Key Takeaways

• There are no clear cut rules for identifying scams. Instead, users should equip a broad framework for measuring projects.
• Using a variety of back tests, thorough research, and public visibility, individuals can arrive at a degree of certainty about a project's legitimacy.
• Staying safe means staying skeptical, especially if someone is promising riches.

If you’ve been around in the cryptocurrency space for a while, then chances are you’ll have come across your fair share of crypto scams. Projects like Bitconnect, OneCoin, and CentraTech have become notorious for their role in duping unsuspecting investors into handing over money for little more than smoke and mirrors.

But how can you tell if a cryptocurrency is a legitimate project or just a scam? There are no hard and fast means for determining whether or not a project is genuine. However, there are several ways that investors can arm themselves with enough knowledge to make an informed and rational judgment.

Types of Cryptocurrency Scams

There are various types of cryptocurrency scams, so it’s worthwhile knowing what to watch out for.

Exit Scams

Unfortunately, exit scams are the best-known type of crypto fraud for a reason. In the days of the ICO boom, exit scams became all too common. Founders would generate massive hype about their project, only to disappear once investors had handed over their funds.

Often, these kinds of scams take the form of Ponzi schemes, using existing “investors” to help spread the word to more victims.

Unfortunately, fraud can be more difficult to spot when a fellow enthusiast is the one marketing it. OneCoin and BitConnect both illustrate how successful this tactic can be, having raised $4 billion and $2.6 billion, respectively.

However, other tactics may be used, as in the case of CentraTech, which used the marketing services of Floyd Mayweather and DJ Khaled to sell its services. Both ended up settling with the SEC for charges brought against them due to their role in promoting the scheme.

Exchanges have also provided fertile ground for exit scammers. Last year, the CEO of IDAX disappeared with user funds, and there are still some who believe that the death of Quadriga CEO Gerald Cotten was fabricated as part of an elaborate exit scam.

Twitter Scams

Twitter scams typically involve someone posing as an industry leader in an attempt to get people to send them cryptocurrencies. It doesn’t necessarily involve someone within the crypto sector either. Paris Saint-Germain footballer Kylian Mbappé has been targeted several times by crypto scammers using his name to promote their efforts, including having his Twitter account hacked.

Phishing Scams

In general, phishing scams aim to get people to hand over details that will give fraudsters access to their funds. In crypto, this could be private keys to your wallets, or perhaps login details to your exchange accounts. Scammers will pose as official representatives of a company or project in an attempt to appear legitimate.

Recently, phishing scams have become more elaborate. 

Crypto security expert Harry Denley recently tweeted a warning about the dangers of using QR code generators for Bitcoin addresses. Rather than generating a code for the address you provide, they’ll create codes for the scammer’s own addresses, and once funds are sent there, they can’t be recovered.

Tips for Spotting a Scam

Although scammers are notoriously good at creating an aura of legitimacy, there are a few lessons to be learned from previous schemes that can help you avoid the same pitfalls.

Who’s Behind It?

The principles of anonymity and privacy are held dear in the cryptocurrency space, but when it comes to handing over money, it’s better to know who you’re dealing with. Research the company, along with the founders and leadership team.

Check out their LinkedIn pages, and Google search them to find out if there are any reasons to be suspicious.It can also be helpful to find out whether or not the company is registered in a credible legal environment.

In some countries, company directors are required to disclose previously held directorships. Often, these disclosures may also indicate whether prior endeavors ended up in insolvency, or worse.

If you’re being approached on social media, particularly by anyone who claims to be involved with a project or other cryptocurrency initiative, then check the profile carefully.

Many founders or project leaders will link to their social media channels from the company website, so this is an easy way to cross-check if the handles match.

Never, ever, give out your private keys to anyone regardless of what they’re promising. If someone is asking for crypto deposits in exchange for even greater returns, the chances are you won’t see your funds again.

Partnerships

The word “partnership” tends to get thrown around with abandon in the cryptocurrency space, as projects attempt to piggyback on the success of better-known brands. Some are harmless enough, such as the many projects which claim to “partner” with AWS or Microsoft Azure when, in fact, they are simply customers.

However, in the case of CentraTech, the company was caught claiming a partnership with Visa, which a company spokesperson flatly denied.In a true partnership, both parties are willing to confirm its existence. If a small project is claiming to partner with a much better-known brand, then it’s worth searching to see if this checks out from both sides.

If there’s nothing on the company website, you could also search on Twitter or other social channels to see if there’s any confirmation that the partnership exists.In a similar vein, celebrity endorsements aren’t any indication that a project is legitimate. In many cases, these kinds of announcements demand even closer examination. 

After the CentraTech debacle, other well-known figures like Steven Seagal are also facing charges related to questionable crypto projects.

Check the Press

The crypto press is awash with paid press releases and sponsored posts that aren’t disclosed as such. Many projects will point to these pieces as evidence of their popularity. 

As part of any due diligence exercise, it’s worthwhile scrutinizing the type of press articles about a project to see if they’re objectively written, or published as part of a PR campaign. While there is nothing wrong with paid PR, an unbiased review from an independent third-party offers more weight in determining whether a project is authentic.

When Moon?

If someone is telling you that a particular investment offers guaranteed returns, or that a token is going to the moon, your scam radar should immediately light up. There is simply no such thing as guaranteed returns, and all investment decisions involve some degree of risk.

This fact is especially true for the crypto industry.All of these tips amount to the same broad piece of advice – do your research. You can’t scam-proof yourself completely, but you can make it more difficult for the scammers to get their hands on your money.