Five Ways To Spot A Scam | A Beginners Guide

The unregulated markets of the cryptocurrency world can be a wasteland with coins of all shapes and sizes. Some are gems and others are flat-out scams. In this article, we will focus on techniques scammers use to persuade investors to willingly let go of their BTC. Here, we will not be focusing on poorly managed projects as this goes under a separate category, but only scams. Most project store their code on a website called Github. It is also worth noting that projects can be open sourced and still be a scam. Check the github repository for changes. If there are little to none, then development is not active. The term scam in this article will refer to a dishonest way to get money; an activity that is considered to be a fraud. As so, low quality projects are not considered. This guide is not a complete guide, but rather a beginners guide to spotting scams. As with all the methods used below, if it seems too good to be true, it is!

Ponzi Schemes

The classic scam is that of a Ponzi Scheme, a scheme which promises high returns with little to no risk. The Ponzi Scheme runs like a pyramid where the money continues to flow to the top. As more and more people enter the scam, the scammer uses the money from the new investors to pay dividends to the older investors. In order for the scam to continue, more and more new investors must join to pay off old investors. Old investors may get rewarded for bringing in new investors. Eventually, there are not enough new investors to pay off old investors and that’s when the pyramid crumbles. Some projects have ways of offering a continuous revenue to investors like lending, trading, mining and so on, but it’s also worth noting that scammers are pretty sneaky and they may lie about their revenue streams.

Pump and Dump Schemes

A pump and dump scheme is when traders and investors are fooled by a sudden and sharp price rise in the value of a coin. After the market has consolidated at a higher price with more buy orders, the scammer dumps the coins at the inflated price and abandons the project completely.

More vicious styles of Pump and Dumps occur when the creator of the coin itself is dumping pre-mined coins on the market. Let’s say, for example, a new coin is created. The owner secretly or openly keeps a proportion of the coins from the beginning. The owner may fool investors into buying the coin by making some vague promises he does not plan to fulfill. As investors are buying, the coin creator is selling his free coins.

The last type might be the most sneaky of all. The scammer finds a coin that has not been in development for some time and is still being traded. The scammer buys up the coin at dirt cheap prices. Once he owns a significant amount of coins, he claims he is taking over the development of the coin, promising all sorts of wonderful things he plans never to fulfill. The scammer may also use marketing and advertisement techniques to prompt investors to buy the coin. As the market grows, he dumps his coins on the buyers and walks away. This type is usually the hardest to spot as pre-mines are usually declared by the coin creator or exposed by active members of the community.

Not Open Sourced

An open-source project refers to a project which is willing to share their code with the public. If open-sourced, coders can access the code and peer-review it. While a closed-source project may not always indicate a scam, it certainly should raise alarm bells. If closed-sourced, it is best to look at the track record of the developers themselves in order to assess if they are genuine or not. Projects may decide to be closed-source because they may not want other projects to steal their creative ideas. However, in the process, they may discourage potential investors who want to see proof of legitimacy. Most projects store their data on a website called Github.  It is also worth noting that projects can be open sourced and still be a scam. Check the Github repository for changes. If there are little to none, then development is not active.

Fake Online Identities

Sockpuppets refer to a fake online identity used to persuade and deceive public opinion. Sockpuppets are common with the cryptocurrency world because it is so easy to create new accounts and new characters, especially in forums. Some projects, in fact, create fake investors to spam the forums to give the impression there is a lot of hype around the project. This type of scam is closely related to the Pump and Dump scam we analyzed above. Sockpuppets take all shapes and forms but are mostly used to influence people to buy coins while the sockpuppet itself is selling. Sockpuppets also have a secondary objective; they may create FUD (Fear, Uncertainty, and Doubt) in investors, making them sell their coins. This can be achieved through spreading lies. As the value drops, the sockpuppets buy the coin while it is cheap.

Another fake identity may be when the project itself claims there are big investors that are planning on investing. When real investors invest, it instills confidence in the project and also reduces the supply available to the public.

Examples of fake online identities can be found on ICO (Initial Coin Offering) websites, who often will simply create some believable identity with fake social media accounts to back it up. Learn how to avoid scam ICOs here

Unrealistic Goals, Claims and Changing Plans

The last scam technique is one that needs to be played by ear. Scammers will try to influence people to buy by promising all kinds of unrealistic claims and goals. These promises may include large dividend payments well above the normal rate of interest or a promise the coin going up in value. If a coin claims it has a relationship with the American Federal Reserve Bank, the likelihood is that it isn’t true. Projects also release white papers talking about their plans; if the plans seem too good to be true, they probably are. Lastly, when a project continues to change course and deviates from its original plan, this should cause alarm. These, however, are not always scams and might just be mismanagement.