By Jide Williams,

The number of cryptocurrencies on the market is on a steady rise. Every year, dozens of new cryptocurrencies enter the market and these are often followed by a series of Initial Coin Offerings (ICOs) (Source), which are a major source of funding for new cryptocurrency projects.

Unfortunately, there are many potential pitfalls laying ambush for new and even more experienced investors. The rabid rave around cryptocurrencies, especially fueled by the false notion that cryptocurrencies are an avenue to get rich quickly, has made many people susceptible to cryptocurrency scams.

Many people have made a lot of money from cryptocurrencies. But cryptocurrencies are by no means a get-rich-quick scheme. There is a significant amount of profit to be made in cryptocurrency, but losses also exist. Knowing the real deal from the cubic zirconias can be the difference between gaining and losing.

Before investing in cryptocurrencies, it is important to know exactly what to look out for. While some cryptocurrency scams are so well-thought-out that it is hard to spot them, many are sloppy and the telltale signs are always there. This article explores both the glaring and the less obvious signs of a cryptocurrency scam.

Types of Scams

Cryptocurrency scams come in different forms. The most common types of cryptocurrency scams are:

Bogus ICOs

A 2017 study revealed that over 80% of ICOs were fraudulent, Centra being one of the most well-known ones. This project raised about $32 million and was endorsed by DJ Khaled. Centra turned out to be a scam and the founders were arrested. One of the telltale signs of a bogus ICO is that the promised rewards are often too good to be true. In the case of Centra, investors would join the Centra ICO telegram group and get contacted by someone who appears to be the administrator. Investors would then get offered private bonuses for sale, sometimes receiving offers to buy the token at a third of its current value.
Once an investor falls for the trick and sends the money (usually in cryptocurrency) to the “special address” they are given, the scammers vanish.

Cloud Mining Scams

Because mining cryptocurrencies often requires copious amounts of processing power and electricity, which many people do not have access to, the option of cloud mining exists to expand inclusivity in cryptocurrency mining. Scammers recognise that this is a viable market and have infiltrated the cloud mining space as well.
MiningMax was a fraudulent cloud mining service. It offered daily returns on investments of $3,200 to investors, with a $200 referral bonus for investors who bring other investors on board. This company ran for two years, and in that time, duped investors of roughly $250 million.

Clone Websites

Some scammers go to the lengths of creating fake websites that are strikingly similar to the original website they intend to replicate. These replica websites are often so well done that a cursory glance through them will not reveal their dubious nature to the average eye.
These clone sites are often created in an attempt to carry out an act called phishing. Unsuspecting visitors who visit these phishing sites would unwittingly give out sensitive information about themselves like their wallet seed or key phrases, or passcodes to these attackers.
These phishing sites are usually registered under domain names similar to the original site as well. For example, using an “m” in the place of an “n,” a “0” in the place of an “o,” etc. Always double check the URL of websites that you are not entirely familiar or comfortable with before saving any sensitive information on such sites.

Cryptocurrency Ponzis

Before cryptocurrencies even existed, Ponzi schemes had been a common fraudulent tactic. As cryptocurrencies gained mainstream popularity, scammers capitalised on the public interest to set up cryptocurrency Ponzi schemes. These work like regular Ponzi schemes, but with cryptocurrencies as the medium of exchange rather than fiat currency.
Bitconnect is perhaps the most notorious cryptocurrency Ponzi scheme. It lasted for over a year and had a market cap of $2 billion. On the day the scheme fell apart, its unit value dropped from $320 to $6 in less than 24 hours, and its market cap to $40 million (Source).
Three men were arrested last year, in 2019, for defrauding investors of $722 million. They ran a Ponzi scheme named BitClub Network for years.

Fake Cryptocurrencies

Some scammers sell the idea that it is too late to cash in on Bitcoin to investors and try to convince them to invest in a new fast-rising cryptocurrency (a fake one) instead. One notable instance of this happening was with a fake cryptocurrency called My Big Coin. Fraudsters robbed investors of over $6 million via this scheme before they were finally caught and shut down.
Fake cryptocurrency projects would usually set up an ICO and convince investors to buy these tokens at a pre-sale price with promises of exponential rewards upon its launch. Investors put their money into these coins and the team behind the projects vanishes, never to be seen again.

