Cryptocurrency Exit Scams; Red Flags You Should Look Out For.
There
is a growing mix of excitement and anxiety over the emergence and growth of
cryptocurrency popularity in different countries around the world. Uganda is no
exception. The internet and press is awash with stories of individuals who have
mined and reaped big from the trade enough to lure new investors to this ‘digital
revolution’. However, the same media is filled with tales of other less
fortunate investors who have lost their money in ‘exit scams’. A number of
questions and concerns have arisen out of the complex nature of cryptocurrency.
How does one protect themselves from falling victim to fraudulent exit scams?
Is there a way to spot an exit scam from a genuine cryptocurrency trade? Is it legal and crucially…with no central
regulatory authority how are exit scam victims remedied? This article focuses
on exit scams in cryptocurrency and how one can spot one and protect their
money from fraudsters.
What
is a cryptocurrency?
A cryptocurrency is a digital or virtual currency that
uses cryptography for security. Digital currency means the money is only
available in digital form, not in a physical nature like usual bank notes or
coins. While exhibiting properties similar to physical currencies, these
currencies also allow for instantaneous transactions and borderless
transfer-of-ownership. Cryptography is the cryptocurrency’s major outstanding characteristic
separating it from other forms of digital or virtual money. Cryptography refers
to techniques for secure communication in the presence of third parties and is
generally concerned with constructing and analyzing protocols that prevent
third parties or the public from reading private messages.
It is this feature that makes cryptocurrency difficult to
counterfeit. Cryptocurrency ‘s other alluring feature is its organic nature
that is; it is not issued by any central authority, rendering it theoretically
immune to government interference or manipulation. According to Investopedia,
the year 2009 was the year that Bitcoin,
the first cryptocurrency to capture the public imagination was launched. A
brainchild of an individual or group known under the pseudonym Satoshi Nakamoto,
it has continued to be a global success and to engage investors from all over
the world including Uganda. As of May 2018, there were over 17 million bitcoins
in circulation with a total market value of over $140 billion. Other cryptocurrencies
such as Litecoin, Namecoin and PPCoin have also crept up.
Cryptocurrencies have advantages that appeal to many for
instance the fact that they assist in saving money. Since fund transfers
between two people are facilitated through the use of public and private keys,
minimal processing fees are incurred allowing users to avoid the steep fees
charged by most financial institutions for wire transfers.
Cryptocurrency projects raise money through ICOs. This is
an unregulated means by which funds are raised for a new cryptocurrency
venture. An (ICO) is used by startups to bypass the rigorous and regulated
capital-raising process required by alternative capital options like venture
capitalists or banks. In an ICO campaign, a percentage of the cryptocurrency is
sold to early backers of the project in exchange for legal tender or other
cryptocurrencies for example Bitcoin.
Bitcoin
employs
a blockchain technology to store an online ledger of all the transactions that
have ever been conducted using bitcoins, providing a data structure for this
ledger that is exposed to a limited threat from hackers and can be copied
across all computers running Bitcoin software. The requirement to verify every
new block generated by the ledgers of each user, minimises chances of forging
transaction histories.
However, it’s not all roses as cryptocurrencies are vulnerable
to hacking. Bitcoin has been subject to over 40 thefts with some exceeding $1
million in value.[1]
The currency is also a target for
digital theft, phishing, fraud, and hacking. In a finding by Bitcoin.com News,
$1.36 billion worth of cryptocurrencies have been stolen by fraudsters during
the first two months of 2018. Fraud constituted the majority of virtual
currency scams (30%) followed by hacking attempts (22 %), theft and exit scams
(17 %), and phishing (13 %).
Governments around the world have reacted and treated the
digital currency wave differently. In January, the government in China ordered
a shutdown of all cryptocurrency mining operations. Tunisia embraced it with an
announcement that it would launch a digital currency based on blockchain
technology and South Africa embarked on research to ascertain the technology's
feasibility. Uganda has however cautioned its citizens against the currency.
