Redditors, Discord users and the good people on Twitter are constantly shilling and shit-talking different tokens.
Search it up on YouTube, and sure enough, there’s a video titled “WHY YOU SHOULD BUY COINX NOW RIGHT FOR 10,000X RETURN”.
The guy on the video’s thumbnail has his hands on his forehead, his mouth agape. You don’t know if these influencers are knowledgeable, delusional or paid to promote the token. Or all of these things at once.
How exactly do you research a cryptocurrency and determine whether or not it’s legit?
The crypto space is filled with thousands of Altcoins, some with their own blockchain and others functioning within an existing one like Ethereum or the Binance Smart Chain.
Many of the Top 100 cryptos by market cap may not even be relevant two to three years from now. Not all of these tokens are made equal. Luckily there is plenty of information to help you determine whether a random altcoin might be a good investment.
Many tools and strategies can help you assess the quality of a whitepaper, the token’s smart contract, its business model, and other variables. Let’s walk through a few points step-by-step to help you determine whether a project/token is legit, a scam or hopelessly inept.
The White Paper
The first thing you should do is whip out the whitepaper for the cryptocurrency. If there’s no public whitepaper or it looks like generic marketing material on a PowerPoint (yes, I’ve seen them), then that’s an immediate red flag. Never invest in a project where the creators haven’t bothered with the whitepaper.
The Team
Look at the team that’s behind the project. In general, the projects where the developers are known (real people and not random pseudonyms) are good because they allow for some sense of transparency. Knowing who is behind the project makes it a lot harder for the developers to disappear and take all the money with them.
How do you research known developers to see who they are? Many people keep public or semi-public Facebook, LinkedIn or Twitter profiles. Established entrepreneurs should be featured on TechCrunch and other such platforms if they are established, entrepreneurs.
Many projects, especially in the NFT token space, feature users known by a pseudonym. When possible, make sure to check out their Ethereum address to see if they hold other NFTs or if they created this wallet just for that one project – again, a sign that they don’t want to be identified if something doesn’t work out.
Tokenomics
How the heck does this new token work, and what are the red flags and problematic features? There are plenty of things to look out for if the document is detailed enough.
Token Distribution
Use Etherscan or similar tools to see the coin distribution. Be wary of tokens with whale addresses (i.e. multiple wallets with 3 to 5% of the total circulating supply). There should be a few hundred unique addresses.
Initial Token Burn
Implementing this feature right at the beginning does nothing. Since this step occurs during launch, it makes the token appear deflationary – like its supply is decreasing. But since the tokens aren’t distributed at that point, the initial token burn doesn’t affect the tokenomics at all. However, it can obscure whale wallets – If 50% of the total supply is burnt and I own 10% of the remaining tokens, I effectively have 20% of the total tokens. But to anyone that doesn’t see that trick, it is only a mere 10% of the supply.
Does It Provide Value or Serve a Purpose?
If you ever want to start a business and then pitch investors to buy into it, you’ll need to provide value and a killer use-case. Look for the same features within any alt token’s whitepaper and messaging. Does the token itself serve a purpose? Would the idea work perfectly well without the blockchain? Is it sufficiently unique from competitors and similar tokens?
Is the Token Contract Unique?
Some coins we affectionately call shitcoins use the same contract code as other projects. This is rampant, especially in the ERC-20 and BEP-20 space. Use a tool like Token Sniffer to check for this.
Is There An Open Source Code Repository?
A core ideal of cryptocurrency is transparency; in line with that – any good project will link to its GitHub repository. That means that anyone who downloads the code should rebuild the ecosystem (assuming sufficient computer skills). You want to buy into an active project with multiple people committing changes and updates. Feel free to go through the profiles of the developers on GitHub to see if they have a strong history of developing different programs and applications. Of course, this is less relevant to ERC-20, BEP-20 and other tokens that are built using smart contracts on another blockchain.
Trading Volume
Hop onto CoinMarketCap or CoinGecko to check out the daily trading volume for the token. You should expect an active token to have several transactions per minute. If there are no transactions or they occur every few hours, you are either very early or the token isn’t going anywhere.
Liquidity Pools
Some new tokens draw in plenty of new investors and get them to put their tokens into a liquidity pool along with Ethereum or another token. Once there are a sufficient amount of tokens supplied, the developers can then withdraw all of their Ethereum and collapse the token price. Look for a liquidity pool that’s greater than $30,000, and that’s locked for at least 3 months. You can use a site like Pools.fyi or Poo Coin to find these pools.
Marketing and Social Media
What is the coin called, and what does it look like?
Squid Game coin was a blatant scam because there are copyright issues with profiting of the name Squid Game. There was no way that token would survive past its initial rug pool. Any tokens that use proprietary names or characters are not going to succeed. Also, tokens named or designed for short-lived trends or have weird names like FungusCoin 123 are unlikely to succeed.
Next, you can look at the Twitter, Discord, website and other Discord profiles.
Are there many unique active users on Discord, and does that reflect the volume and engagement that the token’s profile receives on Twitter? Does the Discord admin start dropping ban hammers whenever someone asks any critical questions? Are there consistent announcements across social media? Does the website look like it was made on a $100 budget?
Is there a roadmap for the next 12 months, and is it detailed and realistic?
Without a proper roadmap, it is quite challenging to invest a token. Is there a realistic timeline and smart, achievable goals being pushed? Or is there just a tiny and vague three-month roadmap?
Also, please stay away if a random celebrity starts pumping a coin.
Takeaways
Use a checklist to make smart decisions. Don’t buy into crappy, overhyped tokens because you didn’t do the ten minutes of research. Use this handy guide to help you assess the project.
A Checklist of Red Flags
Is there a professional whitepaper?
- Yes – but it looks like marketing material 🚩🚩🚩
- No 🚩🚩🚩🚩🚩
Questions about the team:
Research tools include TechCrunch, Facebook, Twitter, LinkedIn, Google Search, Reddit
- Team members are public and have a history of relevant success
- Team members have a history of scams 🚩🚩🚩🚩🚩
- Team members are public but don’t have relevant experience 🚩🚩
- Team uses pseudonyms 🚩🚩
- Team is completely anonymous 🚩🚩🚩
Tokenomics:
- Too many whales 🚩🚩
- Pointless token burn 🚩🚩🚩
- No unique value 🚩🚩
- Some value but many established competitors 🚩🚩
- Smart contract is not unique (via Token Sniffer) 🚩🚩🚩🚩🚩
- Code for ecosystem isn’t open-source 🚩🚩🚩
- Very little development on Github 🚩🚩🚩
- Low trade volume 🚩🚩🚩
- Low liquidity 🚩🚩🚩
Marketing:
- Weird or proprietary token name/design 🚩🚩🚩🚩🚩
- Social media community is too small or too hostile 🚩🚩🚩
- Road map is not detailed or realistic enough 🚩🚩
- Pumped by a celebrity 🚩🚩🚩