Stablecoins are a useful tool in the monetary world. Oftentimes, they can facilitate cross-border monetary transactions without to associated high fees of using fiat.
But just like any other cryptocurrency, there are fake stablecoins parading as real ones with the purpose of stealing your money. So how can you tell when a stablecoin is fake versus real?
Identifying fake stablecoins can be challenging, as scammers are always finding new ways to deceive people. Read on to learn some tips and tricks for identifying fake stablecoins.
Tips for Identifying Fake Stablecoins
1. Research the Project Before Buying
Start by researching the stablecoin project thoroughly. Look for information about the team behind it, the company or organization supporting it, and its development history. Genuine stablecoin projects usually have well-documented information available on their websites and social media channels.
If the stablecoin you are interested in doesn’t have a website or it doesn’t have a lot of documentation to back it, this should be your first sign that it could be a scam.
Related: Stablecoin: Why We Need It
2. Verify the Backing Currency/Product
True stablecoins are backed by a reserve of the pegged asset. For example, if it's pegged to the USD, there should be an auditable reserve of USD or other fiat held by a trustworthy custodian. Check if the stablecoin issuer provides regular third-party audits or reports to verify the backing.
Be wary of stablecoins which are backed by assets, such as the popular Tether, as assets can sometimes not be worth what the company says they are worth. Additionally, any backing behind a stablecoin should be 100% or close. Avoid any stablecoin which is not fully backed by an asset.
3. Check for Regulatory Compliance
Genuine stablecoin projects often strive to comply with relevant regulations to ensure legitimacy and transparency. Look for information about the stablecoin’s regulatory status and whether it complies with the laws of the jurisdiction it operates in.
If a certain stable coin is illegal in your area, it is probably better to avoid buying rather than place an order for a currency you could face repercussions for purchasing.
4. Analyze the Whitepaper
Review the stablecoin's whitepaper, which should outline its technology, use cases, and the mechanisms behind its stability. A well-written whitepaper is an essential sign of a legitimate project.
While it can be challenging to read a whitepaper, it is worth asking a friend or family member to help rather than to waste your hard-earned money. If a stablecoin is lacking a whitepaper entirely, then it is best to avoid buying it.
5. Scrutinize the Team
Research the team members and their backgrounds. Check if they have a strong track record in the cryptocurrency space or in relevant industries like finance. Be cautious if there's little to no information about the team or if their credentials seem suspicious.
If there are no individuals listed as creating or supporting the coin, do not buy. We also recommend looking for pictures and looking the person up on LinkedIn or another social media site to ensure they are a real person and are not made up.
6. Examine the Community
Look for an active and engaged community around the stablecoin project. Genuine projects usually have a growing community on social media platforms and cryptocurrency forums. Check for any red flags or warning signs raised by other users.
Also, beware of celebrity promotion. While it might seem like a celebrity promoting a stablecoin would make it legit, this is rarely the case. Celebrities can be bought just like anyone else, and it is common for them to be paid to post a stablecoin or cryptocurrency they know little, or nothing, about.
7. Be Wary of Promises of Returns
If a stablecoin project promises extraordinarily high returns or guarantees, it may be a sign of a scam. Legitimate stablecoins aim for stability, not massive profits.
Let’s be clear, a true stablecoin will not offer any returns or promises. Stablecoins are simply a type of digital currency, and they are not investment instruments. You should never buy a stablecoin because you are promised you will make money. This is a 100% sign that a stablecoin is a scam.
If you do want to make money investing, then check out cryptocurrency projects which are not listed as stablecoins.
8. Double-Check the Website and Website Security
Pay attention to the stablecoin's official website and ensure it uses HTTPS encryption. Look for proper security measures, such as two-factor authentication (2FA) and secure wallet integrations.
If the website looks sketchy, or you can’t find the information you are looking for on it, be very wary, as it could be a scam.
9. Verify Listing on Reputable Exchanges
Genuine stablecoins are often listed on reputable cryptocurrency exchanges. Check if the stablecoin is available on well-known and regulated exchanges. We recommend only buying stablecoins that are listed on platforms like Binance, Coinbase, and Kraken, as these projects thoroughly vet any project they list.
10. Seek Expert Opinions
When in doubt, consult with knowledgeable individuals or seek advice from reputable sources in the cryptocurrency community.
Remember that the cryptocurrency market can be risky, and scams are prevalent. Always exercise caution and do thorough research before investing in any stablecoin or cryptocurrency.
What Happens If You Get Scammed?
Unfortunately, the stablecoin industry isn’t well-regulated. This means if you get scammed, you will likely lose all your money. While sometimes a government will persecute the scammer and provide retribution to those caught in the scam, these processes, if they happen, take years to sort out.
It is much more likely that when a scam occurs, the scammer has put precautions in place, allowing them to disappear before they are caught by authorities. There are also many cases where scammers have killed themselves or done other things to avoid persecution.
Overall, it is best to avoid purchasing a scam stablecoin in the first place. If you ever have doubt, it is better to not buy in the first place than to take the risk.
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