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 (*coughs 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 opening your wallet to buy or invest 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 white paper. A crypto white paper 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, price chart, coin purchase tab and customer service support. They should also have a Twitter account or any other social media account.
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.
- 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.
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 or 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.
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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 Finance will not be held liable for your investment decisions.