Last updated on July 21st, 2023 at 09:05 pm
With an overwhelming number of cryptocurrency projects listed on various platforms, it can be challenging to differentiate legitimate projects from those that may not be as trustworthy. To assist in identifying potential risks and help avoid investing in a fraudalent cryptocurrency, I have outlined 10 key areas to look for red flags that will help you learn how to spot bad crypto projects!
Project Team
When evaluating a new cryptocurrency company or project, one of the key factors I consider is the team behind it. Their credentials and experience in the industry can provide valuable insights into the potential success of the project. Therefore, I always check for information about the team on the company’s website, including their photos, LinkedIn profiles, and connections. Additionally, I also look for any mentions or feedback about the team from other industry experts or reputable sources.
WATCH OUT FOR:
A project using anonymous team members names or pseudonyms.- A project that lists names of team members, their history, but no links to their professional profile. It is easy for scammers to make a fake identity and work history.
- No relevant experience or expertise: A team with little or no relevant experience or expertise in the industry can be a red flag.
Token Metrics
Crypto token metrics are a set of data points that are used to evaluate the performance, value, and potential of a cryptocurrency or crypto token. Token metrics of a cryptocurrency can be found on CoinGecko or CoinMarketCap. These metrics can include, but are not limited to:
- Market capitalization: This is the total value of all the coins in circulation, calculated by multiplying the total number of coins by the current price per coin.
- Circulating supply: This is the total number of coins in circulation.
- Total supply: This is the total number of coins that will ever be in existence.
- Token price: This is the current market price of a single token.
- Token trading volume: This is the total number of tokens traded in a specific period of time.
WATCH OUT FOR:
- If the tokenomics of a project are unrealistic or unsound, it may be a red flag.
- High token supply or pre-mine: If a token has a high total supply or a large pre-mine, it may indicate that the team is more focused on raising funds than building a sustainable project.
Funding
Crypto projects require funding for development, including the creation of the blockchain, smart contract development, and the creation of the token.
Marketing and promotion: Crypto projects require funding for marketing and promotion in order to raise awareness, attract investors, and increase adoption.
Operations: Crypto projects require funding for ongoing operations such as staff salaries, legal and accounting fees, and other expenses.
Partnership and collaborations: Funding allows crypto projects to form strategic partnerships and collaborations, which can help to increase adoption and build trust in the project.
WATCH OUT FOR:
- A history of mismanagement or poor use of funds.
- Lack of transparency in funding: A project that is not transparent about its funding sources or financials can be a red flag, as it may indicate that the project is not being transparent about its financial situation or that the funds are not being used for their intended purpose.
- No clear use of funds: A project that does not have a clear use of funds or a budget can be a red flag, as it may indicate that the project has no clear direction or goals.
- High pre-mine or pre-sale: A project with a high pre-mine or pre-sale can be a red flag, as it may indicate that the project is not decentralized and that the team is not committed to fairness and transparency.
- No clear funding structure: A project without a clear funding structure, such as an initial coin offering (ICO), a security token offering (STO), or a crowdfunding campaign, can be a red flag, as it may indicate that the project is not following best practices for fundraising.
- No clear revenue or profit model: A project without a clear revenue or profit model can be a red flag, as it may indicate that the project has no long-term sustainability plan.
Github Activity
Github is where developers upload and share code. Most cryptocurrency projects have open-source code. This is because open-source code aligns well with the decentralized and transparent nature of cryptocurrency. A measure of a healthy crypto project is how frequent they are adding and modifying code. A Github repository that is active, well-maintained, and has a good number of contributors can be an indicator of the project’s trustworthiness and commitment to development.
Though, some companies prefer not to have an open-source repository, which means the public are unable to track the development progress of a project or sometimes collaborate.
WATCH OUT FOR:
- Copy-paste code of another project. Usually it means that it offers nothing unique, and likely a low-effort scam.
- Lack of activity: A Github repository with little or no activity can be a red flag, as it may indicate that the project is inactive or not being actively developed.
- No code commits: A repository with no code commits or updates can be a red flag, as it may indicate that the project is not being actively developed or that the code is not being made public.
- No documentation: A repository with little or no documentation can be a red flag, as it may indicate that the project is not well-organized or that the team is not committed to transparency.
Note: these only apply to a project that is open-source, sometimes a company may choose to keep their code private for a competitive advantage, which sometimes is not a bad thing.
Partnerships
Partnerships can be an important factor for a cryptocurrency project because they can help to increase visibility, credibility, and adoption of the token. Partnerships with reputable companies, organizations, or other projects can help to increase the visibility and credibility of a token, potentially attracting new investors and users.
