The basics of crypto due diligence. DO THIS before you buy! #26

Don't jump blindly into new coins. Do some research first, it only takes 10 minutes to spot scams. Here's my guide.

So you found a new investment opportunity in the form of a new coin or token. Before you click that buy button, you should instead spend 10 minutes doing some basic due diligence.

Most scams only take about 10 minutes of research to be uncovered. Here is an easy way to do that. Nothing fancy, just basics.

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I. Check the Team

Go to their main site. Does the project even have a team section? Is the team anonymous or public? Proceed with care either way as explained below.

• Anonymous team = be suspicious and do more research. Check their Twitter accounts, post history, previous projects. A good track record should make you more relaxed. For example, Kujira is an anon team with a great track record. If a team is new and has no track record, best to avoid. Expect the worse from unknown parties. Their tokenomics should also give you a good idea if they are greedy or not as explained under point II.

• Identifiable team (doxxed) = not much better than anonymous teams. Do a similar background check as above. A good example why you should do your research is that in the last bull market, some professional scammers had absolutely no issues with placing their faces all over their site and boasting how great they are. Why? Because their terms of reference said if you bought their token, you dropped all rights to any recourse. You could not sue them even if you lost all your money. Legally they were covered.

  • A good example of that is Freeway. All their team was public and they still scammed so many people by promising unrealistic returns on deposits (43% APY). In total, $119 million was “lost”. Now they are preparing to do it all over again in the next cycle, most likely, with a new team ready to tell you all about their experience.

Freeway “incident” that wiped clean $119 million after withdrawals stopped.

Round two is around the corner.

II. Check Tokenomics

This is one of the easiest ways to spot scams. If the token generation required no mining or effort to create, then you should already be concerned. Tokens that are minted into existence from thin air with a supply in the billions usually don’t have your best interest at heart.

If more than 10% of all tokens are allocated to the “team” or “investors”, then you should also know that those developers are quite greedy and they are likely just after your money.

On the other hand, if the coin has to be mined into existence (there is a cost) and has a fair distribution, then that should signal a legitimate project. If the project has a lot of venture capital (VC) names on their website, that is also a red flag. Venture capital is there to 10x their money, not make you rich. A lot of pre-sales, private sales and similar language should worry you as well since you will buy late and most probably from such VCs. After that the token price will crash.

There are many red flags that tokenomics can expose, reason why many developers decide to publish this data sometimes days before the release of the coin/token (this is to their benefit, of course). I already covered six key red flags related to tokenomics in my previous newsletter. Follow the link for that.

III. Check Twitter Accounts

This is super simple. Just go to the Twitter feed of the project and check some of their most popular tweets. Check the replies. Do you see many one sentence / one word replies? Do they make any sense? Do they seem like bots? That’s a red flag.

Do you see hundreds of likes & replies and around a thousand views? Likely paid engagement. If so, the “project” is likely paying for engagement to appear “popular”. This can be done on Twitter, Discord, Telegram and so on. You can easily buy engagement from third countries where teams of 10 to 100 people are ready to “talk” on your Discord or reply on Twitter for a negligible sum. It’s all fake.

You don’t get 200 replies on 2k views unless it’s a paid promo.

This fake engagement has one purpose: to create hype around a dead project. Its aim is to generate a false impression the project is in demand. It’s not and you are its target or rather your money. Crypto has created literal industries in some third countries where teams of friends produced fake engagement on a full time basis for a few dollars a day during the bull market. Crypto projects were happy to pay for that with your money in exchange for worthless tokens they printed from thin air.

IV. Check Price History

Go to coinmarketcap or tradingview and open the chart. Zoom out to the max so you see all the price history. There is no price history? You can’t find the token or coin? It’s not even listed anywhere? Avoid. No one can predict the future and buying a token without any price history is gambling.

If you do have a price history, make sure you don’t buy the top. Once you zoom out, how far is the current price from the all time high and low? If closer to the top you’re paying a premium which may cost you later. If closer to the bottom then you may have a good opportunity if fundamentals are sound.

V. Is it a copy-pasta?

Many new tokens are just copies of existing protocols or blockchains. They don’t bring anything new to the table. DeFi has many examples. Do we really need a new decentralized exchange with its own governance token? Likely not. Avoid.

This does require some understanding of the crypto space, but if the token or coin sounds similar to established protocols, then you’re probably wasting your money, especially if influencers are shilling it hard. They were probably paid to do it.

Seek innovation or new use cases that stand out. I made a guide on that below.

VI. Did you hear about the project before?

If not, it’s a red flag. A lot of new crypto projects (or rather scams) appear from nowhere with 50k followers on Twitter, thousands of members on Discord or Telegram. It’s all bought. If they are new, be suspicious. Legitimate projects have some history or at least their main developers do.

If it appears from nowhere in your Twitter feed, avoid.

Common Traps & Tips

1. A shinny new coin is released, you fall for the hype, so you jump right in.

   New coins always excite us, but in crypto there are rarely *new* coins that actually innovate. Most are carbon copies. For example, a new ETH token with a new name and zero use case (PEPE anyone?).

   The “developers” hope you won’t notice so they can cash in and dump on you before you realize it. Then they move to work on launching a new token. They repeat this during each bull cycle. Some do this several times per cycle and are professional scammers. Whenever the market wakes up and turns bullish, so do the professional scammers. Don’t be a sheep.

2. You trust the developers, founders, influencers, your friends…

   Don’t trust people or friends that have no clue about due diligence, trust code. If the code is immutable, then you’re onto something good long term. See Bitcoin. If the code is easily changed, the developers have the keys to the blockchain, servers, validators and so on. In such cases you’re literally trusting others with your money. A classic example was Terra / Luna / UST. Do Kwon literally owned the whole ecosystem. He also crashed it to zero due to greed. $50 billion gone in a few days.

   

   Terra ecosystem. Woops.

   Also understand people make mistakes, errors in judgements, or can be driven by emotions (Do Kwon qualifies here too). These are all risks if developers have any direct control of a blockchain network and its tokens. This is why I see “governance” in crypto as a risk, not a feature. Bincoin has no governance.

3. You don’t sell in a bull market.

   The time to sell and secure profits is in a bull market! It’s pointless if you spend hours or days researching crypto projects if you fail to materialize your gains. Greed can take over in bull markets and if you keep holding until the coin crashes by -95% that will erase all your profits.

   Take profits on the way up during a bull market. A 10x is already a huge win, so sell and put that profit aside for at least a year. Don’t throw your win on another altcoin that will crash 95%. The bear market will destroy your profits if you do that. You only deploy your profits once altcoins crash 90% to 95%. Be patient and read my tips on that here (at the end).

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