Don’t Believe the Hype: Six Red Flags of Crypto Businesses
Do you find a promising crypto project but aren’t sure if it’s a good case or a scam? Check it for 6 points of suspiciousness. Otherwise, you can go from riches to rags. Yes, some scams can cost you a whole fortune, so double-check every potential project!If you find even three or four red flags — run as fast as you can. We found this article on Michael Mulder’s blog on .cult, and we like it so much that we want to share his knowledge worldwide. Also, we have added some extras from our team, that is why it could be your new crypto investment guide.
Media sweet spot
If you find that a new project has been positioned in media as “super profitable” and the best on the whole market, it’s a scam. Even the most promising projects don’t do such loud statements. Check what media write about the app and its founders.
If the project gains media attention naturally and gradually, be calm. It’s a green flag. If the founders are well-known in the crypto or tech community, you can be calm too. It’s another green flag.
But if the app “gets famous” in one night, it could be a scam. If you find some scam or suspicious projects in the founder or chairman’s bio, it could be a scam too. It would be better to play it safe and avoid this project.
Advisory Board and Project Support
As we said before, check the bio of the project and its chairmen. Also take a closer look at its partners, backers, and even advisory board.
Yes, we know that sometimes advisors not even are officially employed. But they still have credibility and are linked with the CEO and/or Chairman.
High-quality projects often form partnerships with industry-leading non-blockchain companies or try to receive funding from well-reputed venture capitals (VCs) in the blockchain space. Here are the seven most famous VC funds for crypto startups:
- ConsenSys Labs
- Coinbase Ventures
- Ethereum Foundation
- Gitcoin Grants
- PolyChain Capital
- Blockchain Capital
If you find that some of these funds this project, it’s a green flag!
Look for already working projects. Beta version and community of testers — green flag. It means that the founders are already working on this project.
Avoid projects that haven’t started development. They can promise you mountains of gold, but you can’t be sure that it will become true. The Crypto market saw thousands of projects that promise high-value features, but don’t bring any value to the stakeholders or even users.
It could say a lot about any project, not just crypto. Be aware of projects that have an excessive marketing team, but a small development band. There should be a balance.
A healthy tech and blockchain project have a healthy mix of executives, marketing, engineering, design, and HR. It’s quite common for small projects that some employers could be executives and seniors at the same time. Yet, look for the following roles that contribute a lot of value to the project and are hard to fill:
- Token economy designer
- Distributed systems engineer
- Smart contract engineer
The fine projects should have a tactic and strategic road maps as well. It allows a team explains what they want to achieve and how they will do it. Look for a project with a feasible road map. If you are not a “tech” person, find someone with a deep understanding of the topic. They could tell you if this plan is feasible or not.
Non-tech users can look at the description provided for each milestone. It should include a story where project managers predict how users will adopt the project. Adoption is the bridge between vision and reality. It’s a definite red flag if you can’t find this information.
Don’t get mad at some missed deadlines. Blockchain is a complex matter, so any project could miss its original deadlines. Evaluate how they communicate their failure to the community and if the delay is reasonable. Transparent communication is crucial for any project. Crypto business too.
Token Economics (Tokenomics)
Tokenomics are vital for a crypto project’s long-term survival. Even the strongest “on paper” projects could quickly fall without well-functioning tokenomics. Therefore, it’s one of the most important factors that determine a project’s success.
Decrypt.co describes tokenomics as follows: “Tokenomics is the study of how cryptocurrencies work within the broader ecosystem. This includes such things like token distribution as well as how they can be used to incentivize positive behavior in the network.”
The most famous feature of crypto it’s volatility. That’s why scammers tend to use their cryptocurrency as a speculative instrument, rather than digital coins. The main goal of tokenomics is to reclaim the token’s purpose through complex mechanisms designed by an economist.
If founders didn’t even try to claim the token’s purpose that looks real, it’s a red flag. They should create a smart tokenomics strategy.
The ability to evaluate projects is vital for every potential stakeholder and even user. Some scams may look so feasible, that you trust them a huge part of your money. This already happened to the OneCoin exchange users — they trusted a platform and lost their money.
Try to look beyond the hype and find a “seed”. Does it look genuine, realistic, and feasible to you? If the answer is yes, it’s a green flag. But if they don’t want to share their whitepaper, or technical explanations and block different views on their project, be careful.
Check those projects for AML and KYC. If it’s some exchange or saving platform — use AMLbot to double-check the wallets. It’s better to be safe, that broke.
A key tip for evaluating projects: If a project has a strong community of early adopters or beta testers, that’s a strong indication of the project’s validity.