Cryptocurrency scam: what it is and how to check a project for scam
Cryptocurrency is one of the rare digital trends that is gaining strength every year. New investors are entering the niche, even when the market is highly volatile and there is a chance of losing money in the next few months.
In this new article, we will talk about cryptocurrency scams. We will discuss the schemes used by scammers, examine examples of scam coins and projects that disappeared with investors’ money.
What does “scam” mean in cryptocurrency in simple terms?
Scam is a form of internet fraud that involves deceiving gullible investors. In most cases, the term is used to describe projects that were created to drain money from people.
The term “scam” is also used to describe the actions of fraudsters who deceive newcomers and take possession of their assets. This is the most common scam scheme that is unlikely to ever become outdated.
Scams in cryptocurrency thrive due to weak regulation. The nature of the blockchain is such that every transaction can be traced from sender to receiver, but it is difficult to identify the owner of a crypto wallet.
If a fraudster conducts operations through an exchange that requires identification, law enforcement agencies can obtain their personal data upon request. However, they are likely to hide behind a fake identity or a other person’s identity.
Unlike newcomers, scammers care about the security of their assets, so they are unlikely to use their real data when registering on exchange services. Scammers use wallets that do not require personal data input.
Cryptocurrency crimes often go unsolved. Weak regulation allows scammers of any caliber to make a few hundred dollars through a simple scam scheme. There will always be a gullible investor who wants to make a quick buck in 5 minutes.
Many people who begin to delve into the cryptocurrency niche underestimate the scale of crypto scam. A study by the American company Satis Group LLC showed that 81% of major ICOs in 2018 turned out to be fraudulent.
Of the remaining 19%, only 5% had any value at all. These figures speak for themselves – the risk of losing money in cryptocurrency is incredibly high. Novices should think twice before investing in a hype project.
The volume of profits made by crypto scammers is likely in the millions of dollars. They take advantage of the fact that tokens and blockchains are becoming more and more popular and come up with new scam schemes.
Here are some popular scam methods:
- Sale of unknown tokens. Scammers spread information that you can get profits in a short time with the help of a new coin, collect money and disappear.
- Pooling. Crypto investors sometimes pool assets. Scammers take advantage of this to lure money from gullible investors. They gain trust, accumulate a large sum, and then disappear.
- Trust management. Scammers ask for money to multiply it and then disappear.
- Phishing sites. Scammers create copies of popular exchanges or lure investors to new platforms with low fees and cool bonuses. Users top up their accounts and are left without the promised cryptocurrency.
- Help with withdrawal. Almost all major exchanges conduct KYC and AML before depositing funds. Not everyone is willing to share their personal data, and scammers take advantage of this to “help” with identification.
- Disguising themselves as new coins. Scammers monitor promising coins and create copies of them to make a big profit in a short amount of time. Novices are unaware of smart contract verification and often fall victim to scammers.
New crypto scam schemes appear regularly. Most scammers collect money with minimal effort. They take advantage of people’s desire to make a profit in a short period of time.
I often encounter scammers in the world of cryptocurrency, but even more often, the scam is hidden. It’s not just the fact that you can buy a token but can’t sell it; it’s the fact that developers are selling air with some capital for marketing.
There are several types of scams in the world of cryptocurrency:
- Rough scam – when more than half of the coins are held in the owners’ wallets, or they cannot be sold at all
- Pyramid scam – usually such projects either directly say that it is a pyramid, such as Tron projects or more recently Express games.
- Latent scam – let’s call it that when developers do not initially intend to invest in technology but are heavily focused on marketing. Such projects can change their internal roadmap depending on the situation, as was the case with Safemon, who then created some minimal product with a beautiful interface, Safepal, and the STEPN project also belongs to such projects, but it is more of a hybrid between latent and pyramid.
I have been in the market for about 3 years now, and during this time, I have seen a lot of scams. When you’re in the market, you need to remember the main rule: all cryptocurrency projects try to follow the trend in order to gather more audience, and 90% of these projects will disappear within six months, leaving only 10% behind.
Examples of scam coins and crypto projects
There are many examples of scam coins and projects in the cryptocurrency niche that were created to extract money. Not all cases end positively for defrauded investors. In most cases, scammers do not return anything.
