Assessing the Trading Capabilities of a Cryptocurrency Token

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    The Datafi
    Published on
    · 3 min read
  • In the cryptocurrency market, it is not uncommon to encounter issues from fraudulent projects such as smart contract scams. Examples include the manipulation of a project's smart contract, the restriction of only allowing purchases but not sales, exorbitant fees upon selling that are often unknown beforehand, and a lack of liquidity leading to price crashes upon trading. To avoid these pitfalls, it is important to conduct thorough checks beforehand.

    Here are two things to look into.

    1. Trading Feasibility

    On centralized exchanges (CEX), listed tokens are typically tradable. However, it is wise to examine the liquidity level of the token before making any transactions to avoid significant losses.

    On decentralized exchanges (DEX), the trading feasibility can be verified using the Token Sniffer tool. Simply paste the project address into the search bar, select the "Swap Analysis" option, and the tool will provide information on the token's trading feasibility.

    For example, if we were to check the Floki token's smart contract, the result would indicate that the token is currently tradable with a 3% fee for both buying and selling transactions.

    Note: The "Contract Analysis" option on Token Sniffer can also provide further insight into the contract's security by checking if the contract creator has the ability to alter the contract, such as disabling sales, modifying fees, or minting new tokens. In most cases, the presence of such options would indicate an insecure contract.

    2. Liquidity

    Two criteria commonly used to evaluate liquidity are the trading volume and the LP (liquidity pool).

    Checking Trading Volume

    To check the trading volume, tools like Coinmarketcap can be used.

    Based on the trading volume and liquidity, choose the right source to buy from.

    For example, with CEEK, the CEEK/USDT pair on Gate exchange accounts for 88.8%. Choosing to trade on Gate will be the most beneficial.

    Checking LP

    Using Token Sniffer tool: Data that can be viewed include:

    Current liquidity on DEX exchanges: the more liquidity, the less risk.

    • This liquidity factor can be quickly tested on the DEX, if your trade has a Price impact > 5%, it indicates that the liquidity of the pool is only 20 times the amount you bought. Based on that, consider the amount of investment, avoid becoming the shark of the project.
    • % of liquidity burned/locked in 15 days: Avoid holding the token and having all liquidity withdrawn, making it impossible to trade. Token Sniffer considers 95% as a safe factor, a commitment of the project. This factor only applies to new, small tokens. For old tokens, locking is usually not necessary as the project has been running and developing for a long time.
    • Creator's project wallet percentage of token quantity compared to liquidity: 5% is a safe number, avoiding the situation of selling all the held tokens to get a large amount of liquidity before others sell it.

    Note that scam projects will become more and more cunning, and the only thing that can be controlled is one's own mentality and behavior.