The cryptocurrency industry is full of money and enthusiasm, but those two things combined with the hard-to-trace nature of cryptocurrencies have made it quite the target for scammers, hackers, and frauds. Whether you're investing in a new cryptocurrency project or trading coins on an exchange, you may be at risk of falling prey to one of many different cryptocurrency scams - until now! In this guide, we'll introduce you to the most common types of cryptocurrency scam, teaching you not only how to spot them, but also how to avoid them.
If you want to be able to spot cryptocurrency scams before it's too late, you need to learn the various signs these schemes have in common. First, though, let's divide cryptocurrency scams into four categories:
ICO scams - These are the cryptocurrency scams where a token sale or ICO is used to raise funds for a project which the team has no intention of completing. Instead, the funds are simply used up by the team for personal reasons. ICO scams became extremely popular in 2017, when investors were more willing than ever to participate in token sales.
Project scams - In the case of some cryptocurrency scams, a token sale or ICO is used to raise funds for a project which the team does have the full intention of completing. However, at a later date the team decides to give up on the project and use up the funds for personal reasons, meanwhile ceasing communication with investors.
Exchange scams - Cryptocurrency scams aren't always related to individual projects. Cryptocurrency exchanges may choose to steal from their users - either stealing a small amount on an ongoing basis or running away with all of their users' funds at once. Sometimes, exchanges may claim they have been hacked to cover up their foul play.
Social media scams - These are the least sophisticated of cryptocurrency scams: a simple attempt at an online cash grab by encouraging social media users to send cryptocurrency to a particular address, often under the pretext that they will receive a reward for doing so. Social media scams usually involve the impersonation of some notable individual or group.
Now let's dive into some of the telltale signs of these scams!
Anonymous team - An anonymous team is one of the most obvious signs that an ICO is in fact a scam. With the amount of personal data that's currently available on the internet, there's no reason for founders of a new project not to share their identity on the web. Well, there is one, and that's making sure not to leave a trace when they run away with your money!
Token and fund distributions - The token and fund distributions of the project are two more factors to look at when determining if an ICO is a scam. For starters, the team may have only allocated a small portion of tokens to the ICO (leaving a huge number left over for themselves), or they might not have a clear plan of how they intend to use the funds raised from the ICO - neither of these are good!
Unclear whitepaper - If an ICO's whitepaper is full of buzzwords and vague language, suggesting that the purpose of the project isn't exactly clear or the team isn't fit to succeed, that could also suggest there's a scam at hand.
Anonymous team, poor token distribution, or unclear whitepaper - When determining if an existing cryptocurrency project is a scam, you can look for the same signs we saw in ICO scams; the only difference between these two scams is the timeframe
Lack of activity/communication - There's one other factor that can help you spot scams in existing cryptocurrency projects, and that is a lack of activity or communication with investors. While almost every project is very active and communicative during its launch, scam projects become more apparent as time passes and both activity and communication quickly die off.
No registered company - Although there's a lack of clear government regulation for cryptocurrency exchanges, it's generally accepted that cryptocurrency exchanges should be operating under some kind of registered company in case the law needs to get involved. If an exchange has no registered company behind it, it could mean they are out to scam of users (the worst case scenario), or they are simply negligent (the best case scenario).
No licenses - Similarly, cryptocurrency exchanges operating in most jurisdictions should have some kind of government license permitting their activities. If an exchange has no licenses, it could again mean they are out to scam of users or they are simply negligent.
Open promises - If it's too good to be true, it probably is: this age-old saying applies especially to social media scams, which often offer rewards to entice their prey. The next time you hear about free Bitcoins getting handed out to celebrate some special occasion, ask yourself whether it's too good to be true.
Fake accounts - Social media scammers use fake accounts - often of popular cryptocurrency thought leaders (such as Vitalik Buterin, creator of Ethereum) or successful cryptocurrency exchanges (such as Binance) - to make their rewards and giveaways seem more believable. If you click on their profiles, you'll often see small hints suggesting that their profile is indeed fake.
If you want to avoid cryptocurrency scams, the first step is being able to identify those scams. Once you can do that, it's simply a question of not taking part in whatever activity could put you at risk - whether it's investing in a currency, trading on an exchange, or joining a giveaway.
Of course, there are a growing number of cryptocurrency scams on the web, and it's impossible for us to cover all of them. Your best approach to staying safe is sticking to general rules such "If it's too good to be true, it probably is" (especially when there are big monetary promises on the table), and valuing transparency in the users, projects, and exchanges, you choose to deal with.