Over the past couple of months we've seen some highs and lows, we've seen MEME coins reach for the moon and make the top 10 list. We've seen crypto-naïve celebrities tout poorly researched environmental concerns as fact and, once again, we've seen the Chinese authorities do what they do best flip-flop in what can only be assumed to be a poorly disguised attempt at further market manipulation.
Throughout this turmoil we've also seen a surge in retail investors coming into the crypto space. These are average people, putting their hard-earned wages into something that they see has potential to offer them financial freedom. None of us wants to work our hands to the bone day in day out for the hopes of have a few years when we retire to enjoy the world around us before we keel over. However, with this influx of retail investors (being less crypto savvy) there has been has been, and no doubt always will be, the constant rise and fall of scammers, intent on separating you from your cash because they cannot bring themselves to contribute to society productively.
One of the best things about the crypto-space is accessibility. For the most part, if you have access to the internet you have access to crypto-banking products. Decentralized finances (DeFi) and new cryptocurrencies, built using smart-contracts, give us an opportunity to put our crypto to work and often earn much better returns than traditional banking sectors. However, because it is so easy to set up these contracts there are a lot of them out there. While the vast number are pretty rubbish and may well disappear in a few weeks/months/years they, for the most part, may well be pretty innocuous. However, some of these contracts are designed in a way to catch you out, trick you and scam you out of your money. In this article we're going to look at how we, as the average crypto-investor can avoid getting scammed.
Before taking a look at how we can easily avoid scams (or spot junk tokens). Let's take a quick look at a couple of the main scams that use Ethereum or Binance Smart Chain contracts to dupe us.
The Pump and Dump
One of the most common and easy to orchestrate the ol' pumpNdump scheme. It works by trying to leverage social media platforms, often the scammers have created a carbon copy of another token, but have absolutely no real innovative development behind it. It is a duplicate, often named something similar to another well known coin/token/company, to play on the brand association to generate trust. They will spam channels with suggestions that if you buy this token you'll be rich within a week, or some other unrealistic non-sense. As with all scams they want you to make a snap decision so you may well find they add a sense of urgency to the sales pitch:
Buy now before you miss the boat
You don't want to miss the opportunity of a lifetime
This is like getting into BTC back at the beginning
If you've ever had invites to crappy discord groups claiming to make you a millionaire you'll recognise these kind of scams. It is a distraction tactic, they often have plants in the channels to hype up the sales and get everyone all excited about becoming rich and buying an island. They don't want you to look at the project fundamentals, they want you to be driven by greed, they also don't want you to see who is holding most of the tokens. They will list the token with something like ETH, BNB pair on a DEX, like UniSwap or PancakeSwap. Once a suitable price increase has been established and folks are converting their BNB/ETH for the next big thing they will dump a truck load of tokens on the market and extract as much of the underlying ETH/BNB as possible. The price takes a massive nosedive and everyone left holding the bag is questioning what happened. Sometimes they will go for a double pump and even encourage people to 'buy the dip' or just 'hodl'. Then later they will dump again, the aim of the game is for them to trade their worthless tokens for something with actual value.
Sticky Fingers (scam smart contracts)
I've called this one sticky fingers, because it reminds me of the Home Alone's infamous thieves who, at one-time, floated the idea of using taped hands to snatch funds from unsuspecting charity boxes......I give you....the sticky bandits!
Although unlike Harry and Marv, from the movie, this scam is a little smarter than the cut-copy pump and dump. Instead this employs slightly more complex contracts that often include hidden (or less obvious) functions that can prevent users from doing anything meaningful with the newly acquired tokens. What often happens is the functions they add allow only select addressed (or perhaps just the owner) from being able to sell the tokens. As with a pump and dump this relies heavily on us, the end user, not doing our homework or not understanding smart-contracts. They will attempt to get folks to buy a new token on a DEX having created the pair themselves. At this point those holding the tokens may well find themselves unable to sell the newly acquired token. It is like a 'smart-dump' scheme, it prevents the average buyers from getting spooked and cashing out. The scammer(s) then just needs to come along and sell their tokens into the market and therefore extract the underlying paired asset.
You may well be looking at these scams and wondering if any crypto is safe. You may be thinking "do I need a degree in computer sciences and need to read the smart contracts myself to be able to avoid these?", while it is recommended to do you homework on a project (and we'll talk about that later) it can be tough to get your head around the contracts themselves as the syntax may not be the easiest thing to read/understand.
This is is where those awesome folks at Token Sniffer come to the rescue......because if it looks like a shitcoin, and smells like a shitcoin.....then chances are you'll be wiping your foot on the grass (cursing under your breath) if you accidentally step in it....
The way this tool works is simple, when someone comes along and tells you to invest in some random token and gives you the contract address for you to add it to your MetaMask, you simple copy that address and paste it in the search bar in the top right corner of the website. If it has already been reported as a scam you'll get a warning at the top of the page saying why it has been reported.
Additionally, they have a 'smell test' section which also runs automated checks on the contract for you. While this isn't exhaustive it does help weed out those copy token pump and dumps by spotting duplicate contracts. Additionally, they list out the other contracts that this token has in common and you can easily see if one of these contracts has been reported as a scam already.
In around 2mins you can start to get a picture of the smart-contract itself underpinning a token and begin to make better informed decisions before taking the leap, it really is a no-brainer!! If you don't have time to do even a little research, then you don't have time to invest (a good motto to live by).
Doing Your Own Research (DYOR)
It is important to point out that Token Sniffer alone shouldn't be our only source of information. You see the one common theme with scams is that the focus on lack of understanding. That means that knowledge is is the key to avoiding these, but does it have to be difficult to find the right information? Well, no it doesn't, you're likely reading this article on some sort of computer or handheld device capable of doing a little web searching, right? That is all we need to do, look for the information. To make life easier I also put together a short list of things to look for and where to get the info in an earlier article.
In this article there are 20 questions and links to a bunch of other resources. I highly recommend before parting with any funds, folks just sit and do at least a basic level of research....because it is better to miss the boat than be on-board when it sinks!!
As you can see it is getting easier and easier to do a little research in this space. However, that doesn't mean it isn't worth reminding ourselves of just a few key things to remember when someone comes to us with an investment opportunity.
- Go searching for info yourself (not just the links they provide).
- Don't feel rushed, if they are pressing you to make a decision, ask why they care so much about you making money?
- If it is too good to be true.....then it probably isn't!
- Ask someone else whom you know or can trust, get them to look into it for you and give you a second opinion.
- Greed is a big motivator, don't let it drive your decisions.
Thanks for reading, hope you got something useful out of this article, stay safe out in cryptoland, good luck y'all!