Shaurya Malwa · 1 day ago · 3 min read
Crypto is booming. Since its creation in 2008, cryptocurrencies, other crypto assets, and blockchain technology have disrupted the way we think about money and decentralized systems. There’s been growing widespread adoption of the technologies, more investments poured into crypto projects, and increasing legitimization of the industry. Big companies have been incorporating crypto into their portfolios, and even the recent pop of Bitcoin and Ethereum in the market is now attracting new investors.
Once people figured out what crypto was and the value it offered, it seemed like nothing was going to stop its forward march — nothing except for scams, which could derail the entire industry.
As crypto grew, so did the schemes intending to defraud naïve investors. A recent report, the “Crypto Investor Scam Report,” details the ways over $16 billion has been stolen from investors through various scams since 2012. Due to the deregulated nature of crypto, that’s money that those investors can’t get back. What’s even more jarring is that those projects were out to deliberately take advantage of uneducated investors wanting to get involved in crypto, and many founders simply disappeared overnight, leaving notes that they had taken the money and ran. Some have been arrested and charged, but many haven’t.
In looking at examples of big crypto scams, we see a common lure: The promise of high returns. This could be through investing money with one person who’s created special trading software. Or it could be through a kind of multi-level marketing scheme, where crypto investors receive rewards for referrals. It could also be through crypto projects that ended up as stand-alone coins and exchanges with no use case for the coins other than to be passed back and forth like trading cards.
Because crypto scams have displayed pretty distinct red flags, here are some things that investors can watch for so they don’t get scammed.
1. Get Rich Quick on High Returns
Some of the biggest crypto scams, like BitConnect and PlusToken, made massive promises of high returns — upwards of 1% per day, which is very promising but unsustainable. While many high risk investments yield high returns, crypto projects promising this kind of return typically end up borrowing back and forth from investors without having any established coin or structure to generate the returns. Seeing high returns from established coins like Bitcoin and Ethereum is one thing, but stay away from investing in new coins with these kinds of promises.
2. No White Paper or Proven Model
Every crypto project should have a white paper or a proof of concept demonstrating what they hope to accomplish. Satoshi Nakamoto’s 2008 white paper that established Bitcoin and blockchain technology is considered airtight and sets an industry standard for other crypto projects. It should be a red flag for an investor if the white paper is badly compiled, not well thought out, plagiarized, or if there’s no white paper at all. The same thing goes for a working business model. Can the crypto project demonstrate that they can do what they promise, that they’ve thought through coin adoption, or have an established blockchain? If they can’t, there’s another red flag that the project might not exist beyond the hype.
3. Shady Team with Low Credibility
Find out about the team behind the crypto project. Is the team more than just one person who has claimed to have created special trading software, or who will promise to manage a crypto portfolio for you? Look for a solid team with diverse, credible backgrounds who can be searchable on other sites to corroborate who they are. Big red flags are if the team has a history of criminal activity, like the team behind the WoToken scam, or if there’s no one to be found behind the project and they want to stay anonymous, like the BitConnect scam.
4. Huge Promotions and Hype
Another red flag is if the crypto project runs huge promotions, flashy events, and hypes a fear of missing out if you don’t buy into their project. Typically the flash and fanfare are there to hide the fact that there’s no working business model, or to cover up a lack of knowledge or experience. Unfortunately, the hype can be a great lure to someone who fears they may miss out on the “next big thing,” but savvy investors will see it as a red flag.
5. Money is Only Made Through Referrals
Finally, beware of crypto projects where investors can only really earn returns through referrals, and not through any revenue or dividend from the actual project. This kind of structure is fundamental to a pyramid scheme or a multi-level marketing scheme, where the system is only supported by more and more people investing, and not through product returns.
The cryptocurrency industry relies on investors to help crypto become institutionalized, and gain more credibility and legitimacy in the marketplace. While there are indeed scam projects out there, knowledgeable investors will be able to spot them and turn their money towards worthwhile, serious projects that can push the industry forward.
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