Before You Buy That Crypto; Read These 5 Questions To Ask
Buying cryptocurrency doesn't have to be rocket science or a blind gamble. Here are five questions to ask before buying any coin or token.
Table of Contents
Introduction
- The Appeal of Cryptocurrency
- Common Scenarios of Crypto Investment Gone Wrong
Understanding Crypto Scams
- The New Market of Cryptocurrency
- Pump and Dump Schemes
- Non-Practical Purpose Coins
Five Questions to Ask Before Buying Cryptocurrency
- Importance of Due Diligence
Question 1: Who are the creators of the token or coin?
- Importance of Public Records
- Checking the White Paper
Question 2: Does the coin or token have an official website and social media page?
- Necessity of Online Presence
- Red Flags in Digital Footprints
Question 3: What is the purpose of the token/coin?
- Identifying the Token Type
- Risks of Purpose-Less Coins
Question 4: How many holders does the crypto coin/token have?
- Evaluating Holder Distribution
- Risks of Heavy Percentage Holders
Question 5: What is the liquidity and transaction volume?
- Importance of Liquidity
- Evaluating Transaction Volume
To Sum Up
- Key Takeaways for Safe Crypto Investment
- Importance of Independent Verification
- Reminder to Conduct Due Diligence
Picture this. You're scrolling through Twitter, and a tweet pops up inviting you to invest in the latest hottest crypto token on the market. You open the tweet and scroll through the replies full of people praising the token. It looks like a good deal, so you buy the token.
A week later, the token is sitting in your crypto portfolio, useless and worth nothing.
Another scenario. Your friend visits you at home, and they start telling you about a new cryptocurrency that will shoot for the moon. They convince you to buy the new coin.
A month later, the coin stops pumping. The coin creators are nowhere to be found. Their social media pages are suddenly inactive or unavailable. The value of the coin plummets steadily to zero. Your friend starts to avoid you. Now you've lost money and probably a friend.
Cryptocurrency is a reasonably new market, but scam tactics are as old as time. At every turn, a new crypto token or coin is touted as the greatest thing since sliced bread.
98% of the time, the token or coin turns out to be a pump-and-dump scheme or a joke (*cough cough Dogecoin*). On the other hand, the coin may not be a scam; but because the creators have an unclear or non-practical purpose for it, the value might eventually crash terribly.
To avoid getting roped into an entanglement of regret because you bought "bad crypto", here are five questions to ask before buying cryptocurrency.
5 Questions to Ask Before Buying That Crypto Coin or Token
The following questions are fundamental questions to ask before buying or investing in a cryptocurrency:
- Who are the creators of the token or coin?
The founders and developers of the crypto coin or token should have public records of who they are and what they do. If the developers or team behind a new cryptocurrency are unknown or have a dubious-looking online presence, chances are high that the coin will be a liability to your portfolio. Also, a team of people who have shown their faces can be recognized and made to face the consequences if their crypto project turns out to be a scam.
In addition, check for the coin's whitepaper. A crypto whitepaper is a comprehensive rundown of the cryptocurrency project's technology, objectives and principles. All legitimate cryptocurrencies have a white paper containing detailed project information. Take your time to read this document, as it will help your investment decision.
- Does the coin or token have an official website and social media page?
A genuine cryptocurrency should have (at least) a basic website containing team details, a white paper, a price chart, a coin purchase tab, and customer service support. It should also have an active social media account on Twitter/X, Reddit, Discord, etc.
The lack of an online footprint is a cause for concern in this digital world. This particularly holds true for markets and investment opportunities. Even in the stock market, buying stocks owned by an unknown company would be inadvisable. How much more crypto?
- What is the purpose of the token/coin?
Hype is a great selling tool for crypto scammers and pump&dump merchants. Many coins and tokens are introduced to the market without having any clearly stated use. Keep your wallet closed if you can't pinpoint whether the coin or token is a utility token, a governance token or a security token. It is not worth the hype. It is not worth your investment. If you decide to take the risk, purchase only a small quantity, like $10 or $5.
Josephine Inika
- How many holders does the crypto coin/token have?
A viable new coin should have at least 200 holders - people who have the coin in their wallet. However, if only a few holders have a heavy percentage or stake of the coins, that's a red flag; because they can manipulate the price, cash out and disappear.
- What is the liquidity and transaction volume?
If the coin's liquidity is less than $30,000, that's a glaring sign that investing in it will likely pay you in tears and regret. Also, a genuine new token or coin should do not less than five transactions on the blockchain per minute. There should be consistent buying and selling of the token that will increase over time. If the coin has low liquidity and transaction volume, it's likely bad crypto.
Josephine Inika
To Sum Up
Buying cryptocurrency doesn't have to be rocket science or a blind gamble. There are always red and green flags to spot. It can be tempting to risk investing in a new cryptocurrency. However, it will help to always ask the five questions above before buying any coin or token.
