Foreword

Cryptocurrency investments are characterized by high returns and high risks. Investing in newly launched coins in the primary market is like leveraging the likelihood of both failures and profits. However, projects with hundreds of times the profits may also be scams and fraud that intend to lure investors into investing where they end up losing all their funds. Therefore, before investing in new cryptocurrencies, it is crucial to effectively identify scams and develop suitable investment strategies to minimize risks. In this lesson, we will introduce potential risks and prevention methods for investing in new cryptocurrencies, aiming to help you identify problematic project teams and provide techniques to spot fraudulent projects. We will also offer key considerations and advice for investing in new coins, giving you a clearer understanding of the investment landscape in the primary market.

Risks in New Cryptocurrency Investments

Legal and Regulatory Risks

The regulatory landscape for cryptocurrencies is not well-defined, and different countries and regions have varying positions on cryptocurrencies. Investors should carefully study the legal and regulatory policies in their own country or region and determine whether the cryptocurrency they plan to invest in complies with local legal requirements. For example, the Chinese government has banned cryptocurrency exchanges from operating within the country and considers all ICO activities illegal. The U.S. SEC also takes a strict stance on cryptocurrencies and considers most cryptocurrencies as unregistered and illegal securities.

Technological Risks

The value and security of cryptocurrencies depend on their underlying technology. If there are vulnerabilities in the algorithms or smart contract codes, it can attract hackers who can exploit them, leading to price crashes. There have also been instances where platforms providing services for new coin investments or cryptocurrency wallets storing assets have experienced some problems, resulting in the loss of user funds. Therefore, it is important to choose reputable platforms to participate in and only invest in early-stage projects with solid technical expertise.

Project Mechanism Risks

Project mechanism risks refer to problems in the token’s algorithm, technology, or design structure that result in the token failing to fulfill its intended function and producing unexpected outcomes. For example, in the case of Luna and UST, project mechanism risks led to price collapses and death spirals. UST stablecoin failed to maintain its peg to $1, while the excessive minting of Luna caused its price to rapidly plummet to near-zero. It is important to have a deep understanding of how the project works to avoid investing in tokens with design flaws.

Market Risks

Cryptocurrency prices can experience significant volatility due to various factors. These factors include news related to project teams, changes in market demand, regulatory changes, and shifts in the global economic environment. Investor sentiment and expectations can also influence cryptocurrency prices. Technological innovation and progress can enhance intrinsic value but can also eliminate outdated coins.

Operational Risks

Blockchain is an immutable distributed ledger, and most on-chain operations in cryptocurrencies are irreversible. Therefore, investors need to have a certain level of professional expertise to perform transactions and transfer cryptocurrency assets. Improper operations can lead to financial losses. For example, engaging in large-scale swaps with low-liquidity trading pairs can result in slippage, and using lending services needs to pay attention to collateral ratio and liquidation rules. Incorrect contract authorizations can also lead to private key or seed phrase leaks, resulting in the theft and loss of digital assets.

Fraud Risks

Cryptocurrencies, due to their strong anonymity and resistance to censorship, have become a breeding ground and tool for fraudulent activities. For example, fraudulent investment platforms or exchanges may use counterfeit websites or advertisements to induce investors ino depositing funds, and investors are unable to withdraw or only to find the website get shut down. Social networking apps or community platforms may have users impersonating influencers or experts, who recommend investors to buy worthless or non-existent cryptopcurrencies and promising high returns with low risks. Criminals may also utilize fake social media accounts or customer support channels to send private messages to investors, requesting personal information, passwords, seed phrases, and more, with the intention of stealing cryptocurrencies or engaging in identity theft. Many projects operate as Ponzi schemes, attracting funds through enticing airdrops, giveaways, and lotteries, only to perform rug pulls later on. Smart contract authorization scams usually involve inducing users to authorize contracts from unknown sources to execute automated trades or operations and then stealing assets from investors’ wallets.

