How to avoid crypto scams
On Nov. 1, just slightly after the Squid Game hype was at its peak, investors were throwing their money into a cryptocurrency named after the hit Netflix show.
SQUID, a coin that billed itself as a “play-to-earn” cryptocurrency — usually this means playing a video game and getting rewarded in crypto — was slowly rising from $15 to over $30, and getting users excited. Then, in the span of a few seconds, it shot up to over $2,860 and then crashed down to $0. The developers of the coin, who had restricted users from withdrawing, sold at a high price, and then deleted all their social media accounts and wiped their website. One user, who had put his entire life savings of $28,000 into the coin, lost everything.
In the crypto world, this is known as rugging. Most of us would call it something else: a scam. Like everywhere money is involved, scams are common in the crypto world. But there are ways to protect yourself.
Focus on coins with established histories
Photo by RODNAE Productions from Pexels
One of the main appeals of cryptocurrencies is getting in early — finding a coin that hasn’t exploded in value yet and exponentially increasing your investment.
That’s why it can be tempting to find new coins that are just starting. But without any established history, it can be really hard to separate the scam from the real deal.
What counts as an established coin? It’s more than just existing for a long time. Look for coins that have gone through a few periods of volatility. If a coin already has a few rollercoaster rides behind it, it’s more likely that its developers are not looking for a one-time pump and dump.
But history alone is not a guarantee that you won’t get scammed, which brings us to our next point.
Look at the market cap
Photo by Tima Miroshnichenko from Pexels
A lot of crypto scams rely on a so-called pump and dump. This is when a few users, sometimes the developers of the coin, conspire to inflate the price by buying a ton of it and then coordinating when to sell it so they make a profit, while everyone else is left holding a coin whose price just crashed.
Doing this requires the scammers to be able to own enough of the coin to move its price. With coins that have a higher market capitalization — the total value of all outstanding coins, this is obviously harder. SQUID coin’s market cap, for example, could not be verified but was self-reported around $295 million. Bitcoin, by contrast, has a market cap of over $1 trillion (almost 3400 times more). It takes much more financial power than most people have to move Bitcoin.
Check the developer
Photo by ThisIsEngineering from Pexels
With crypto scams, the culprit is often someone who had access to the coin early. It’s not uncommon for that to be the developer of the currency itself. Creating your own cryptocurrency is relatively easy, and extremely underregulated, which means opportunists will often create a coin to make themselves rich at the expense of everyone else.
That’s why it’s important to do some research on the developer of the cryptocurrency you’re looking to invest in. Are they unknown? Are they backed by any big names? Is there a community behind the project with a sizeable audience? All those factors should be considered. The more experience and presence a developer has, the more likely they’re dedicated to the coin for its merits, and not just in it for a quick profit.
All these tips are here to help you avoid scams, but at the end of the day, even the best of us can get hoodwinked. By sticking to exchanges that verify the coins they let users trade — Vivid’s portfolio for example is hand-picked by our crypto experts — you can get another level of safety. That way, the only thing standing between you and getting rich is your own investment skills, not someone else’s malice.