WATCH OUT FOR:
- Non-existent or fake partners: Some projects may claim to have partnerships with big companies or organizations but in reality, these partnerships don’t exist. This can be a red flag.
- Lack of credibility or reputation: A partnership with a company or organization that has a poor reputation or lack of credibility can be a red flag.
- No real value-add: A partnership that does not offer any real value or benefit to the project or its users can be a red flag.
- Vague or undisclosed details: A partnership that is announced with little or no details about how it will be implemented or what value it will bring can be a red flag.
- No track record of success: A partnership with a company or organization that has no track record of success in the industry can be a red flag.
Uniqueness
Being unique is important for a crypto project because it can help the project to stand out in a crowded market and attract investors and users. Being unique does not gurantee a project’s success, though if it can target a specific problem or market inefficiency, its helps to increase its adoption and value, especially if the problem is difficult and much needed.
WATCH OUT FOR:
- Lack of differentiating features: A crypto project that lacks any unique features or functionalities can be a red flag, as it may indicate that the project does not have a clear competitive advantage over other projects in the market.
- Copycat code of existing project/s.
Roadmap
A project’s roadmap in cryptocurrency is a plan or a set of goals that outlines the development, growth, and future plans of a crypto project. It typically includes a timeline of key milestones and deliverables that the project aims to achieve. Often this is done through a a ‘whitepaper’, which is usually a PDF document that outlines the project’s goals, technology, and business model.
The whitepaper can also include details about the project’s vision, mission, and objectives, as well as a clear understanding of how the project will be developed, marketed, and launched. It also helps to understand the project’s vision, mission, and objectives, which can help to determine if the project aligns with your investment strategy. It also helps to understand the team’s commitment towards the project.
WATCH OUT FOR:
- Lack of a roadmap on the website.
- Lack of a whitepaper or unclear whitepaper: If a project doesn’t have a whitepaper, or the whitepaper is unclear or poorly written, it may be a red flag.
Market Analysis
Look at the market trends, chart and historical performance of the cryptocurrency. Check the trading volume, market cap, and the overall trend of the coin, it will give you an idea of how the coin is performing. A token with both rising volume, and rising price is a good indicator that is healthy. Check other technical indicators and data using a platform like TradingView.
WATCH OUT FOR:
- Overbought technicals. Check various trading analysis indicators such as the RSI, MACD etc. to ensure the project isn’t already in the overbought territory. You especially should not buy if is showing bearish divergence on the larger timeframes (Daily, Weekly, Monthly).
- Low trading volume: Low trading volume in a crypto project can be a red flag, as it can indicate a lack of investor interest and make it more risky to invest.
Exchange Listings
Generally, the more exchanges that a token is listed on, allows for more people to buy and sell the token, increasing its liquidity. This can make it easier to enter or exit a position in the token. However being listed on the larger and more reputable exchanges is more important that being listed on many unknown or non-credible exchanges. Binance is the largest exchange, and being listed on it alone brings huge volume.
WATCH OUT FOR:
- Removed or blacklisted from certain exchanges.
- Insufficient trading volume: Exchanges with low trading volume may be more susceptible to price manipulation, and can make it difficult to buy or sell a token.
- Limited trading options: There should be multiple pairs for the cryptocurrency you are interested in. For example ‘COIN’/BTC, ‘COIN’/ETH, ‘COIN’/USDT, ‘COIN’/USDC. The more pairs the better. If there is only one or two trading pairs on also possible exchanges, it can be risky.
- Hack history: A history of hack or security breaches is a serious red flag.
Community
Pay attention to the community and media presence of the cryptocurrency. A strong and active community and positive media coverage can indicate a healthy project and a good sign of potential growth. The social media channel you should check include Twitter, Reddit, Telegram and any others the project has. Check the number of followers on these channels and what people are generally saying about it.
WATCH OUT FOR:
- If the project doesn’t have a strong community or partnerships, it may be a red flag, or it may be simply too early for the project (sometimes it pays off to be really early).
- Negative sentiment from the community. Check the sentiment of what others are saying if there is a community, and ask yourself is this FUD (Fear, Uncertainty, Doubt)? or do these people have legitimate concerns about the project. Sometimes others will spread FUD in their own self interest as they want to buy in at lower prices.
Conclusion
This has been a guide on how to spot bad crypto projects, listing some red flags to watch out for. The crypto market is still a bit of a wild west. You need to be dilligant with your capital and remember most of the scams pop up in a bull market.