Team and Operational Risks

Every investment carries risks, whether in traditional finance or the cryptocurrency market. Even reputable businesses can face bankruptcy, let alone early-stage blockchain projects. Changes in market demand and increased competition can lead to reduced profitability or losses, ultimately leading to market elimination. Internal issues such as poor management, operational failures, or improper employee management can also affect the project’s operations and development. Improper financial management or token price collapse can lead to insufficient funds and poor liquidity, preventing the team from continuing to provide products and services. The team’s technical expertise and experience are also closely linked to the project’s ability to thrive in the market.

How to Identify Fraudulent and Failing Projects

The blockchain industry is rapidly evolving, and along with the development of technology, there are many projects that fail to stay relevant and eventually become obsolete. Investing in cryptocurrencies that fall into this category carries a high risk of losing savings due to the absence of genuine technological innovation or intrinsic value. Therefore, it is important to conduct detailed research and investigation before purchasing new cryptocurrencies to minimize the likelihood of choosing these fraudulent projects. Generally, fraudulent and failing blockchain projects exhibit the following characteristics:

1. Anonymous Team
   Not all projects run by anonymous teams are scams, and not all projects run by identified teams are legitimate. However, the privacy and decentralized nature of blockchain technology can be easily abused by malicious actors. Anonymous teams lack accountability, which can circumvent legal constraints and investor protections. Therefore, it is important to exercise caution when participating in projects with anonymous teams to safeguard your assets.

2. Extremely High Returns
   Fraudulent projects promise investors exceptionally high returns, such as doubling or even multiplying their investments several times over a short period or guaranteeing their principal without the risk of loss. These promises are often unrealistic and should be viewed vigilantly.

3. Ponzi scheme
   Fraudulent projects may require investors to recruit others to join the project, forming a pyramid-like organizational structure. These projects distribute rewards to investors based on the number of new members they recruit or their performance. This practice is commonly referred to as “multilevel marketing” or a Ponzi scheme, as it relies on recruiting new members to generate profits and is not a legitimate business model.

4. Excessive Marketing
   Fraudulent projects heavily promote themselves on social media or other platforms, showcasing trading screenshots, account balances, profit reports, and more to attract investors. These displays are often fabricated or intentionally manipulated, and investors should remain vigilant about such promotional methods.

5. Inconsistent Information
   Fraudulent projects may provide vague or unverifiable information about their technical details, team backgrounds, partnerships, legal compliance, and more. This could be indicative of the project team’s attempt to conceal certain information or issues, or it may reflect their lack of understanding. There is even a possibility of deliberate deception.

6. Secret Fund Transfers
   Fraudulent projects may attempt to transfer project funds secretly, such as moving funds to other accounts to evade the supervision and scrutiny of investors. Investors should closely monitor the flow and utilization of project funds and be vigilant if they notice opaque or problematic fund movements.

7. Refusal to Respond to the Community
   Fraudulent project teams may refuse to respond to community inquiries or comments, or they may only address trivial matters. This may indicate that the project team does not genuinely care about the community’s opinions or questions and may be attempting to conceal or cover up certain information or issues. Investors should take note of this behavior and exercise caution.

8. Problematic Website or Partners
   Fraudulent projects may include false information or data on their official website, such as poorly designed pages, a team member list with questionable backgrounds, or false or plagiarized whitepaper content. They may also claim to be in partnership with well-known companies or institutions, or falsely promote endorsements from fake investors and organizations, in order to gain investors’ trust.

9. Lack of Use Cases
   Some blockchain projects may be nothing more than empty ideas, lacking practical application scenarios and a viable business model. Therefore, investors need to have a basic understanding of the industry prospects related to the project and determine whether the project they are investing in has real use cases and development feasibility.

10. Insufficient Liquidity of the Coin
    Some cryptocurrencies may suffer from insufficient liquidity, making it difficult to buy, sell, or exchange them. Typically, active projects do not encounter this issue. If the trading volume and liquidity of a project’s cryptocurrency consistently decline, it may signify reduced market demand, but may also indicate potential risks that the project team manipulates prices. Therefore, it is crucial to remain cautious and vigilant to avoid situations where capital withdrawal drains liquidity.

11. Lack of Community Management
    Blockchain projects need an active community to support their growth. If the project team fails to manage the community properly, it can lead to the loss of user base and reduced exposure, making it challenging to achieve their development goals. The number of followers and the level of community interaction are also important indicators for judging the quality of a project.

