There are hundreds of projects launching every day. Investing in cryptocurrencies provides asymmetric life-changing opportunities, which makes it easy to confuse investing in them will bring money effortlessly. It will unfortunately not. However, when the research side of investing is taken seriously, the market participants can gain a decent chunk of an edge over those viewing and chasing crypto as if it is a lottery. So, we are going to be talking about how to detect and avoid rug pull and scam projects. The list of things we wrote here to be paid attention to is not exhaustive, but it is a good start. Let’s begin.

Anonymous teams

Anonymous teams in crypto projects don’t immediately mean that the subject project is a scam but it should be factored in for why the developers or creators choose to launch the project anonymously. Do their pseudo-anonymous names have a reputation? If so, how and where? Although they don’t disclose their identities, how transparent are they about what they are doing and what they build, etc? What are their on-chain wallets and how are they using the funds?

All of these questions can be asked and should be asked. There is no one-fit-all answer to how to pick a project with an anonymous team that isn’t a scam but in accordance to the given investors’ experience and skepticism can weed out a lot of blatant rug-pulls if they do their due diligence.

Lack of crypto background & weak or irrelevant team members

If you see a launch of a crypto project that has team members with backgrounds from the regular corporate world, meaning that they don’t have previous experience in cryptocurrencies, it should be considered as a risk factor.

The realm of cryptocurrencies is completely different from traditional structures, be it governments or corporations. Hierarchies are messy in the industry, most of the time, the community plays the most important factor in the project’s success. Also, the reputation in the cryptocurrency realm works differently than in the corporate world. A regular resume, an institutional background doesn’t mean much in this ecosystem because the crypto industry is one of those fronts that are at the cutting edge so it requires creativity, passion, long hours, and possibly resilience to an extremely bumpy road, unlike structured and clockwork-like bureaucratic legacy institutions.

Out of jurisdiction projects and their backing legal foundations

Cryptocurrency projects aren’t being run like traditional companies. But, usually, there is a legal foundation behind a cryptocurrency project because there is a legal entity needed to hire people to do the job, pay taxes, or sign legal papers to comply with traditional structures. It should be considered that if you are investing in a cryptocurrency project that is being backed by a foundation outside of your jurisdiction, it should be considered as a risk factor. This doesn’t mean that you should avoid projects that are not founded in the country you reside in. This means the given investor should be extra careful about what they are investing, most of the time, they are not under the protection of regulatory measures their governments take.

This is not necessarily a bad thing because fewer regulations mean more maneuver chance for innovation meaning more upside potential. Consequently, it is a high-risk high-reward situation.

Copy-paste code

One of the selling points of cryptocurrencies is that they are fully open source. This means everybody with an internet connection can see how the software behind the subject cryptocurrency works and what the exact code is.

There is another benefit to being open source, every software problem has to be solved for once in the industry. When a successful crypto project develops an efficient way for implementation or creates an entirely different application, other projects can adopt it and use it in their design. The problem arises when low effort projects just copy-paste what other projects do without adding any value, thus raising the question: why do their projects even exist? So, an educated investor should ask the founders of the project they are planning to invest in: what proportion of this project’s software has been borrowed from others, and what is their contribution to making their value proposition more deserving?

The project appeared overnight

Building a community is not an easy task, and quite frankly, there are no shortcuts to it if one wants it to be long-lasting. If you see a project that appears overnight with their website, social media channels, discord with thousands of followers and members, creators of that project are probably using bots. They are pumping the numbers of their social media channels, paying a freelancer to their website with pre-existing templates(there are thousands of templates, likely, there is always a template you haven’t seen), and paying a couple of influencers with low reputations to be in the limelight. If you see this type of behavior, you probably shouldn’t touch that project with a ten-foot pole.

Low liquidity

Liquidity is the measure of a project’s popularity in the market by how much money goes in and out. It is proportional to the number of investors who buy in or sell out within the contributions of day traders as well. The more a project has liquidity, the harder it is to influence/manipulate its price in either direction, either up or down. 

It is a market-sensitive measurement of the project’s esteem.

Disproportionate token distributions 

When it comes to cryptocurrencies, all of the transactions, wallets, and funds are transparent to be seen by anybody with an internet connection on the blockchain. This means people can see how much funds pseudo-anonymous addresses hold in their wallets and how decentralized the project’s tokens are in the community. It is usually bad if one wallet has a huge amount of tokens, or a couple of wallets hold a large proportion of all tokens.

This means the project and its price is prone to be controlled by large players, aka whales. Although this also signals conviction for the project that if someone has a large number of tokens, they could also be an insider that knows exactly when to unload their huge bags to the market, crashing the price of the token when the time comes.

Bag holders can distribute their tokens to more than one wallet to make it seem like the tokens are not concentrated in a couple of wallets as well. There is not a strict way to tell how to approach this but a general rule of thumb is the more the tokens are distributed along with many wallets the better. It is surely something to pay attention to.

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