How To Verify If A Crypto Project Is Fake? Case Study & Red Flags

How To Verify If A Crypto Project Is Fake? Case & Red Flags

Before investing in any crypto project, sound and thorough DYOR (Do Your Own Research) is indispensable to verify its reliability. Indeed, although cryptocurrencies are bringing great profit opportunities for investors, all that glitters is not gold. Many scams are emerging, and it is best to protect yourself. But how to verify if a crypto project is fake?

To verify that a project is really trustworthy, it is necessary to investigate it through fundamental analysis, analyzing the team, the long-term goals and prospects, the token economy, the security of the platform, and so on.

  1. Although it may seem complicated to analyze, it is essential to avoid losing money. As the great Warren Buffett says, 'the first rule in investing is not to lose money'. This is easily demonstrated through a quick mathematical calculation. Let's assume we invest $100 and lose 50%, or $50. Well, to recover and get back to the initial sum, it would not be enough to make +50%, but we would have to aim for +100%. This underlines the fact that it is much more important not to lose money than to try to earn it in a short time. So, analysis of a crypto project is indispensable before investing, both to avoid losing money unnecessarily and to select the most potentially promising blockchain projects.

In this in-depth research by the PlasBit team, we will explain how to verify a legitimate crypto project, and we hope that all readers will be prepared to deal with any scam attempts in a knowledgeable manner.

How to Verify if a Crypto Project is Fake? Step-by-Step Guide

If you are tired of losing money in USDT scams and other similar scams, this is the guide for you. We will prepare you for any scam attempt by a less-than-legitimate scheme. The key is to carefully analyze the fundamentals of the project and recognize any common red flags that could be symbolic of a scam project. Next, we will delve into a particular case study about 'Project Y' (not the real name), which, in a devious and manipulative manner, has scammed and is continuing to scam numerous investors around the world. It won't be the first in the last, but at PlasBit, our mission is to restore true financial freedom to users, and we are particularly sensitive to educating about these scams in order to ensure as much security and peace of mind as possible for our users. So, let's see what process to follow to verify a project.

Step 1: Analyzing the Project Website

First, go to the project site and analyze it from top to bottom. Check that the connection is protected and secure and that the site has implemented an HTTPS certificate. Also, check that the company's contact details, including their real address and VAT, are present in the footer. Copy and paste them into Google to verify that the company is correctly registered in its country. Also, quickly scan the Terms of Services and Privacy Policy pages to check the company's correctness regarding user protections. A well-made site will certainly have all these elements well taken care of and easily found because it has nothing to hide and, indeed, cares about demonstrating its trustworthy reputation.

Step 2: Analyzing the Whitepaper

The whitepaper is often the most important part of a project because it explains its objectives and how it intends to achieve them. Not only that, it is, in a nutshell, a general overview of the whole structure of the project and should also contain the team, a brief market analysis, the difficulties the project proposes to solve, an explanation of the token economy, and so on. It is the most important document to analyze because, from it, you can easily tell whether the project has good long-term prospects or is just hype. In the case study that we will analyze later, in fact, a thorough analysis of the whitepaper would have revealed numerous common red flags, which, if identified, would have allowed numerous users not to lose money in this scam.

Step 3: Analyzing the Team

The team is the engine behind the project. To test the potential of the project, you will necessarily need to understand who the team is and what kind of experience and results they have behind them.

As you can well imagine, if the team is anonymous, it is clearly a red flag: If you aspire to build something great, at the very least, you have to be willing to put your face to it. Even if the team is visible, still check what their past projects have been and whether they have experience in the area. Although great ideas may seem appealing and promising, they must succeed in being executed by a competent, motivated, and honest team.

Step 4: Be Sure to Understand The Use Case and How It Generates Value

After analyzing the previous points, stop for a moment and reflect on what you have read. Try giving brief mental answers to the following questions, "Where does the money come from in the short-term project? And in the long term?", "Does the project actually solve a real problem for which there is enough demand?", "Is the team able to implement the proposals made and turn the ideas into reality?", "Is the token economy sustainable?" These are questions that are difficult to answer briefly and unambiguously, and this must be done after demanding research and critical analysis of the factors involved. Nevertheless, if you want to properly assess the potential and the transparency and integrity of the project, this is an indispensable step.

Step 5: Make your Own Conclusions and Decide Based on the Possible ROI

Although the project may sound exciting and has passed the "red flags test," remember that if your intention is to invest, you must have a clear strategy in mind and a hypothetical return on investment (ROI) to aspire to. If you invest €100, for example, what return would you aspire to, and how soon would you want to withdraw it? Make your own assumptions and calculations to assess a realistic ROI you can pull out of this investment and, finally, decide if it is worth it. Investments are nothing more than a mathematical game; although the possible ROI might seem attractive, perhaps another investment might be more profitable and secure. Do your own research (DYOR).

