. Also, watch out for overpromising and unrealistic goals.
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