Scams are a form of online fraud that involves deceiving investors, and are one of the most common ways you can be tricked. The term is usually used to describe crypto projects created for the sole purpose of extorting money from gullible crypto users.
The concept also includes fraudulent actions carried out with the aim of cheating customers and taking possession of their crypto assets.
In this article, we’ll tell you how to avoid scams and mitigate the risk of losing your money when investing in cryptocurrency projects.
What schemes are people using to trick you out of your money?
There are quite a few different schemes used by scammers to run away with the assets of crypto newbies and gullible investors. Let’s look at the most common ones.
Pump and dump
This is one of the most common crypto scams. It involves the unexplained acceleration in the value of a cryptocurrency, which then attracts investors.
- the price of a crypto asset rises sharply;
- at a given peak price, the scammers sell absolutely everything and withdraw their money;
- the price of the crypto asset falls sharply;
- investors lose everything they’ve put in.
How does this work? A cryptocurrency is released to the market, without being backed by a real product, funding, a team… or anything at all. The scammers then start to hype it, flooding the internet with information about the crypto project’s potential wherever they can, ordering paid reviews from bloggers, creating a fake website and roadmap, writing news articles about the project’s successes and achievements, publishing expert opinions, and more. If they manage to generate hype and pique the interest of traders and investors, then the price of the token will grow in line with demand, and at the peak the scammers will “drain out” all of their tokens, the price will rapidly dump to zero, and traders will lose everything.
It is of course possible to make a short-term profit on a pump, but only by recognizing that once the token has increased in value by, for example, 100x, it’s probably time to take profit and breathe a sigh of relief.
Rug pull
This scheme works as follows:
- scammers create a crypto asset, often disguising it as a popular token;
- they launch a trading pair and a pool on a DEX (decentralized exchange);
- users add their own assets;
- the people behind the scheme suddenly withdraw their tokens, leaving the “victims” with their depreciated tokens.
Honeypot
This type of scam is conducted as follows: scammers create a token, release it on a DEX and undertake an aggressive advertising campaign. Crucially, only the people running the scheme can sell it, because of a rule written into the token’s smart contract. Once people start buying the coin that’s being advertised, the price begins to rise. After it reaches a satisfactory level, the scammers sell the tokens while they’re still worth something. Nobody else can then get rid of them.
Fake token sale
A token sale is the initial sale of a cryptocurrency at a fixed price. The sale is carried out directly by the project owner for the benefit of early investors.
Fraudsters launch a site for a “new startup”, fill it out with content, come up with a description of the “crypto project”, and register pages on social networks. Essentially, they do everything to create a reasonable impression that the project exists and has potential. Next, the preliminary sale of crypto project tokens is announced, real money is collected from investors, and after a while the scammers put a stop to their activities and disappear with the appropriated funds.
Fake tokens
Sending fake crypto is a very common type of scam. People do it in order to gain access to the recipient's crypto assets. The key risk with counterfeit coins is losing control of your crypto wallet.
If you try to sell the fake tokens you received, you’ll see an error message. It turns out that this type of cryptocurrency can’t be sold, as the smart contract doesn’t permit it. You might see a “helpful” message telling you that sales can only be made using the issuer’s addresses. After trying to sell your tokens, you may receive a request from the scammers asking to access your crypto wallet. By agreeing, you will give the scammers full control over the wallet and, as a result, lose all the assets stored on it.
Exit scam
For many, cryptocurrencies represent uncharted territory, and the internet is full of people who seem very friendly and are happy to offer useful advice. Unfortunately, some people’s eagerness to share important information can be part of a trick, designed to get you to invest in a scam. These scams are often based on pyramid schemes, and even cryptocurrency exchanges have been known to scam users.
Ponzi scheme
The essence of this fraudulent scheme is that scammers fulfil their obligations to customers not at the expense of real income, but by attracting more and more participants and reassigning funds. This is the pyramid scheme in all its glory.
The fraudsters:
- build a platform, convincing early customers to invest in a “crypto project”;
- bring more and more new customers on board, promising incredible profits;
- use the funds brought in from new customers to pay out profits to the earlier investors;
- convince the investors to reinvest their profits (most of them agree, believing the project to be legal and profitable as evidenced by the income they’ve received);
- as soon as the influx of new crypto assets stops and there is nothing to pay to the investors, the company disappears.
How to assess whether a crypto project is a scam
The main thing to understand is that there is no tool in the crypto industry that allows you to determine the reliability of a crypto project with 100% certainty. You can study a project and even use special services that reveal risk factors, but you’ll likely never be certain whether you’re looking at a scam or a genuine gold mine.
Ultimately, you have to take full responsibility for your decision. This is why it’s so important to do your research on the projects you’re considering investing in, analysing the nuances and weighing up the pros and cons before you commit.