Bonus Step: Recognize The Common Red Flags

Some patterns and elements are usually repeated in scam projects. So, how to verify if a crypto project is fake? Recognize the most common red flags:

  • Fake and exaggerated partnerships: If a project boasts of an unlikely partnership with an influencer, before you believe it, check that the person has also shared something about it. If there are no mentions of the project in the influencer's profile, the partnership is probably fake.
  • Absent or inactive community: If a crypto project does not have a community, it has missed the point of Web3. In Web3, it is all about connections and community; that is where the real value of blockchain is. In the ambition of a transparent and incorruptible world, communities are the foundation of any crypto project, and not having one is clearly a red flag.
  • Insistence on investing "soon" and artificial FOMO: Many projects do a complicated but effective manipulation of users' perceptions, making them perceive the project as an opportunity to be seized quickly. This is done by using advanced marketing strategies that cause FOMO (Fear of missing out). Be careful, and do not make impulsive decisions. For investments, always try to rely on rationality and make analytical and studied decisions. Don't also become a victim of hype and manipulative FOMO.

Not sure whether to invest in 'that' project? How to verify if a crypto project is fake? Armed with this step-by-step guide, we are convinced that you will be able to objectively and consciously evaluate any project and make informed and sound decisions.

How to Verify if a Crypto Project is Fake? Project Y Case Study

If you still have doubts about how to carry out a project analysis in a practical way, this case study will clear up your last doubts. Together, we will carry out an analysis of a project that is turning out to be a scam, and we will understand how users should have done useful research to understand the negative potential of the project.

  1. Team Composition: The first critical factor in this project is the team behind it. In fact, there are several individuals at the helm who, after a quick search, we can see have launched other dubious projects in the past, mainly related to multi-level marketing, which often leads to real Ponzi schemes. In fact, in Project Y, instead of a team experienced in finance and technology, we have a team primarily experienced in network marketing, and this suggests a focus on advertising rather than technology and innovation. Moreover, the team's previous projects clearly suggest that Project Y may also turn out to be a scam project based on multi-level marketing, which does not create real value.
  2. Dubious Business Practices: Although word-of-mouth and communities are the basis of Web3 and blockchain projects, multi-level marketing is another matter. In fact, in the case of Project Y, no real community is created that supports the project, but only a lot of people interested in making money in a short time who are uneducated about blockchain become victims of a Ponzi scheme. In fact, if a project does not create real value, be it technological or financial, but only brings in funds by annexing new people, then the underlying value is random. Especially if the first people who come in earn money on the back of those they bring in: there is no creation of intrinsic value, only an artificial increase in people.
  3. Lack of Transparency: The lack of transparency surrounding the project is alarming. The team behind the project does not communicate sufficiently with investors, partly due to the lack of promised technological developments. Moreover, the absence of individuals with genuine financial expertise within the team raises concerns about the project's ability to deliver on its promises. The use of false or misleading promotional tactics, such as fabricated office settings and deceptive marketing materials, further undermines trust in the project and suggests a lack of integrity on the part of its promoters.
  4. Blockchain Anomalies: Anomalies observed within the blockchain infrastructure further underscore the project's lack of credibility. The unusual number of validators, all starting with the same token amount and initiating at the same time, raises questions about the decentralization and integrity of the project's network. The lack of diversity among validators in terms of token stake and initiation timing suggests potential manipulation or centralization of control, further diminishing trust in the project's governance structure.
  5. Tokens Held Off-Blockchain: The revelation that tokens are not held on the blockchain but on a third-party platform is concerning. This situation introduces a layer of centralization and control that contradicts the principles of decentralization and transparency central to most legitimate blockchain projects. Holding tokens off-chain raises questions about the security of investors' assets and exposes them to potential risks such as mismanagement, manipulation, or loss. It also undermines the trustworthiness of the project and suggests a lack of commitment to blockchain principles.
  6. Lack of Regulatory Compliance: The project's operations in jurisdictions known for lax regulatory oversight raise concerns about its compliance in crypto with relevant laws and regulations. The absence of regulatory compliance increases the risk of legal scrutiny, enforcement actions, and potential loss of investor funds. It also indicates a disregard for regulatory standards and a willingness to operate in a legal grey area, which could expose investors to significant legal and financial risks.

These common red flags highlight areas of concern regarding Project Y's operations, governance, and compliance. You should carefully consider these factors when evaluating the project's suitability for investment and exercise caution to avoid potential risks and losses.

How To Verify If A Crypto Project Is Fake? Case Study & Red Flags

Common Types of Crypto Scams

Now that we understand how to check a crypto project and figure out if it is legitimate and authoritative, it is good to remember that there are also many other risks in this area. In fact, investing money in the wrong project is just one of many of the possible ways in which you can be scammed. Let's look at some of the most common crypto scams methods so you know how not to end up in a scam trap.

