The cryptocurrency market is literally overflowing with various projects that are trying to invest. Therefore, with any investments, it is important to clearly understand which projects have a chance of prosperity. You must also be aware of which are obvious fraudulent schemes. It is worth noting that even promising projects at first glance may fail to meet expectations.
Why is this happening? The cryptocurrency market is volatile, token prices are constantly changing, and many factors influence it. That is why investing in cryptocurrencies has certain risks. However, if you understand what to pay attention to when choosing a project for investment and what signs accurately characterize a fraudster, this will help significantly reduce risks. But, it will not eliminate them altogether. Of course, there are many successful projects, for example, FTX trading bot, the development, and the creation of trading agents that help minimize risks and optimize the trader's work.
Let's look at a couple of examples:
The rug pull - this most often occurs in DeFi, and is not surprising. DeFi platforms provide valuable services to users - you can take a quick loan in crypto, invest profitably and make a profit only because your tokens will replenish the liquidity pool. This enables the service to work without interruptions. But this happens only when the platform is not a fraudulent project.
The creators of the project issue a token and open a liquidity pool. This token is used in conjunction with a popular cryptocurrency, for example, Ethereum or a stablecoin. When the liquidity in the pool reaches a decent level, the creators of the project merge the token into the pool. They then take the coin from the pool that was previously paired with the token. The price of the token collapses, and investors are left with nothing.
First of all, you need to make sure that the token distributes between users and the creators of the project honestly. In order to do this, study the token contract. The contracts of tokens on the Ethereum network is viewable on Etherscan. In the contract, find the Holders tab: when you click on it, data on their wallets will display. If the bulk of the total number of tokens in circulation is in one or a small number of wallets, then this indicates the possibility of a Rug Pull.
Another sign is seeing contracts with the status “Unverified”. This means that the contracts are not checked by third parties for proper functioning and the likelihood of fraud increases. For example, such a contract may provide an opportunity to withdraw tokens only to the wallets of the founders of the project or prohibit users from selling the token.
One of the recent cases of a Rug Pull is BNB42. This DeFi platform promised its investors fabulous profits, and the income was to be accrued at fixed rates, 20% per day. However, this already means that investors should be extremely careful with the project.
On February 15, 2022, the scammers withdrew all user funds. The total amount of investor losses amounted to more than 2.7 million US dollars.
Later, CertiK published the data of the fraud investigation, where it was indicated that the scammer used a smart contract that allowed the withdrawal of funds in the token to only one wallet - the wallet of the fraudster.
As above, all cryptocurrencies are highly volatile. This means the prices of tokens are constantly changing in one direction or the other. Strongly depending on the situation of the market as a whole. And what would you think if you saw that the price of a coin is constantly growing?
It is likely that such a project is exceptionally profitable for investment (spoiler: no). This is the essence of fraud: the value of the token is being artificially inflated to attract investors. Often, no one wants to miss this opportunity.
Only now it is necessary to pay attention not only to the schedule of changes in the asset price but also to sales. If the token is not being sold but being bought, then this is a bad sign. Investors can buy the token indefinitely, and the asset price can inflate to impressive values. But what to do with an asset that cannot be sold? Absolutely nothing.
In fact, this is a scam, the honeypot. Scammers artificially raise the price of the token in order to attract the maximum number of investors. Only now investors can buy a token, and the only wallet that can sell it is the wallet of the founder of the project, the very scammer. When the investment amount reaches a certain level, the fraudster disappears with the investors' money. The price of the token collapses, and investors lose their invested funds.
The main feature of the honeypot is obvious: only certain wallets can sell the token.
According to the results of the sensational series “The Squid Game”, a project called Squid, created based on his motives, gathered a lot of investors in the shortest possible time. When the price of the token rose from 1 cent to almost $ 3,000 in just a week, one very unpleasant detail was revealed. Investors could only watch the price of their crypto assets grow, but they could not take advantage of it in any way. In fact, they couldn't sell their tokens.
What happened in the end? The founders of the project merged their tokens and fled.
Nevertheless, the project managed to survive precisely thanks to those who believed in it and were deceived. The investors, and the community. Now the Squid token is represented by a meme coin on the Binance Smart Chain. The project is completely decentralized and managed by the community.
There is a huge number of machine schemes and projects, and we have considered only some of them. All cases of fraud, regardless of their classification, are aimed at emptying the users' pockets. Therefore, before investing in a project, no matter how attractive it may seem, check all the information. Study the token smart contract. If you don't understand it, ask a specialist to help. Make sure that the contract is verified and does not contain traps for you as a potential investor. Do not be careless and study everything you find on the project. If there is at least one share of doubt, it is best not to invest, the prevention of large patents depends on you.
