How to check a token for scam?

10 MIN READ
Cryptocurrency
06 March 2024
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What are scam projects

Cryptocurrency scam projects are fraudulent projects created to trick investors into investing money. Their main goal is to attract people's attention and convince them to invest in a project that doesn't really exist or has no real value.
The most common scam projects in cryptocurrency are: fake ICOs, pacifier coins, pseudo-investment projects, Ponzi schemes (pyramids), and pirated coins.

How scam projects work

As a rule, scammers artificially raise the price of their project, thus manipulating people's expectations and playing on their greed. Investors start carrying money to the project because they expect it to grow exponentially, but after the launch, the developer disappears from the market, taking away investors' funds. When the deception is revealed, users get rid of assets en masse, Panic sale occurs and the price collapses to zero. Someone manages to sell assets and get something, and someone loses all his funds due to lack of liquidity.

Let's take a closer look at all types of such projects:

  • Fake ICOs. These are projects that conduct an initial coin offering (ICO) to raise money from investors. However, these projects are scams and investors do not receive any real assets in return for their funds.
  • Fiat coins. These are cryptocurrencies that have no real value or use. They are often created by scammers to trick investors into buying them.
  • Pseudo-investment projects. These are projects that promise investors high returns in a short period of time. However, these projects are often scams and investors end up losing their money.
  • Ponzi schemes. Another type of projects that promise high returns in a short period of time. These returns come from money generated from new investors rather than from actual investments. A Ponzi scheme works as follows: the fraudster creates an investment project that promises high returns to investors, then attracts new investors. The scammer uses the new investors' money to pay off the previous investors. The Ponzi scheme works as long as the fraudster can attract new investors. Once the flow of new investors dries up, the scheme collapses and the investors lose their money.
scam projects

Ponzi scheme

One of the most famous projects based on a Ponzi scheme is MMM, which was created in 1992 and collapsed in 1997. An example of cryptocurrency projects of this type is Express Game - it functioned in 2022.

cryptocurrency scam

Express Game User Profile

  • Pirate Coins. These are cryptocurrencies that are created based on an existing project. They are often used to trick investors into selling their assets in an existing project and investing in a pirate coin. Such coins can be compared to phishing websites.

In addition, there are also cases when fraudsters buy an existing token with low liquidity, raise a hype around it, after which investors buy it into their portfolio, and fraudsters "unload" with the help of new investors, selling the token much more expensive than they originally bought it.

Another common method of fraud is the inability to sell a token after buying it: investors buy a token, but cannot sell it, even if its price rises. At that point, the scammers are removed with the liquidity that the investors have deposited. A well-known example of such fraud is the Squid token, which appeared on the market after the release of the "Squid Game" series. Fraudsters created a frenzy around the coin, fans of the series began to buy, the price rose by 310000%, but when investors wanted to sell the token, it was not possible to do so. After people began to realize that it was a scam token, the price of the coin collapsed.

Cryptocurrency scam projects

Squid token chart

To avoid falling for the tricks of scam projects in cryptocurrency, it is important to thoroughly analyze any project before investing in it.

What are the risks of investing in scam projects

Losing your entire investment is the most common risk associated with investing in scam projects. Scammers often use complex financial schemes to defraud investors, and investors end up losing all of their money.

Of course, investors may realize at some point that the token they invested in is a scam, however, this is usually when the price of the token starts to decline. Even if investors manage to recover some of their money, they still suffer financial losses.
Apart from the financial side of this issue, the psychological effects on the individual cannot be discounted. Losing money can have serious psychological effects on investors. They may experience feelings of frustration, anger and even depression.

Scam projects usually do not provide investors with proper legal protection, because of which, even if a person wants to somehow recover his lost funds, he will not be able to. The FTX exchange, which collapsed in 2022, is slowly returning funds to victims, because in any case, assuming the legal protection of users. In scam projects, this is not provided.

The main signs of scam projects

Too "sweet" conditions - one of the main signs of scam. Promises of high returns for a short period of time - one of the most common signs of fraud. Scammers often promise investors high returns to get their attention. However, these promises are often unrealistic and unrealizable.

