The 7 Biggest Red Flags to Watch Out for When Investing in Crypto
You can ring up monster profits from crypto investing, but that doesn’t mean it’s easy.
To have any chance of reaping those life-changing gains everyone dreams of, you first have to choose the right cryptocurrency. And there lies the challenge.
In the early days of 2010 and 2011, the few who were aware of crypto simply bought (or mined) Bitcoin (BTC). It was practically your only option.
But today, more than 18,000 cryptocurrencies are listed on CoinMarketCap.com, with more popping up almost every day.
Many of these coins appear to be very cheap – trading for pennies on the dollar in some cases. They’re similar to penny stocks but much cheaper and much riskier. And those oh-so-low prices make them very tempting to investors looking for a way to replicate Bitcoin’s trajectory from being worth mere pennies to trading for tens of thousands of dollars.
But investors need to be wary.
The great majority of cryptocurrencies that exist today – more than 90%, at least – will never register huge gains. Most will fade into obscurity, eventually joining the growing list of “deadcoins.”
To be successful, crypto investors need to arm themselves with tools to figure out which coins are worth betting on – and which should be avoided.
One way to do that is to look for qualities you want in a crypto, and Chief Crypto Strategist Nick Black created his Five Ts of crypto investing formula to help you do just that.
But equally as important is knowing the red flags of crypto investing. These are the most common warning signs that, when spotted, should tell you to dig deeper into the project – or in some cases, abandon it entirely.
If several of these red flags turn up in the same project, your best bet is to walk away and look for something else. The risk of taking a big loss is just too high.
To help you invest confidently, we’re going to show you the biggest red flags to watch out for in crypto, and equip you with easy rules of thumb that you can go back to again and again when deciding which cryptos to buy…
Crypto Red Flag No. 1: A Crazy Cheap Price
You’ll find hundreds of cryptocurrencies at incredibly low prices – I’m talking about several zeros after the decimal point until you get to a positive digit.
To give you an example, I dug deep into CoinMarketCap.com‘s database and found something called Bird Token (BIRD), ranked at 9,614. The price of BIRD as I write this is $0.00000000023. That’s nine zeroes after the decimal, folks.
The reason for this has to do with tokenomics, and in particular, the total supply of the coin. Bird Token has a maximum supply of 35 trillion. That means if the price of BIRD was $1, the market cap would be $35 trillion. That’s 152% larger than the entire United States economy – an obvious impossibility.
But many advocates of coins like these try to lure in new investors with promises of round-number price targets of $1 or even $0.01. When you can buy millions or even billions of tokens for very little, it sounds like a good bet.
Don’t fall for it.
The only real way to identify the “penny coins” that have real profit potential is with an expert like American Institute for Crypto Investors Advisory Board member Tom Gentile on your side, who has identified a select group of lesser-known cryptos that are incredibly cheap today but could deliver “Bitcoin-like” windfalls in 2022. We’re talking about potential 5,000% gains for two of these coins within five years. (You can go here now to learn more.)
Crypto Red Flag No. 2: A Community Focused on Hype
People who invest heavily in a coin – known as “bagholders” in crypto-speak – often become its biggest cheerleaders. That’s not necessarily a bad thing if the coin has a legitimate purpose and a strong development team.
What’s not healthy is if all you see is price cheerleading and no talk about the merits of the underlying project or what it hopes to achieve. Instead, when you check on these communities on Reddit, Twitter, Telegram, and other social media, you find nothing but messages saying things like “[coin name] will moon soon!” and “ignore the fudders!” (fudders being anyone who points out the project’s flaws).
This behavior is a sign the project is mostly or all hype – and little or no substance. Oftentimes, hyped-up projects will see temporary price surges as suckers are lured in, but the good times never last.
Crypto Red Flag No. 3: A Weak Development Team
When researching any crypto you’re thinking of buying, you need to check the project’s website to see what kind of info is available on the development team.
Is the information thin? Do they all have full names and not something that looks like a social media handle? What kind of backgrounds do they have? Have they worked on other crypto projects or at any major tech companies?
Nick even encourages you to ask yourself questions like, would you let your children hang out with the founders? Would you loan them money? These may seem silly, but they can help prevent some really bad investment decisions.
Crypto Red Flag No. 4: The Coin Is Brand New
Beware of jumping on a coin that was only recently released (that is, in the last few days or weeks) unless it’s from reputable developers.