Signs of scam coins
- Advertisements about windfall profits: Projects promising asset price increases of hundreds of a percent within a matter of days are the first and surest sign of a scam.
- Lack of documentation: Solid projects always have detailed technical documentation, and coins must have a whitepaper.
- No listings on major exchanges: Creators of legitimate projects make every effort to spread awareness about their coins on major cryptocurrency platforms as early as possible, as this boosts confidence among traders and investors. If the coin is being sold only on questionable exchanges, this is a clear sign of a scam.
- Total anonymity: Serious crypto projects are always backed by a big team, partners and funds. If you can’t find any information about the project, you should exercise serious caution.
You can use a number of free services offering useful information free of charge to check coins: Token Sniffer, Etherscan, Solscan, BscScan, CoinMarketCap, CoinGecko, CertiK.
How to stay safe
Don’t rush into any investment. Study the project you’re interested in carefully:
- assess the startup in terms of how popular it is and how ready the team are to implement their ideas;
- find out about the project’s founders, making sure there are real people behind it and that you can find out about them in the public domain (i.e. on social media);
- study the developers’ previous projects and read reviews;
- analyse the development strategies proposed by the creators;
- look closely at the profit margin forecast, and exercise caution if it seems too high;
- evaluate the reliability of the crypto project from a technical perspective;
- seek out new articles and trusted expert opinions about the startup’s potential;
- check to see if a large percentage of the tokens are being held in one or a few wallets, in which case it’s better to avoid the project;
- check to see if the coin is listed on major exchanges;
- seek out community conversations;
- don’t blindly trust opinion leaders, as they can be bought out by scammers.
It’s also worth checking out the company’s legal and physical addresses. If it’s registered offshore, and moreover if it’s registered to an untraceable offshore location , there is a high chance that scammers are behind it. This is especially true when there’s no information about the place of registration.
Don’t invest in projects that make promises about high profits and even guaranteed profits while ignoring the product’s quality.
When trading on a DEX, look out for “clones” of coins. Look closely at tickers and see how much liquidity there is in pools.
If you want to take advantage of a new decentralized marketplace, make sure its code has been independently audited. Well-known auditors of DeFi platforms include
CertiK, Hacken and ConsenSys.
What to do if you think a crypto project you’ve already invested in could be a scam
If you’ve identified signs of a scam in a crypto project you’ve invested in, the most important thing to do is immediately withdraw your funds. But what if you can’t do this using the standard methods?
It is rare that all participants are prevented from withdrawing their funds at the same time. Keep checking whether you can withdraw on a regular basis. If the platform supports internal transfers, you can create a new account and try to use it to withdraw the money.
Sometimes only small amounts can be withdrawn. You could therefore try to withdraw your funds in instalments.
If you suspect a crypto exchange of scamming, you can try to withdraw your funds using all of the currency options on the platform.
In any case, you shouldn’t panic. That definitely won't help. Projects often function for some time after the early signs of a scam have been identified, and some payments may even be fulfilled. It’s only after seeing the complete panic among investors that scammers will suddenly disappear. If you decide to warn new users about the dangers of investing in a project, you should therefore send private message rather than doing it publicly.
If all else fails, you could try to contact the project’s technical support and tell them that you are, for example, the owner of a site that monitors crypto assets and you cannot withdraw your money, so you will have to inform the public of the situation.
Most importantly, if you detect signs of a scam project, be careful not to kid yourself that everything will be fine and the delays in payments are just a temporary issue. This is something that happens, but there’s nothing stopping you from returning to the project later in such cases. If you don’t pull out in time and a miracle doesn’t happen, you’ll lose all of your money.
Scammers often deploy additional tricks to bring in new investments, such as fake promotional campaigns about asset inflows, purported relaunches of crypto projects and more. If you aren’t sure about a project, try not to get too excited by its promises.
It goes without saying that you should always remember to spread your risk. The old adage of not putting all of your eggs in one basket rings true. Furthermore, don’t invest any more than you are willing to lose. When putting your money in a crypto project, make sure that your financial situation won’t change significantly in the event of a loss.
Summary
Crypto investments are always risky, and there are no special tools to guarantee that projects – even profitable ones – aren’t scams
And even if you are trading or investing in solid, legitimate projects, you need to remember that the crypto industry is still a relatively young and unpredictable beast.
The best defence against crypto scams is vigilance. If you study projects carefully, checking the information several times over and before each transaction you make, your chances of holding on to your crypto assets are many times higher than those of people who invest thoughtlessly.
Any financial transaction must follow study, research and an analysis of the offer. Even if your friend, eyes ablaze, proposes a “totally safe bet”, do your own due diligence instead of giving them your blind trust.
In crypto, there are two scenarios that play out very often: high rates of return and security. Feel free to choose the first option, but be prepared to lose money. As for the second, you will stand to earn less, but you can be assured of the relative safety of your assets.