The cryptocurrency market is often compared to the Wild West, as there is a constant possibility of being cheated. There is rarely anything like customer service or guarantees. For many, the technology behind cryptocurrencies is too complicated, and it isn’t very easy to deal with the matter.
Unfortunately, people who take advantage of this situation and want to take advantage of ignorance are also not far away. Therefore, you will find some tips below that show you what to look for and what you should avoid. Because, as with any financial transaction, you should think carefully and never act hastily.
The so-called due diligence is a careful, systematic and detailed collection, examination and analysis of data and risks, which is carried out by the buyer when buying cryptocurrencies (but also other investments in general). It usually begins with a rough analysis (screening) of all available currencies and, with a positive assessment, goes into a detailed analysis of specific currencies.
Here one analyzes the functioning as well as the strengths and weaknesses of the currency. Some aspects can serve as concrete reference points for the analysis. It is important to remember, however, that you shouldn’t just rely on others’ research, comments, thoughts, or report, as some black sheep give paid advertising content as their research.
Open code on GitHub & Co.
Any cryptocurrency that wants to be worth something should make its source code openly accessible and viewable (e.g. on the well-known online service for software development projects GitHub ). This so-called “repository” should not only be available but should also be updated regularly.
In the first step, it is not imperative to understand the exact meaning of these updates – the primary concern is that regular updates are available. A warning signal will be that there has been no update for over a year or if only one person provides these updates.
Positive examples of this are Bitcoin, Ethereum and Litecoin.
A relatively clear negative example of such types of alarm signals is the cryptocurrency Karmacoin: there has been no update here in the past three years, and the few changes come entirely from a single user.
If a cryptocurrency “guarantees” that a profit can be made from the investment, or provides incentives to convince others to buy that currency, it is most likely a pyramid scheme. The guaranteed profits come almost exclusively from the fact that new participants invest and participate in the currency and bring in their capital. These business models can grow very quickly, but will inevitably crash at some point – without exception.
Look closely at the team behind the cryptocurrency: are there people with experience behind the currency? As a rule, software developers should stand behind the cryptocurrencies. A simple internet search should be enough to quickly get an overview: Can you find convincing information that comes from several sources? Or can you already find indications of fraud or questionable behaviour here?
An example: The developer of Ethereum, Vitalik Buterin, was previously a well-known name and contributor in the Bitcoin environment.
Fees / trading
This is not necessarily an indication of fraud, but it shows how important it is to understand the background of a currency: which exchanges are they trading on? How are the conditions? And what are the fees for trading?
Beautiful outside, but ugly inside!
A modern and pretty website and an excellent social media presence do not necessarily mean that there is a good project behind it. Many new cryptocurrencies spend a lot of time and invest a lot of money to design their appearances to look good – but without a trustworthy concept. So here it is essential not to be blinded by the first impression.
The ICO and cryptocurrency world provides a lot of opportunities for investors that have taken their time to do research, so they can make smart investment decisions.
There are also pitfalls that can result in losing a tremendous amount of money due to frauds, scams, or even legit businesses that have poor structure and have fewer chances of succeeding.
So, if you take note of all the points stated in this post, there’s a high chance that you’ll never fall into any of these pitfalls.