Avoiding Scams in the Cryptocurrency Industry as a Beginner
The cryptocurrency industry is full of promise for those that have a firm understanding of the landscape and has helped a huge number of investors achieve financial freedom—all the while building up to disrupt practically every industry there is.
But for the uninitiated, the cryptocurrency industry can be a perilous place, as crooks and thieves look to snare unsuspecting victims with an ever more elaborate list of scams designed to part them from their funds. With that said, by doing some basic due diligence before investing, the vast majority of these scams can be avoided.
Wait for Audited Code
As the old saying goes, “code is law” in the cryptocurrency industry. Since most cryptocurrencies are built on publicly readable blockchains and have public smart contracts, it’s usually possible to determine if there are any functions that are a cause for concern by auditing this code.
However, few people have the knowledge to audit the code themselves, which is why it’s important to rely on trustworthy third-party security companies to perform an unbiased audit and publish the results. This will usually shed light on whether the smart contract has any functions that allow the owners to mint coins, reverse or pause transactions, and other features that could be misused.
The final page from VeraChain’s deep-dive on NewsCrypto. (Image: VeraChain)
Most high-quality projects are quick to have their smart contracts or audited by a third-party security company. Take NewsCrypto for example, a hugely popular platform for budding and experienced traders. To put platform users and NewsCrypto Coin (NWC) holders at ease, and to help demonstrate that long-term growth is on the agenda, NewsCrypto enlisted the third-party audit firm VeraChain to audit the entire platform from top to bottom, and published the full report online for all to see.
Unfortunately, not all platforms are as confident as NewsCrypto, so it can take some time before you will see an audit for your prospective investment — if it ever appears. Nonetheless, it is important to wait until one is available, particularly when potentially dealing with newer, less established projects with no credibility — such as the myriad that are cropping up in the decentralized finance (DeFi) space.
Filter Out the Noise
Unfortunately, many cryptocurrency investors have the mindset that early investment is the surest way to turn a profit. And while this may be true in many cases, it’s also the easiest way to buy into overhyped, overshilled projects that have little chance of turning a profit. Because of this, it’s important to be able to filter out the true buzz, from the paid shills before investing.
One of the simplest ways to do this is to Do Your Own Research (DYOR). Take some time to research the project yourself and make your own mind up about whether it is worth investing in. Remember, it is incredibly difficult to find genuinely non-biased information about projects, as there are a huge number of influencers, experts, and thought-leaders who are willing to promote just about anything if they are compensated.
Use Etherscan to see if the majority of the supply is held by a few addresses. (Image: Etherscan)
There are several ways you can look into how strong a cryptocurrency really is, without needing to rely on outside opinions. Want to see how popular it is? Enter the contract address into Etherscan and check the holders tab to see how many token holders there and see whether it’s actually trending by using Google Trends. Want to see if that price drop is normal or an actual dump? Check the asset’s usual volatility on Shufflup to see if it’s within the normal range.
There are a huge number of online tools and solutions you can use to access the raw data on the performance and interest in a cryptocurrency, which will allow you to separate the real from the hype to make more informed investment decisions.
Don’t Chase Ultra High-Yields
“if it’s too good to be true, then it usually is” is another poignant quote for cryptocurrency investors since many investors have both inflated expectations and higher risk appetites, which can lead to disastrous consequences in the cryptocurrency industry.
With the advent of cryptocurrency staking, yield-farming, peer-to-peer lending platforms, and other similar decentralized earning opportunities, more people than ever before are earning a reliable return on their investment — with many achieving upwards of 8% APR with little risk.
Yield-farming coin YAM lost more than 96% of its value in less than a week. (Image: CoinGecko)
However, a huge number of nebulous, often suspiciously high-yielding have been cropping up as of late, many of which are not backed by solid fundamentals, haven’t been audited, and don’t have anything going for them other than pure blind hype. While some of these projects may generate strong returns at first, the risk incurred by using them could be catastrophic, as has been seen numerous times in recent months. As such, these are best avoided unless you are willing to roll the dice and risk as much as 100% losses.