Pump-and-Dumps

If you’re into traditional investing (i.e. investing in the stock market), then you may be familiar with pump-and-dump schemes. In the golden years of the stock market (think Jordan Belfort from the Wolf of Wall Street times), a group of scammers would pool money to buy penny stocks (low-quality stocks), thereby driving the prices of these stocks up. Investors are then encouraged to invest in these seemingly fast-rising stocks with promises of easy big-money returns. These stocks eventually turn out to be worthless and investors lose a lot of money in the process.
Scammers have been clever enough to apply the same principle to cryptocurrency trading. These scams are often hidden behind a facade of legitimacy with fake celebrity endorsements and fake news articles.

How To Avoid Falling For Cryptocurrency Scams

The importance of knowing how to spot and void cryptocurrency scams cannot be overemphasised. Below are some precautions you should take to minimise your chances of getting scammed.

Know the Team

Every industry has its superstars. Hollywood has Angelina Jolie and Denzel Washington, and a song from Beyonce is likely to pique your interest. In the same way, there are known names in the cryptocurrency industry. Before investing in any cryptocurrency, be sure to research the individual team members thoroughly.
One of such figures is Vitalik Buterin, the creator of Ethereum, which is the second most valuable cryptocurrency in the world. He is one of the most well-known figures in the world of cryptocurrency and has been actively involved in the industry for ten years.
Try to find out who the names listed on a cryptocurrency project are, and check the names listed on platforms like LinkedIn and other social media to vet their legitimacy. Check their followers, their posts, and how well they engage and interact with their followers. Many scammers make up fake founders and even create fake social media pages for them. Check when these accounts were created and how active they are.’

Peruse the Whitepaper

A whitepaper is an official document that details the strategies, goals, and timeline for a cryptocurrency project. Whitepapers are supposed to be incredibly detailed and include information like the financial model of the project, the legal concerns, SWOT analysis, and an implementation roadmap (Source).
Read whitepapers thoroughly. The real juice about a cryptocurrency project is in its whitepaper and you would be doing yourself a disservice if you only skim through it.
There have been rare cases where a fraudulent cryptocurrency project presented a whitepaper that was so good, they were able to pull in millions of dollars in investments. This was the case with PlexCoin. The company had raised over $15 million in investments before the scam was unravelled and the United States Securities and Exchange Commission (SEC) had to step in and close it down.

Monitor the Initial Coin Offering

Also known as the token sale, the ICO drives the initial crowdfunding process on a new cryptocurrency project. A legitimate company will make its token sale process transparent, such that investors can monitor its progress (Source).
Any establishment that is being coy about its token sales should not be trusted. Some fraudulent companies hide the progress of their token sale under the pretext of individual funding addresses. Under such circumstances, it becomes impossible for potential investors to track the progress of the token sale. If the amount a cryptocurrency project has raised and how much time is left on the sale isn’t visible to potential investors, that is a red flag, and you should avoid investing in such projects.

Look Before Leaping

The temptation to jump in on cryptocurrency projects with ambitions of getting rich quickly is pretty high. Even after reading through the whitepaper carefully, do not be quick to hop on a cryptocurrency project without doing your due diligence on all fronts.
A good place to start might be cryptocurrency and ICO spaces. These are popular on platforms like Reddit and Quora. Follow credible cryptocurrency accounts on social media and immerse yourself in the world of blockchain projects. And in all you do, ensure that you keep both your eyes peeled, not just for scams, but also for potential pitfalls inherent in projects before investing your money in them.
This brings me to my final point.

Evaluate the Project’s Feasibility

As a cryptocurrency investor, you need to know the markers to look out for when deciding what ICOs to take. This is why studying a project’s whitepaper like a manual is important. You need to understand what a project’s aims are and whether or not they are feasible (Source). Projects with overly-optimistic projections and shady timelines are best avoided. If it looks too good to be true, it probably is.

Final Thoughts

If you are going to invest in cryptocurrencies, it is imperative that you go into it equipped with as much knowledge as you can. There are many avenues to make profits from cryptocurrency trading, but there are also many ways to lose money. The more you know about the market and the latest trends and schemes, the less likely you are to get defrauded of your money. If you are patient, keep a cool head, have realistic expectations, and eschew greed, you significantly improve your chances of getting the most out of the good deals and you avoid falling prey to the bad ones.

Jide Williams, a Tech Professional with a Product Development Background