The risk of falling for a scam when buying another token is very high, especially if the project has no documentation or any factors of trust. Scammers create the appearance of excitement, accumulate a portfolio, and disappear.
It is important to distinguish scam projects from those that failed due to developer shortcomings or a decrease in interest. If the course of a hype coin suddenly drops, it cannot be called a scam. This situation is standard for cryptocurrency.
In early May 2022, Bitcoin and other altcoins dropped in price. The value of many investors’ portfolios declined, and beginners were able to enter the market when it was in a state of descending tops.
LUNA topped the outsider rankings – the price of the cryptocurrency fell by 99.99% in just one week. The value dropped from $87 to 1 cent. The stablecoin token fell by 60% to 0.37 dollars.
Against the background of problems, coin holders began to massively spread messages that LUNA was a scam. However, the crash occurred due to the drop in UST stablecoin. Experts note that it was an important component of LUNA’s stability, and its fall could not go unnoticed.
The collapse of LUNA is also associated with a decrease in the reserves of the fund responsible for providing UST. As a result, all major exchanges suspended coin withdrawals, and major holders lost millions in assets. Although this is not a scam, the situation is not pleasant.
After the release of the popular series “Squid Game”, people around the world ordered costumes, participated in themed quests, and started following previously unknown Korean actors.
Scammers could not miss the opportunity to use this hype train for their own interests. They created the Squid cryptocurrency based on the series and promised that the winner of the quest would eventually take the entire fund.
The result is obvious – the founders disappeared with the accumulated assets. Interestingly, on November 1st, the token reached $90, only to fall to $0.003 a few minutes later.
This cryptocurrency is tied to the TON blockchain, which is the foundation of the Telegram messenger. Several years ago, Pavel Durov announced the creation of his own coin and set a threshold for investors at $1 million.
As a result, the project had to be shut down due to a US court order that banned the mining of “grams” worldwide. Media reports suggested that Durov could be sued, but the case was resolved positively.
During the TON hype, scammers created ads inviting people to become investors with a minimal threshold. They collected money and disappeared, leaving only an unpleasant aftertaste for “holders” of the coin.
Last summer, founders of a large exchange disappeared with users’ assets worth $2.3 billion. They announced that the service had been hacked and that the assets had been taken by scammers.
The hacker version fell apart after investors accused the company’s founders of fraud. After that, the founders disappeared from the radar, and their guilt has not yet been established in court. They have not been found for more than a year.
The financial pyramid was created in 2018 according to the classic Ponzi scheme. The founders tried to attract as many new investors as possible and paid the “old-timers” out of the investments of new users.
During the platform’s operation, they managed to collect 480,000 bitcoins. The founders withdrew 195,000 BTC to their accounts and followed the example of Africrypt’s founders. As a result, users lost $3 billion.
Some projects are not scams, but scammers take advantage of their popularity to sell as many tokens as possible and take money from novice traders.
The first place among all scam projects is taken by Terra Luna. I think there’s no need to explain what happened – everyone saw it. Could someone predict it? No, but you could have followed the rules and listened to the right people if you wanted to earn here, not lose.
In my blog, I have mentioned many times that this is not the project to invest in. The second place is taken by BitConnect, where the basic pyramid offered high returns and the end was quite obvious.
The third place is taken by the Parity wallet hack. Yes, it may not have been a scam led by the creators themselves (although who knows), but I’m mentioning it because it held about 514,000 ETH and all of it was frozen in the blockchain due to an error. The funds have still not been returned, but if they are, the price of Ether will be in question.
From this, one can conclude how often scam projects can be encountered. Therefore, it is always necessary to analyze the project that interests you and listen to the right people, and we’ll talk about analysis below.
How to check a coin for scam
It’s important to understand that in the crypto niche, there is no tool that will allow you to determine with 100% certainty whether a project is a scam. There are useful services for assessing the reliability of an application or coin, but they only show risk factors.
The final decision always remains with the investor. They must conduct their own research, analyze the weaknesses, and only then buy this one crypto.
Signs of a scam coin:
- Advertising huge profits. If the creators of a coin or non-fungible token (NFT) promise that the purchased assets will increase in price by 300% in a few days, it’s better to remove them from the whitelist instead of browsing dozens of lots on NFT sales platforms.