In addition, lack of transparency is also a sign of fraud. Scammers often do not provide investors with any information about their projects. They may have an opaque website or not provide any information about their development team. If you can't find any information about the project team or it is anonymous - safely put a red flag to the project.

Marketing is good, but aggressive marketing campaigns are scary. Scammers often use an aggressive marketing campaign to get the attention of investors. They may use social media, advertising, opinion leaders, and other methods to spread the word about their project. This kind of behavior is often a red flag to look out for before investing.

An example is the game IguVerse and its aggressive promotion. Social media, bloggers, Pop Up ads, native advertising and many other marketing tools were used for promotion. This cryptocurrency project announced its revolutionary approach to the gaming and entertainment industry, but problems arose over time. Withdrawal restrictions, lack of games and dissatisfaction with the quality of apps became serious problems. Investors noticed misconduct by the project team. Despite continuing to attract investments and holding ICOs, it became clear that the project lacked real value. The team did not fulfill its promises and did not honor its commitments to investors.

crypto scam

IguVerse advertising banner

If you see any of these signs, it is important to analyze the project thoroughly before investing in it.

Tools for token verification. Checking the security of smart contracts

If you decide to invest in a project, it is very important to conduct a detailed reserch to avoid fraud. There are many token verification tools that can help investors assess the safety and security of a project.

Scammers often use FOMO (fear of missing opportunity) tactics when promoting their projects. Announcements in social networks clearly demonstrate that the user has no time to think about it - they need to invest quickly, otherwise it will be too late. However, investing money without doing research is very risky. In order not to fall into the trap, you should take the time and study all the available details of the project.

The first thing you should do is to check out the team that created the project. The project team is one of the most important factors to consider when deciding to invest: an experienced and qualified team with a good reputation is a sign that the project has a good chance of success. Developers of scam tokens, on the other hand, prefer to remain anonymous, realizing that they are committing a crime and disclosing information about themselves could lead to their arrest. If you are interested in a new project, but can't find the developers' details on social networks or website - be careful.
Of course, the fact of anonymity does not guarantee that the project is illegal, but it is definitely a red flag. Most companies emphasize their reputation and disclose the identities of all team members, as without this information they can't even list on major exchanges. An open team is a reputational point that inspires trust from users.

After you have studied the team, you should pay attention to the White Paper of the project. A White Paper is a document that describes the project, its goals and potential benefits. The White Paper is an important source of information for investors. If a project doesn't have a White Paper, that's another red flag. Typically, scammers don't waste time with a White Paper. At the same time, having a White Paper alone still does not guarantee the honesty of the creators. The document should be scrutinized carefully. For example, if the White Paper consists solely of promises of high returns and predictions of coin growth, that's a red flag. In addition, pay attention to how the document is written - incoherent and poorly structured text should be a warning to you. Conflicting or unclear information can also indicate a bogus project.
If you see something wrong with a White Paper, it is important to do more research before investing in it.

After this step, you should examine the advertisements. Scammers tend to actively promote their products among popular bloggers and on social media. It is important to remember that bloggers advertise for a fee, and not all of them are concerned about their reputation.
Before investing in a project, check the social networks associated with it. Pay attention to the date of creation of groups or channels. If the coin is new, and the news feed is full of promises of "easy" money, it could be a red flag sign of fraud. In addition, even if you found information about the project on paid resources - it is not 100% certainty in the integrity of the project, because in such groups are often closed comments, and as soon as the project is skamish, information about it is removed. Never blindly believe in the advertising of such investment assets, even if you found the information from your favorite blogger.

Next, pay attention to whether the token is placed on coinmarketcap.com and coingecko.com. On these sites, as a rule, you can find all the most important information about the asset: its capitalization, total supply, links to the website and White Paper, a list of exchanges where the token is traded, and audit data.
If the project is clean, this information will be available to you.

skam token

Information and links to the official Chainlink token marketplaces on CoinMarketCap.