Finally, just because the person recommending the cryptocurrency to you is a friend, family member or celebrity you like does not mean you should buy it. Always do due diligence before adding a coin or token to your wallet/portfolio.
Frequently Asked Questions (FAQs)
Q: What should I look for in a cryptocurrency's white paper?
A: A white paper should detail the project's technology, objectives, and principles. It is a comprehensive document that explains the purpose and mechanics of the cryptocurrency. Reading it thoroughly helps make informed investment decisions.
Q: Can a cryptocurrency without a white paper be legitimate?
A: While rare, some legitimate cryptocurrencies might initially launch without a white paper. However, this is usually a red flag. Most reputable projects provide a white paper to explain their technology, objectives, and principles in detail.
Q: How can I determine the purpose of a cryptocurrency token or coin?
A: You should be able to identify if the token is a utility token, a governance token, or a security token. If the purpose is not clear, it's likely a hype-driven project without substantial value, making it a risky investment.
Q: What does the number of holders tell me about a cryptocurrency?
A: A viable new coin should have at least 200 holders. If a few holders have a large percentage of the coins, it indicates potential price manipulation risks. A diverse holder base suggests more stability and legitimacy.
Q: Why are liquidity and transaction volume important when evaluating a cryptocurrency?
A: High liquidity (at least $30,000) and consistent transaction volume (at least five transactions per minute) indicate active trading and market interest. Low liquidity and transaction volume suggest a lack of interest and higher risk.
Q: What are common signs of a crypto scam?
A: Common signs include anonymous or suspicious creators, lack of an official website and social media, unclear purpose, few holders with a heavy percentage of coins, and low liquidity and transaction volume.
Q: How can I protect myself from investing in bad cryptocurrencies?
A: Ask critical questions about the creators, the purpose, the online presence, the number of holders, and the liquidity and transaction volume. Conduct thorough research and due diligence before investing.
Q: Should I trust cryptocurrency recommendations from friends or celebrities?
A: No, always perform your own research regardless of who recommends the cryptocurrency. Friends, family, or celebrities might not have the necessary knowledge or may be unknowingly promoting a scam.
Q: What should I do if I suspect a cryptocurrency is a scam?
A: If you suspect a scam, avoid investing and report the cryptocurrency to relevant authorities or platforms. Educate others about the potential risks to prevent them from falling victim to the scam.
Q: How do I verify the credibility of a cryptocurrency's team?
A: Look for publicly available information about the team's professional background and previous projects. Check for LinkedIn profiles, previous work in the tech or finance sectors, and any press coverage or endorsements from reputable sources.
Q: What is the difference between a utility token, a governance token, and a security token?
A:
- Utility Token: Used to access a product or service within a blockchain ecosystem.
- Governance Token: Grants holders voting rights to influence project decisions.
- Security Token: Represents ownership or stake in an asset and is subject to regulatory scrutiny.
Q: Why should I be wary of cryptocurrencies with low transaction volumes?
A: Low transaction volumes indicate low market activity, which can lead to difficulties in buying and selling the cryptocurrency. It may also signal a lack of interest or confidence in the project.
Q: What are some red flags in a cryptocurrency's online presence?
A: Red flags include incomplete or poorly designed websites, lack of detailed information about the team and project, inactive or non-existent social media accounts, and no community engagement or support channels.
Q: How can I assess the market interest in a new cryptocurrency?
A: Look at the trading volume, liquidity, number of holders, and community engagement. High interest and activity typically indicate a more reliable and potentially successful project.
Q: What should I do if I have already invested in a potentially fraudulent cryptocurrency?
A: Stop any further investments, document your transactions, and report the issue to the platform where you purchased the cryptocurrency. Seek legal advice if necessary, and warn others in the community.
Q: Are there any tools or platforms to help evaluate cryptocurrencies?
A: Yes, several platforms provide analytical tools, market data, and reviews to help evaluate cryptocurrencies. Some popular ones include CoinMarketCap, CoinGecko, and Blockchain Explorers for transaction verification.
Q: What is a pump-and-dump scheme in the cryptocurrency market?
A: A pump and dump scheme involves artificially inflating the price of a cryptocurrency through false or misleading statements, followed by selling off the overvalued coins. This leads to a rapid price decline, causing significant losses for unsuspecting investors.
Q: How can I differentiate between a genuine cryptocurrency and a meme coin?
A: Genuine cryptocurrencies typically have a clear purpose, detailed white paper, and active development team. Meme coins often rely on social media hype and may lack a clear use case or development roadmap. Researching the project's fundamentals can help differentiate the two.
Disclaimer: This article was written by the writer to provide guidance and understanding of cryptocurrency trading. It is not an exhaustive article and should not be taken as financial advice. Obiex will not be held liable for your investment decisions.