Even then, it pays to be cautious. Often people jump on a coin in its early days and cause the price to skyrocket – but the correction that almost always follows is brutal.
You also have to watch for “rug pulls,” in which unscrupulous developers launch a coin and hype it up, luring in a lot of buyers to jack up the price quickly. Because what happens is the team then cashes out their own stash of the coin and vanish, leaving a worthless coin that leaves investors with huge losses. An example of this was last year’s Squid Game (SQUID) token.
Squid Game was launched October 26, 2021, just as the Netflix series of the same name was becoming wildly popular, and the developers used that name recognition to bring in buyers and send the price up thousands of percent. By November 1, 2021, less than one week later, the SQUID price hit a high of $2,861.80 – only to close that same day at $0.003304.
SQUID investors were not able to sell their tokens, and the scammers behind the project made off with some $3.4 million. They’ve since been blacklisted, and the crypto has been reclaimed by the community – but not before a lot of people lost a whole lot of money.
SQUID price over time
Crypto Red Flag No. 5: A Deep Market Cap Rank
Sites like CoinMarketCap.com and CoinGecko.com rank every crypto by its market cap – the value of the coin’s total supply of tokens multiplied by the price. Coins with the most potential tend to rise on the list.
Some crypto investors use it to set cutoff points, as in, they might simply ignore any coin that falls outside the top 100. But you don’t need to be that strict. In fact, a hard cutoff like that can make you miss out on some really promising investments.
Instead, a good rule of thumb is to recognize that the further down the list a coin is on CoinMarketCap.com, the riskier it is likely to be.
It’s rare to find anything worthwhile past the 500 level.
Crypto Red Flag No. 6: Unprofessional Website/White Paper
Ever since Satoshi Nakamoto published the Bitcoin white paper in 2008, the creation of a document that outlines the purpose of a coin and how it works has been a minimum expectation. It’s something investors should always look into, much as you would SEC filings from a company as part of your due diligence before buying a stock.
Any reputable project should have its white paper on its website. If the coin doesn’t have one, you should abandon any idea of investing right there.
If the project does have a white paper, read at least some of it to get an idea of whether the project is valid. A poorly written white paper with a lot of grammatical errors and misspellings suggests those behind the project are prone to sloppiness and carelessness – traits you don’t want in a development team.
Although you won’t be able to tell from reading the document itself, make sure you also poke around on the Internet to see if the developers simply cut-and-pasted most of their white paper. That’s often a sign of a hastily assembled project that is likely to be a cash grab, or worse, a straight-up rug pull.
Crypto Red Flag No. 7: Low Trading Volume/Lack of Liquidity
If you’re looking at a cryptocurrency that isn’t among the most popular, you have to take a hard look at its liquidity – which essentially just means how easy it is to cash out your coins. You need to know that you’ll be able to buy and sell the coin whenever you want.
This is another area where the CoinMarketCap.com website comes in handy. It lists all the exchanges where the coin trades as well as the trading volume. If the coin doesn’t trade on an exchange that allows U.S. customers, you may need to use a swap site like UniSwap. But keep in mind that those sites tend to have high fees.
Also, be sure to look at the daily trading volume in U.S. dollars, represented by the vertical gray bars at the bottom of the price chart. The higher the daily trading volume, the better. And look at the trend. Is trading volume dropping off over time?
Coins with strong liquidity have daily trading volumes of tens of millions or hundreds of millions of dollars and trade at several top exchanges.
Several “scam-detector” websites have sprung up to help you identify tokens that are outright scams. One is Token Sniffer. The other is BSC Check, which tests tokens on the Binance Smart Chain. (Although one could argue just being on the Binance Smart Chain is a red flag – a lot of scammy projects there).
Remember – we’re still in the very early stages of cryptocurrency; a lot of this market is still unregulated, and scammers are coming up with new ways to separate you from your money every single day.
With these red flags at your fingertips, you’re already ahead of the game and better equipped to make smart investment decisions.
And the team here at American Institute for Crypto Investors will continue to bring you the latest and greatest resources to help you keep your hard-earned money safe and secure.
Next, make sure you check out our comprehensive guide to protecting your crypto, where you’ll find out the most common ways you can lose your crypto, the biggest security mistakes you need to avoid, and exactly what steps you can take to protect your investments.
Advisory Board Member, American Institute for Crypto Investors
Follow me on Twitter @DavidGZeiler.