Bank of Uganda warned that investing in bitcoin and other digital currencies
"is taking a risk in the financial space where there is neither investor
protection nor regulatory purview." Kenya and Nigeria have issued similar
concerns and Namibia cryptocurrency use for commercial purposes.
What
is an exit scam?
Many naïve and unsuspecting investors have been conned of
their money through exit scams. An exit
scam is when unethical cryptocurrency promoters vanish with investors’ money
during or after an initial coin offer (ICO).[2] The decentralized, anonymous nature of
digital currencies hinder any efforts to trace scammers who dupe the investors
as opposed to if there was a central authority managing the system/currency.
Mode
of Operation;
·
Promoters introduce a new cryptocurrency
platform with overly favorable concepts for investors
·
It then proceeds to raise money from the
investors through an ICO
·
The business may or may not run.
·
The promoters then disappear with the
collected ICO money leaving the investors with nothing
This new form of forgery lurks and preys on unsuspecting
investors and feeds on the decentralised and anonymous nature of the system to
grow. According to Investopedia’s Shobhit Seth, approximately $9 Million is
lost each day in cryptocurrency scams. Many
such scams are on the increase today since naive investors are lured into
putting their savings into “the next big thing,” after being promised absurdly
high rates of return.
In November 2017 Confido,
an escrow-related cryptocurrency startup disappeared overnight after collecting
$175,000 through its initial coin offering (ICO). This incident led to the market cap of the
cryptocurrency to fall from about $6 million to $70,000 within that week. LoopX,
another crypto startup abruptly shut down in February 2018 after raising $4.5
million from investors through a combination of bitcoin and Ethereum. Its ICO
promised ‘guaranteed profits every week which they boasted to be due to “the
most advanced Trading Software out there to date.”
Giza
Device, another scam vanished in March after raising US$2
million in cryptocurrencies in a fake ICO. The funds were said to be for the
purpose of funding the development of a “super secure storage device” for
cryptocurrencies. A common denominator in all these is the promise of a super
return or advanced advantage making the particular scheme superior to others. Bitconnect, a cryptocurrency-lending scheme,
shut down its operations in January and vanished, leading to an exit scam with
an estimated loss of around $250 million.
The most publicised scam was probably the Pin Coin and
I-fan scam (Singapore and Dubai respectively) which conned an estimated 32,000
investors of an alleged $660 million in tokens.
They were sold to tokens for money allegedly injected into I-Fan, ‘the
most advanced social media network’ with a very high success probability, used
to connect athletes and entertainers to their fans. The multi-level marketing
ponzi schemes were under the control of Vietnam-based outfit Modern Tech. I
checked out the site and it is well-done with a captivating visual appearance
and can easily sway an investor who wants a piece of the pie. However, the site
bears no mention of any founders or advisors and even their multi-lingual white
paper, has no clear founder information. The scammers for the Onecoin scam were arrested but not
before they duped investors out of $350 million USD.
How
to spot a cryptocurrency exit scam?
There is no particular laid down indicator or rule book on
spotting an exit scam but as an investor, you will do well to weigh the
following before making investment decisions. These points should be a starting point;
1) Extremely Extravagant Return Projections
and Guaranteed Profits:
The most important indicator of an exit
scam is derived from the fact that it must have the ability to lure new
investors fast. These scams thrive from the need for the potential victim to
want a cut on the ‘next big thing’ and therefore will have crazily high and extremely
generous return projections. Most times if something sounds too good to be
true, it is. Forgetting this rule is the first step to getting conned in an
exit scam. A case in point is the BitConnect
scam which promised investors a steady 1% daily return. This meant that an
initial investment of $1,000 would have been transformed into a return of more
than $50 million within just 3 years! If
the prospective returns sound like a financial miracle, simply stay away. Ponzi[3]
schemes use funds by the new victim investors to pay off the older ones and it
is always just a matter of time.
High return projections aside,
guaranteed profits are another obvious sure way of identifying a fraud or exit
scam ICO. This is because like business, there are no certainties in the
blockchain system, and no proven, reliable, or guaranteed methods of generating
profits. Flee from any ICO that promises returns to investors for “staking”
their coin. BitConnect promised guaranteed profits and
turned out to be a Ponzi Scheme.
