10 Red Flags to Look for When Buying Cryptocurrency

Do your own research to avoid falling victim to a crypto scam.

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Updated May 28, 2024
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With inflation on the rise, you might be looking for ways to pay your rent and other bills. If you’re considering boosting your savings with crypto, be careful. According to the FTC, more than 46,000 individuals claimed to have lost over $1 billion in cryptocurrency scams since the start of 2021. The median reported loss is $2,600 per individual.

Cryptocurrency is not regulated by any government agency and investments are not protected like a savings or checking account. With so much money at stake, it's vital to spot the signs of a crypto scam.

Here are 10 red flags that your investment may be a scam.

Unrealistic claims

Rokas/Adobe online scam on phone

A common sign of a crypto scam is unrealistic claims. If a website selling crypto claims to do something that seems too good to be true, it probably is. Be wary of any offer that makes grandiose promises without being able to back them up.

For example, if an advertisement claims you may make a 10 times return on your investment in a short period, that should be a major red flag. Be skeptical of any project that claims to offer guaranteed returns, regardless of the investment amount.

Another example is a project that claims to have developed a "new and improved" blockchain technology much better than anything else. Unless the team can provide solid evidence to support their claims, you should be wary of investing.

Not being listed on major exchanges

rarrarorro/Adobe woman checking cryptocurrency quotes on her smart phone using the Coinbase app

If you want to invest in cryptocurrency, check to see if it's on major exchanges, such as Coinbase or Gemini. If it's not, you should reconsider investing.

Cryptocurrencies that aren't on major exchanges are often scams. Listing on an exchange requires paperwork for registration, which scammers are usually unwilling to go through.

Lack of detail in ICO paper

MclittleStock/Adobe woman computer initial coin offering ico

If an initial coin offering (ICO) paper is short on details, it may be good to avoid putting in your money. A well-crafted whitepaper should provide clear and concise information about the project, team, and crypto. If crucial information is missing, it’s likely the ICO is not a good investment.

Do your due diligence and research an ICO thoroughly before investing. You want to be sure you're getting into a project with a solid foundation.

Lack of an ICO paper altogether

zoommachine/Adobe ICO White Paper Signature

An ICO without a whitepaper is often a sign that the project is not well thought-out, that the team is inexperienced, or that it is a scam. Before investing in an ICO, request and review the whitepaper. If the group cannot provide one, walk away.

Pump-and-dump behavior

shevtsovy/Adobe Stock market trader analyzing bitcoin price trend

If an ICO shows signs of pump-and-dump behavior, you may want to look elsewhere. Pump-and-dump schemes artificially inflate the price of crypto to raise its price. When the price goes up and attracts new investors, the original owners sell out and leave new investors holding crypto with a much lower value.

In the stock market, pump-and-dump schemes are considered fraud and they are illegal.

Do your research to understand who is promoting a crypto and track the price to determine if it’s a scam.

There's a questionable celebrity endorsement

Martin Barraud/KOTO/Adobe Celebrity being interviewed photographed by paparazzi at red carpet event

Sometimes, celebrity endorsements may be misleading. For example, in 2017, Floyd Mayweather and DJ Khaled were both paid to promote a crypto scam called Centra Tech, but they did not disclose these payments in their social media promotions.

Suppose you're considering investing in cryptocurrency that a celebrity has endorsed. Here’s what to look for:

  1. Check to see if the celebrity has a history of endorsing scams or other questionable projects.
  2. Research the project itself to see if there are any red flags.
  3. Consult with an investment advisor to get a second opinion.

Celebrity endorsements may be a helpful way to learn about new investment opportunities, but they should not be the only factor you consider when making an investment decision.

The community is small and inactive

Andrey Popov/Adobe businesspeople getting bored in office

When considering investing in a cryptocurrency project, it is crucial to assess the strength and activity of the community supporting it. A small and inactive community could show a lack of interest or belief in the project, leading to its eventual failure.

Conversely, a large and active community shows a high level of engagement. It suggests that the project has a better chance of succeeding. Therefore, considering the size and activity of a project's community is an integral part of due diligence.

Minimal to no information on the founding team or company

fizkes/Adobe confused businesswoman annoyed by online problem looking at laptop

A project's website should tell you about the team behind it. If there is minimal to no information available, the project may not be reputable. A team unwilling to share information about themselves could be hiding something. Therefore, it is best to avoid investing in projects with minimal details on the founding team.

Disorganized or inexperienced team members

khunkorn/Adobe stack folders and documents

A disorganized or inexperienced team may be a sign that they don’t know what they’re doing. You'll want to be sure that the people running the business are competent and have a track record of success.

To aid your research, look for online reviews and testimonials from other investors. You may also check out the team's social media accounts to see how they interact with the community. Are they unprofessional or don’t take the business seriously?

The code is not open-source

Pormezz/Adobe banker and client shaking hands after business loan grant

An open-source project is one that anyone may view, download, and change the code. This transparency is essential for ensuring that the project is trustworthy. In contrast, a closed-source project is one where the code is kept hidden from view.

This lack of transparency may make it difficult to know if the project is legitimate. Scams are unfortunately common in technology, and many scammers may try to hide their code to avoid detection.

As a result, you should be cautious when considering a closed-source project. If you're unsure whether to trust a project, err on the side of caution and choose an open-source alternative.

Bottom line

Rokas/Adobe Incoming call from scammer

By being aware of some of these red flags, you may protect yourself from falling victim to a crypto scam. Always conduct your research and never invest more than you may afford to lose.

These are just some of the things to look out for when assessing a cryptocurrency investment. If something is too good to be true, it probably is, and there are more reliable ways to boost your bank account.

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Author Details

Larisa Redins

Larisa Redins is a highly experienced professional writer and editor. With experience writing on diverse topics, such as eco investments, real estate, cryptocurrency, side hustles, and budgeting, she loves to learn and share her knowledge with readers.