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How to Know if a Cryptocurrency is Real, a Scam, or Worthless

Updated on December 28, 2017

Secrets of cryptocurrencies

How to differentiate between quality cryptocurrencies and scams

There is so much information and mis-information out there concerning bitcoin and other cryptocurrencies, that it's difficult for even those that have an understanding of the asset class to always recognize the fake from the real.

The truth is there are a lot of cryptocurrencies that have been developed that are nothing more than scams. Not only that, but those built in an attempt to meet a market demand, most of the time fail to differentiate enough from existing cryptocurrencies, to support a reason for them being adopted by the market.

To help to more accurately identify cryptos with a chance of lasting for the long term, I've put together a list of four things that all real cryptocurrencies will have associated with them.

It doesn't guarantee they'll survive, but it does mean they'll have a much better chance of surviving, or in the case of scams, being ignored altogether.

#1 Meeting market demand by solving a problem

One thing that is no different about cryptocurrencies than any other asset class, product or service, is it needs to meet a market demand. If people or businesses don't have a use for what is being created or developed, it is basically useless.

Since there is already a history of cryptocurrencies, we have a foundation to work from that the rest of the coins can be judged by. If a new coin isn't solving a different problem that bitcoin, ethereum, or a few other cryptocurrencies are already solving, they aren't going to have any lasting value.

If they become popular and you want to take a position in one, that's fine, as long as you understand you shouldn't be in it for a long time. When you make some money, sell the crypocurrency and run; it's not going to last.

Another factor is if there is some difference between an existing coin and a new coin, it has to have enough difference in order to make it attractive to a significant number of people that see it as adding value to their lives.

One example of one I see failing, and which a lot of people aren't aware of, is with bitcoin against bitcoin cash. In the case of bitcoin cash, which forked off of bitcoin, it doesn't offer enough of anything new to justify it having any staying power. Eventually I think it's going to not only crash, but probably cease to exist. There has been money to be made there, and those that held bitcoin when it went through the fork, aren't going to lose any of their own money, although they will lose the temporary value bitcoin cash now has.

Just be sure you can accurately and clearly identify why a new coin's development will be accepted by the market. If if doesn't meet a specific need, it won't survive, even if it enjoys a temporary boost in value from speculators, or those that don't understand why they're even buying it. Don'e be one of those, you could easily lose everything you put into it.

#2 – Strong network or community

Another extremely valuable aspect to consider when analyzing the validity of cryptocurrencies is the network or community built around it. It should be growing, active, and vocal about the coin the community supports.

The importance is if there is a strong and significant community built around the coin, it means most should have a stake in the cryptocurrency, meaning they own some, and that suggests it has a good chance of surviving, assuming the first point above is in place.

These first two points are vital to the success of a cryptocurrency, but it doesn't guarantee they'll survive. It does mean there is at least a perception of value by those supporting it, and it is worth checking out further.

Another factor in the size of the community behind a coin is it increases the size of the blockchain behind the coin, which increases the safety of the coin and ledger against being hacked.

What needs to be known after these two main elements is the safety factor.

#3 Is the code behind the cryptocurrency safe from hackers?

As just mentioned, the size of the community is an additional layer of safety of the blockchain against being hacked. But that's a secondary layer of safety. The primary layer of safety is the code that created the cryptocurrency in the first place.

If you're new to cryptocurrencies, they are nothing more or less than software code. They are basically code made to meet a market demand, just like any other code is. The key to cryptocurrencies is their built-in resistance to being hacked.

If you ever read about some of the large hedge funds taking an interest in and investing in blockchain and cryptocurrencies, one of the things you'll read about or listen to is they're either hiring on some quality IT teams, or they're spending money on a company that specializes in that area.

Why? The major reason is they want to have experts analyze the code to ensure its safety from being hacked.

I have a colleague that is an expert in coding, and he has found some coins that are very susceptible to being hacked, and they're not safe to invest in. This is what the hedge funds are looking for before they take a position in any coin; especially those that are new to the market.

After all, there's a reason they're called cryptocurrencies. They're supposed to be designed to be extremely difficult, if not close to impossible to being hacked.

Don't panic at this because you may lack the skills to determine the quality of the code in regard to resisting hackers. It's not hard to find expert commentary on how the design of the code of a coin aligns with safety from hacking. Just be sure to read carefully through the conclusion that was drawn by those that know what to look for.

The key is to not ignore that part of the cryptocurrency market and blindly invest.

#4 Development team

Lastly, knowing the team behind the design of the coin, or at minimum, the reputation they have in the market, is a key to determining the validity of the coin concerning whether or not it's a scam, or if it is built to last.

The point isn't that we have to have heard of who the individual members of the team are, as in most cases they could be from anywhere in the world. It's like Google, Facebook or Amazon. Most of us are clueless as to the individual names of the IT department of these tech giants, but we definitely know they have put together a team of high-quality and qualified individuals that can get the job done.

That's the same way to consider the team behind designing a specific cryptocurrency, and what type of team remains in place to maintain the code.

On top of the expertise in code and other elements of the design, I also am looking to see who the entrepreneurial person is behind the cryptocurrency. It's one thing to have expertise in code and other tech skills, it's another to identify the demand of a market and build something that has a strong chance of supplying that demand over the long haul.

Conclusion

I know of some investors or businesses that look at this list of qualities to look for in a cryptocurrency in a different order than I do. But having owned, operated, or acquired a number of businesses over the years, the first thing I want to know is whether or not something is meeting a market demand. If it's not, the rest doesn't matter.

If there is a cryptocurrency that is very safe and has an excellent development team behind it, yet it serves no real purpose, it would be nothing more than a well-developed piece of code that does nothing to solve a problem. Why bother researching the rest if you can't find a purpose for the existence of the coin?

After that, looking to see if it is attracting a network of fans that own the cryptocurrency and are interested in what it can do. That is vital to making a decision. If no one knows about it, how will it increase in value? It'll just be an interesting coin that has a tiny group of followers.

If that's in place, then I find it worth the time to further check out the development team and the underlying code.

Assuming all of that is in place, it provides an excellent chance that the specific cryptocurrency isn't a scam, and it has a decent chance of surviving and thriving. That in turn means it'll generate strong returns for those investing in it.

When researching cryptocurrencies that attract your interest, filter them through these four things to help make a decision on whether or not you want to take the plunge.

As of now, there are few of these cryptocurrencies I would consider as one to buy and hold. Bitcoin is one, and probably ethereum. These should be considered short-term holdings unless some significant breakthrough appears that improves the outlook for each cryptocurrency.

Just remember, always ask this question first and foremost: Does it meet a specific market demand different and better than an existing cryptocurrency, and if yes, go ahead with further research.

With so much emotion attached to the various cryptocurrencies out there, just be sure to objectively step back when you ask that question. Keep in mind that the difference needs to be meaningful, not some something cosmetic or a tweak. That isn't enough to differentiate and boost its chance at success.

If all these things align for you, take a little money and give it a shot. If you can identify a quality and legitimate cryptocurrency before it soars, you don't need a lot of money to generate some amazing returns. But even if you are a little late to the game, taking a position in an existing crypto like bitcoin will pay off for a long time. Just wait for the market to correct and buy in at that time, i.e. buy on the dips.

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