2)
The
Credibility of the founders:
It is an old adage that a product should
be judged or weighed from the producer, owner, creator or founder. When you
first hear about a cryptocurrency investment opportunity, look into the team
that runs. Try to gather as much information as you can. Chances are that if it
is genuine, this information will be readily available. They will be normal traceable
people whose friends and connections can lead them to you be it via social
media or their internet profiles. Expect plenty of connections and respectable
past job experiences and accept nothing less.
Accountability and ownership are already a challenge in this virtual
world. Always verify the credentials of the crypto teams of those ICOs that
look promising. Brand-new social media profiles with barely any connections
should always be a red flag for any diligent investor. However, fake online
credibility is also easy to attain with a few dollars to spend so discern
cautiously.
3) The project’s white paper standards.
The white paper is basically the most
important document of a cryptocurrency project. It is a document that details
how the project is designed and developed, how it evolved, and how it will
generate business. Therefore, having no white
paper, a bad white paper, or one that is blatantly plagiarized should give you
your matching orders. If the white paper is unclear and ambiguously written,
then the whole project ought to be treated with suspicion. You should be able
to understand the business and the project from this paper and if
incomprehensible, the project is just not for you. No shrewd investor injects
his/her hard-earned money into a project they do not understand well and the
role of that document is to give you a standard understanding of the scheme.
4) Extreme Promotion Activity;
Have you ever seen a new company
searching for investment but seemingly carrying an advertisement and promotion campaign
so big that you will wonder how good willed the founders are to want everyone
to enjoy a piece of the cake? Big promotions indicate a big budget and it
defeats common sense that a brand should go all the way to spend all their
money on promotion except if the founders expect to reap the benefits in a very
short term. Short term rewards ought to raise red flags as they are too good to
be true. Most exit scams really have extremely huge promotion campaigns. Full-page
ads of new ICOs by lesser-known founders in the print media should always push
you in the opposite direction. In India, the popular exit scam Confido reportedly paid bloggers to
spread the word on the various online forums. While big promotions themselves
are no evidence of dubious intent, a prudent investor should investigate the
claims made before investing.
5) Non-existent Working Model:
The working model of the cryptocurrency
project should be very important to you as an investor as it is the only way
your money will make returns. Does the model make sense to you or it’s a
concept-only, with a non-existent product? Most cases where it is the latter,
the project does not work. The team should prove their worth by convincing you
of the viability of their model if they really Do not invest until the founders
prove to you that their project is worth investing in.
6) Shaky or Unrealistic Roadmaps
A roadmap is a detailed list of what the
initial coin offerings project team has achieved so far in the development of
their project, as well as what they plan to achieve provided to the potential
investors. If no roadmap is provided there is a high chance the only future
plan is “exit” and “profit”. A roadmap should be realistic. The absence of a working platform prototype or any code at
all is a red flag you should never ignore as an investor.
Roadmaps which include plans of using
ICO capital to develop a prototype or those make any references to future token
price, are highly likely to be exit scams. If the ICO you’re considering
investing in offers an unrealistic future roadmap and has not achieved anything
significant run away.
All in all, the same way you wouldn’t
normally invest in the shares of a company whose business you don’t understand
of the company, or if you don’t trust the people behind it, don’t give
cryptocurrency projects the benefit of the doubt. Always do your own research
about the ICO you are considering for it is wise not to rely on only what you
have heard from other sources. Do your own due diligence and pay close
attention to claims that are being made. Be very rigid when it comes to crypto
investing. It may be what saves you from an exit scam.
.
[2] What's
a Cryptocurrency Exit Scam? How Do You Spot One? | Investopedia https://www.investopedia.com/tech/whats-cryptocurrency-exit-scam-how-spot-one/#ixzz5FhXnSapA
[3]
Named after Charles Ponzi, a con artist who ran many similar schemes
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