- Complete anonymity. A major blockchain project is always backed by a large team, funds, and partners. If there is no information about them, be cautious.
- Lack of documentation. Bitcoin and popular altcoins have detailed documentation describing the technical nuances of their operation. A coin should have at least a lightpaper, and preferably a whitepaper.
- Focus on money. Recently, most new projects have been focused on social activity. They don’t reduce everything to numbers but try to change the world for the better. For example, reducing the carbon footprint of blockchain operations.
- Absence of the coin on major exchanges. Developers try to spread information about tokens on major services as quickly as possible. This increases investor trust. If a coin can only be purchased on dubious exchanges, this is a sign of a scam.
Automating routine tasks for checking a coin for scam can be done using helpful services. They provide a lot of valuable information for free, so don’t miss this opportunity.
What to use for analysis:
- Token Sniffer. Checks a coin’s reputation by name or address. If the report has many red crosses, it’s a bad sign.
- Etherscan, Solscan, BscScan show information for each address existing in their blockchains.
- CoinMarketCap and Coingecko. Major coin listings conduct audits before placing information in the directory. Access to data is available even without account registration.
- Certik. An independent project performs audits of projects that are in demand in the digital world.
As we’ve already mentioned, there is no real way to be 100% sure of a project’s reliability. Experience shows that even investors who know much more than ordinary users often find themselves left behind. Cases like Africrypt confirm this.
When even serious players with multi-million-dollar portfolios lose money, average investors start to feel uneasy. However, this doesn’t mean that one should leave the niche. Standard research helps to find signs of a scam, and if you dig deeper, the hidden pitfalls become apparent.
I use the following services:
How not to fall for a scam project
Financial pyramids that live off the influx of investors’ funds are proliferating like mushrooms after the rain. The list is constantly growing because launching a simple pyramid requires minimal resources.
Surprisingly, in 2023, users continue to bring money to projects that reek of scams from miles away. A striking example is the Finiko pyramid, which collected $500 million. Several members of the project team were eventually held accountable, but this does not change the situation.
Potential investors forget a simple action before transferring money to a new project. They ignore the quality test and try to jump on the hype train to collect the cream.
Recommendations to help avoid scam projects:
- Perform DYOR. Doing your own research in cryptocurrency is a mandatory step for every investor who wants to be in the niche for a long time.
- Check listings. If a project’s coin is on Binance, Huobi, FTX, and other major exchanges, it means it has passed a basic security audit.
- Look at the team members’ social networks. If they hide behind standard avatars and do not provide links to their pages, it is suspicious.
- Analyze the community’s opinion. Crypto investors often share information and help each other. If a large number of users talk about scams, it’s worth thinking about.
- Don’t trust opinion leaders. Some bloggers are ready to give subscribers financial recommendations with a 100% guarantee.
- Check blacklists. For example, you can install the MetaMask wallet extension for Chrome or Firefox. When connecting the wallet to a phishing site, Web3 will receive a corresponding notification.
The best protection against cryptocurrency scams is investor vigilance. If they check the information several times and do fact-checking before each transfer, the chances of preserving funds will be much higher than with mindless investing.
There are two main scenarios in the crypto niche: high multipliers or security. Those who choose the first option are willing to lose their money in case of failure. But conservatives spend funds only when they are confident in the reliability of the offer.
Any financial transaction must go through a checking stage. Even if a friend offers a “sure thing,” you cannot trust their words. Behind them should always be specific facts that are easy to verify.
It is necessary to fully analyze the project, its tokenomics, roadmap, team, design and functionality, and social networks for activity.
How do you properly analyze a project to understand if it’s a scam or not?
Let me try to answer briefly. We have a trend, for example, Move-To-Earn – run and earn, the pioneer was StepN, which successfully made serious profits and went on to conquer the peaks of the cryptocurrency market.
Now the project has fallen by 90%, as have their sneakers and token. Could it have been analyzed that the earnings, which amount to +400% per year, would last forever? I think it could have been, and again we return to the question of which people you listen to because they are an important link in your endeavors. They lead you through this market, and you make mistakes, while they earn from advertising the same project.
In this example, you don’t even need to analyze when and which token unlocks will be from the funds that bought this token for $0, although this needs to be done! But at 400% per year, everything is clear; the market has entered a descending-tops phase, and no one will support such projects.
