Hackernoon logoCrypto Exit Scams Have Stolen Billions โ€” Here Are 6 Things to Watch Out For by@lihanlee

Crypto Exit Scams Have Stolen Billions โ€” Here Are 6 Things to Watch Out For

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@lihanleeLihan Hyunwoo Lee

Co-founder of venture-backed startup Xangle โ€” bringing disclosure and information aggregation services to crypto.

So you've decided to invest in a new crypto project. You've been hearing about how it's a booming investment landscape with some pretty high returns. You see a new coin that's promising to be the next Bitcoin with a yield of 30%! The fact that there's little information about the company or founders doesn't really bother you โ€” they must know what they're talking about. Since you don't want to miss the next big thing, you invest, thinking you'll sell off after a big jump. And then one morning you find a note on the website that reads "We've run off!" and your investment is gone.

Unfortunately, this happens more often than we want to believe with new investors in the crypto space. While there are legitimate, sound crypto investment opportunities in the market, there are also many malicious actors waiting to defraud unsuspecting investors hoping to take a chance at backing a new start-up. In fact, according to the "Crypto Investor Scam Report," investors have lost over $16 billion since 2012, across 136 different scams. That's money that investors can't get back, due to the unregulated nature of crypto. And while 411 individuals have faced criminal charges, only 15 projects of the 136 have seen any kind of sentencing taken against the founders.

Now that the industry is growing, with more widespread understanding and adoption, there are a few simple things that will help weed out bad actors and continue crypto on its path upwards: Education and awareness on the part of investors, and transparency and accountability on the part of the industry.ย 

1. Structure of a Scam

What is the structure of a typical crypto scam? There are a few forms crypto scams can take. The first, which is known as a Ponzi scheme, is a promise of high returns on your investment โ€” upwards of 1% per day โ€” if you invest in an anonymous website, or with someone promising their own proprietary trading software.

Another is a pyramid scheme, where investors don't make money on their investment itself, but must refer others to join in order to see any returns. Sometimes these two are combined.

Scams also often involve a coin that has no usage outside of an exchange created by the company. The term "exit scam" is used to describe a situation where the founders disappear overnight.

What's interesting to note is that crypto investing functions differently from how these companies say it works. Additionally, there are many legitimate start-ups and projects offering value and opportunity to their investors. In order for the industry to grow and become more institutionalized, these worthwhile companies need monetary backing. Scams can certainly discourage investment, but there are a few ways investors can distinguish the good projects from the bad ones.

2. Solid White Paper

Any crypto project should start with a white paper, or proof of concept to demonstrate what the project is and how it'll come to be. The white paper should be error-free, professional, well-constructed, and not plagiarized. Demonstrating a credible white paper shows that the team has thought through the execution for their project, and documented it.

3. Proven Use Case and Business Model

Next, check to see if the new crypto project has a working model or proven use case, whether it be a new coin or blockchain application. Too often people invested in scams that had nothing to prove beneath the promises of high returns. Demonstrating a proven use case not only means the team has tested what they're working on, but it also means that they're not afraid to show you how it works.

4. Credible Team

Check the team bios and background. Those who run scams often have questionable backgrounds, or information about them can't be easily found on the internet. Check for credible institutions, any past work that's applicable to the current project, or any other projects they've founded. Also, look for teams that have more than just one or two people involved, and look for teams that include a diversity of strengths, skills, and positions as well. Be very wary of any project that wants to stay anonymous.

5. No Hype, Just Excitement

There's marketing, and then there's hype, where flashy presentations, buzzwords, and big promotions overshadow the fact that there's nothing of substance beyond. Look for start-ups who are excited to get investors on board, but who also have authentic, testable ideas they can talk about. Be wary of anyone shouting big promises, and focus on those willing to do the work to bring their idea to market.

6. Willing to Share Information and Disclose

A legit company has nothing to hide, and especially wants to be transparent with an investor interested in backing them. This means that a credible project will be transparent about who they are and what they're working on. They may have already disclosed information about their project publicly, or will certainly offer it if asked. Be wary if there's not much out there to find, or if they're reluctant to share information.

ย Improving the Industry Moving Forward

The future trajectory of crypto is only upwards. But that forward movement is going to rely in part on investors willing to back new crypto projects to bring more innovation into the world. While crypto scams have devastated investors, and while scammers will always remain out there, smart, savvy investors will know how to assess new projects and pick credible, hard-working teams to back.

Author profile picture

@lihanleeLihan Hyunwoo Lee

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Co-founder of venture-backed startup Xangle โ€” bringing disclosure and information aggregation services to crypto.

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