12. Lack of Updates and Maintenance on Codebase
    The codebase of a blockchain project needs regular maintenance and updates to ensure its security and stability. If the project team fails to update the codebase regularly, it may cause vulnerabilities and security issues. Moreover, it may indicate a lack of technical expertise or a diminished commitment from the project team to sustain operations.

It is important to note that the aforementioned considerations are just some potential warning signs and precautions. They do not guarantee the ability to identify all fraudulent or failing blockchain projects with 100% accuracy. Therefore, before investing, it is necessary to conduct thorough investigations and research from multiple angles, as well as gain as much understanding as possible about the project’s history, team, technology, and market prospects, in order to make informed decisions.

Strategic Points for Investing in New Cryptocurrencies

Rational Investing, Avoid Impulsive Participation

Investing is not gambling. No matter how lucrative your previous profits are, underestimating the risk of potential losses and lacking risk awareness can lead to setbacks. In the financial market, risk and return coexist, and surviving for the long term allows you to seize good opportunities when they arise.

Develop Entry and Exit Plans and Strictly Follow Them

Everyone wants to make good returns, but even professional investors can encounter losses. Therefore, when investing, you must consider various possible scenarios, prepare for the worst, determine the maximum loss you can bear, and set exit conditions when gaining profits. Do not invest funds that could affect your daily life, and only participate within the range of acceptable losses. Whether it’s making a profit or suffering a loss, stick to your plan and develop your unique set of investment strategies.

Diversify Your Investments and Avoid Going All-In

The failure rate of new cryptocurrency projects is extremely high, with an average of 90% of projects not lasting over a year. Therefore, putting the majority of your funds into a single cryptocurrency project comes with a high probability of failure. On the other hand, diversifying investments can effectively spread risk. While it may lower the maximum potential return, it also prevents catastrophic impacts on investors when a particular project encounters problems, thereby maintaining stability in portfolio performance to some extent.

Long-Term Holding to Generate Stable Yields

If you can’t hold, you won’t be rich. As Rome wasn’t built in a day, the development of a project takes time as well. Cryptocurrency market prices are highly volatile, and without a long-term perspective and patience, you often end up earning only small profits. The most lucrative returns in the financial market come from long-term accumulation and project growth. Frequent entry and exit transactions only lead to only small profits. Take the time to understand the technology and ecosystem of the new coin you hold, explore the long-term prospects of the project, and be a patient investor. You will increase your chances of making substantial wealth.

Conclusion

This lesson introduces the types of risks and preventive strategies when investing in new cryptocurrencies. While investing in new coins has great potential for high returns, without proper risk control strategies, the high failing rate of startup projects can easily lead to significant losses. It is important to have the ability to identify fraudulent projects and manage risks effectively in order to protect one’s capital. This course discusses the characteristics of fraudulent projects, introduces common risk types, and provides some advice for investing in new coins. It is hoped that through this course, investors can navigate their investments more successfully in the primary market.

Takeaways

• Cryptocurrency investments feature high risk and high return. They also attract the attention of illegal fraudsters.
• Investors should be able to identify fraudulent projects and develop investment strategies to reduce risks.
• Cryptocurrency investments come with various risks, including legal and regulatory risks, technological risks, project mechanism risks, market risks, operational risks, fraud risks, and team and management risks, among others.
• Fraudulent or failing blockchain projects typically have one or more problematic aspects, such as anonymous teams, unreasonable high returns, pyramid schemes, excessive marketing and promotion, inconsistent information, secret fund transfers, refusal to respond to the community, problematic websites or partners, lack of application scenarios, insufficient liquidity of the coin, lack of community management, and outdated codebase.
• In addition to conducting thorough investigations and research, it is important to gain as much understanding as possible about the project’s history, team, technology, and market prospects to make informed decisions.
• Investing is not gambling and must be approached with rationality and proper risk management.
• Diversifying investments can effectively spread risk, reduce the probability of failure, and maintain the stability of portfolio performance.
• Long-term holding allows for stable yields. It is crucial to understand the technology and ecosystem of new coins, explore the long-term prospects of the project, trying to be a patient investor.