In StepN, we saw a very obvious “scam”, but what about other projects? It’s quite simple: when you see an interesting project, you need to understand what problems it solves, whether there will be money (people) there, and whether it will develop.
Pay attention to the funds because where there are funds, there is financial support. But at the same time, the presence of funds lets you know that there will be a dump, and based on the fund’s unlock schedule, you should roughly understand when there will be a pump and when there will be a “scam.”
And most importantly, don’t invest in projects that follow a trend! Because they are here for a short time, the trend will pass, and something new will replace it. You saw a project, bought it, made a 20% profit – and you’re already gone. Want to earn money? – Go work at a factory.
4 myths about “scams” in cryptocurrency
The rapid development of cryptocurrencies contributes to the emergence of numerous myths. Most of them are easily debunked through quick analysis. If you examine each fact under a microscope, it becomes clear whether it works in real-world conditions.
We have collected several popular myths related to cryptocurrencies. Beginners should avoid them so as not to miss the opportunity to invest in a worthwhile project because of imaginary problems.
The crypto rate should be stable
For some reason, both novice and experienced crypto holders are convinced that if Bitcoin reaches a $40k mark for one coin, it shouldn’t fall. This is a common myth that remains relevant over time.
A certain percentage of crypto enthusiasts firmly believe in stability and do not accept any fluctuations. However, it should be obvious to everyone that stability and crypto are incompatible things.
For example, the value of tokens of the popular Web3 project STEPN recently fell by more than half. Sneaker owners began to cry out about scams in profile chats, but this is not the case. Although the sneaker scam scheme is quite real.
The game continues to live and develop, the developers have big plans for implementing steps from the roadmap. User expectations may differ from the real situation, and that’s their problem.
Cryptocurrency trading is a scam
Cryptocurrency trading is profitable trading. A user buys coins at a low rate and resells them at a high rate, earning a percentage from each transaction. The scheme continues to exist even now, but banks and payment systems have recently tightened the screws on “swindlers.”
Trading is not a scam, as no one deceives anyone when conducting transactions. If the buyer and seller use verified exchanges for P2P trading, everyone is satisfied.
Earning multiples is easier than ever
Infobusinessmen and scammers create an image of a magical tool for newcomers, which will allow them to earn thousands of dollars from investments of $100-200. In most cases, the system does not work that way, but still there are exceptions.
The example with Terra LUNA proves that there is no easy money in crypto. At one point, assets can turn into a dummy, and it will be impossible to achieve a return on investment.
It is worth preparing in advance for the loss of money and investing in crypto the amount of funds that can be lost without damage to your financial situation. This is the only way to protect yourself from the sudden collapse of a coin or project.
Opinion leaders do not invest in scams
Lately, bloggers and celebrities from various fields have started actively investing in cryptocurrency. Founders pay them a lot of money to film a video with the participation of an opinion leader, where they use the application on camera.
If an actor or blogger advises investing in a new crypto game, their words cannot be taken at face value. If you ignore DYOR (Do Your Own Research), the risk of losing money will significantly increase.
By the way, one of the STEPN clones is actively being promoted in the CIS countries. It smells like a pyramid scheme and a scam from a mile away, but user interest continues to grow. People are willing to overlook flaws in the pursuit of profit.
Investing in crypto always involves risk. It doesn’t matter whether it’s a cryptocurrency airdrop or buying an NFT on an exchange. In each case, it is necessary to assess the risks and make a decision based on specific facts. There are no special tools for evaluating the guaranteed profitability of crypto projects.
What do crypto scammers profit from?
Scammers prey on people’s desire to make money without effort. They capitalize on the popularity of crypto and the lack of regulation in the market.
Is Tidex exchange a scam?
There are many negative reviews about this exchange on the internet. However, it cannot be said that it is a scam project. It continues to operate despite all the criticism.
Is cryptocurrency LUNA a scam?
It’s not a scam. Problems with LUNA arose due to a mismanagement of the ecosystem that ensures the stability of the coin.
What is cryptocurrency trading?
It’s profiting from the difference in exchange rates. Users resell tokens at a higher price than they bought them and earn a few percentage points from the transaction amount.
Why is crypto fraud so widespread?
Due to the lack of regulation, the anonymity of wallet owners, and the growing popularity of the crypto industry.