Of course, these steps should be done in combination - not just studying the White Paper or analyzing the bidding schedule to make a final conclusion. Let's return to Squid: the project had clear technical documentation, but spelling errors were found on the website - a red flag for a non-serious approach.
You can also study user reviews on various sites: if the project's commenters are mostly negative, this could be another red flag.
In addition to analyzing the project's fundamental data, you should examine the smart contract.

For example, the Bscheck.eu platform analyzes smart contracts for fraud. Here you can check tokens in Ethereum, BSC, Polygon and other networks, getting information about the largest token holders, developer wallets, the project's liquidity level and much more.

scam project

Platform Bscheck.eu

Studying the liquidity of a project is crucial when analyzing it, as liquidity determines how quickly and easily a user can trade a token.
Consequently, tokens with high trading volume are considered the most liquid. This data is available on all token exchanges and tracking platforms. If the liquidity is low and constantly decreasing, it could be a signal of a fraudulent project.
There is a platform called Honeypot.is, which simulates token buying and selling transactions to identify potential scam projects.

scam token verification

This tool focuses on tokens in the BSC network. You just need to enter the token address in the appropriate field on the website and perform the check. If the result is marked red or orange, the project should be carefully reviewed. A green mark probably indicates that there is no scam.

scam project is

Verification of the token on the BSC network at honeypot.is.

To verify token transactions, you can also use the DEXtools marketplace, which allows users to track markets in real time, as well as monitor transactions with a particular token.

token verification

DEXtools platform

There is a project created by Dapp Radar called GitHub. This is a kind of blacklist, which includes the addresses of smart contracts that have already been identified as fraudulent.

The above methods should be used in combination, as only such an approach will allow you to make truthful conclusions about this or that asset. It is important to realize that none of them guarantees that a token will not turn out to be a fraud, but only this approach will allow you to see the whole picture of the asset and then make investment decisions.

How not to fall for scam tokens: tips from the CRYPTOLOGY team

There are plenty of opportunities in the crypto world and they are becoming more and more every day, but there is also the other side of the coin - scam projects. Scams, unfortunately, are not uncommon in cryptocurrency and beyond. In order not to fall for such projects, it is important to carefully approach the investment process.

First and foremost, you should conduct a comprehensive research on the project you plan to invest in. This includes analyzing the team behind the project: find out about their past experience and reputation in the cryptosphere. Having experienced and respected members on the team can be a good indicator of the reliability of the project. Next, pay attention to the project's whitepaper - this is a document that should disclose full information about the project's goals, strategy, technology, and tokenomics. A thorough analysis of the whitepaper can help you understand how feasible and realistic the stated goals of the project are. Don't forget to also keep an eye on the project's activity on social media and forums. Active participation in the community and regular updates can indicate the seriousness of the team's intentions. However, keep in mind that high social media activity alone does not guarantee success. In addition, carefully study the tokenomics of the project. Questions you should pay attention to are: how tokens are distributed, what are the mechanisms of their circulation, are there inflation risks, and what is the total volume of issuance.

We recommend the following platforms for resarch: coinmarketcap.com, coingecko.com, Bscheck.eu, Honeypot.is, DEXtools, DefiLlama, GitHub.

In addition, be sure to study the project's website: assess how well it is made, whether there are no errors and inconsistencies. Inconsistencies or lack of transparency in these aspects is a red flag for investing. If during your research you find inconsistencies or something seems suspicious to you, it is better not to invest in such a project. Remember the principle of "trust but verify". Your vigilance and a thorough project review can save you from losing money.

Frequently asked questions about scam projects

What are scam projects?

Scam projects are fraudulent schemes created to get funds from investors and get away with exit scam. The main objective of these projects is to attract investors' attention and convince them to invest in a project that does not exist or has no real value.

What are the most common types of scam projects in cryptocurrency?

Some of the most common cryptocurrency fraud schemes include: fake ICOs, worthless coins, pseudo-investment projects, Ponzi schemes (pyramid structures), and counterfeit cryptocurrencies.

What are the signs of scam projects?

One of the most common and main signs of fraud is the promise of quick riches over a short period of time. In addition, scammers often shy away from providing information about the development team. They also typically employ aggressive marketing techniques, using social media, advertising, and influential leaders to get investors' full attention.
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