Crypto Romance Scams

Some of the most manipulative and dangerous crypto scams are crypto romance scams. In fact, in recent years, more and more people have been scammed by fake online girls who, after getting acquainted with the victim, convince him or her to invest money by entrusting it to them and carrying out a real theft. There are real scam factory towns, such as KK Park, where people are kidnapped and forced to perpetuate online scams under captivity and threat. Be careful that you don't end up in this crypto scam.

Ponzi Schemes

As in the case study analyzed, based on multi-level marketing, Ponzi schemes are also present in crypto. Unfortunately, the search for easy money and shortcuts convinces people to invest in scam schemes, allowing scammers to expand their scams and loot. Be careful of those who promise you substantial gains, and always do the proper research to verify the reliability of the project.

Classic and Slow Rug Pulls

Rug pulls occur when cryptocurrency projects or exchanges abruptly shut down and disappear with investors' funds. In many cases, these scams are orchestrated by individuals or teams who raise funds through an initial coin offering (ICO) or token sale, only to vanish once they've collected a significant amount of money. Additionally, slow rug pull scams can be more difficult to detect beforehand, as the scammer continues the fraud in the long term to create the appearance of legitimacy.

Address poisoning attacks

In an address poisoning attack, scammers send small amounts of cryptocurrency to the wallets of whales or large investors. In doing so, through scripts, they recreate a sender address similar to the one with which the victim used to send transactions. In this way, seeing a known address in the last transaction, the victim is likely to copy the scammer's address in future transactions, falling into this manipulative trap.

Pump and dump schemes

As with ponzi schemes, scammers manipulate users' perceptions to create hype and fomo. In doing so, they make this sensation happen at a specific time, leading more and more people to buy quickly. As we analyzed in the Squid Game case, shortly after the "pump," comes the "dump": The team, after raising money from hasty investors, sells its holdings, makes a profit, and collapses the price of the token quickly.

Crypto Giveaway Scams

As analyzed in a previous article, in crypto giveaway scams, a fake contest is organized to trap investors. For example, scammers often used Brad Garlinghouse, CEO of Ripple, in some AI-generated videos found on Youtube, in which he is programmed to announce giveaways and that everyone who sends cryptocurrencies to a certain address will receive twice as much back. Obviously, it is a scam, but many people unfortunately fall for it.

Crypto Recovery Scams

Crypto recovery scams are another very common form of scam. In this type of scam, users who ask for help after losing money in a previous scam are targeted by the scammers to convince them to receive help in recovering their lost funds. Unfortunately, recovering lost funds is next to impossible, and in this scam the scammers get paid and then disappear into thin air, not recovering lost funds from users and instead scamming them a second time.

Unfortunately, these are just some of the common scams that occur in cryptocurrencies, and new ones emerge every day in this dynamic and poorly regulated industry. It is, therefore, the responsibility of users to inform themselves and be ever vigilant to prevent becoming a victim of scams. PlasBit, in this context, will continue to provide you with free educational materials in which you can learn and make informed and conscious decisions.

How to Verify if a Crypto Project is Fake? Final Considerations

Now that we have seen more specifically both the most common red flags, a case study based on multi-level marketing, and the most common types of scams, it is time for a final recap of all the things to keep in mind before making any kind of investment. Security is essential in Web3.

  • Risk Management: Risk management is the basis of any kind of investment strategy. Before investing money in any asset, consider how much you can invest, how long you want to keep your funds locked in, and when you plan to achieve the desired ROI and exit the investment. Also, as mentioned earlier, make sure through careful research that the investment is in all respects worthwhile and has good potential. Finally, diversify your investments and do not go all in on one asset. This is the basis of risk management. Divide your funds among multiple uncorrelated assets.
  • Regulatory Environment: The regulations surrounding cryptocurrencies vary significantly from one jurisdiction to another. You must stay informed about relevant laws and regulations governing crypto assets in your country or region. Compliance with regulatory requirements can help protect from legal risks and ensure the legitimacy of investments. Use reputable exchanges and platforms that adhere to regulatory standards to provide additional peace of mind.
  • The Power of Community: Communities are the foundation of Web3. They are useful both to help develop a project or ecosystem faster and to receive useful feedback about a possible investment. In fact, if there is a healthy, positive and dynamic community supporting the project, it can be a sign that the team has succeeded in building a pleasant and productive environment. Conversely, if the community is full of complaints and pessimism, it could be a clear red flag regarding communication between team and community, and probably other weaknesses.
  • Trustworthy Sources: When analyzing a project, always remember to evaluate different sources of information and apply sound critical thinking. In fact, often some sources of information are paid to promote certain projects, which does not help in making rational and objective decisions. Always seek out more impartial and authoritative sources from which to draw information, and consider that they too may be biased or promotional.

In conclusion, we hope that this PlasBit research has helped you understand how to verify a crypto project and that it can help you navigate Web3 in a more knowledgeable and informed way, minimizing risk. Indeed, it is only through information and knowledge that users can make wiser and more informed decisions, minimizing the risks of falling victim to a crypto scam. We hope this article can help you, and see you in the next research.

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