Today’s topic is a continuation of scams – 6 more to scams to avoid, specifically “Indirect Scams.” This type of investment scam doesn’t target an individual but instead targets groups of people.
Reports to the FTC (Federal Trade Commission) show that scammers are alarmingly responsible for stealing people’s money. Since 2021 more than $1 billion in crypto has been reported lost or stolen by about 46,000 people.
A recent Consumer Protection Report points to social media as the starting place for half of the people who reported losing crypto to a scam between Jan 2021 and Mar 2022. Those scammed said it started with either an ad, post, or message on a social media platform. Unfortunately, that makes it very difficult for us legitimate crypto educators.
Most of the reported crypto fraud losses that began on social media were investment scams.
In fact, 64% or $575 million of all crypto fraud losses reported to the FTC, were about bogus investment opportunities.
So, today I’m going to talk about what you need to know to avoid what I call, “Indirect Investment Scams”.
More Direct Scams to Avoid
But first, I want to mention a couple more direct crypto scams. In a previous blog post, I talked about “Direct Scams where people try to steal crypto directly from you. You can read that post here.
Here are a couple more Direct Scams that I want you to be aware of:
- A so-called “investment manager” contacts you out of the blue. They promise to grow your money — but only if you buy crypto and transfer it into their online account.
- Scammers impersonate well-known companies. These come in waves, and scammers might say they’re from Amazon, Microsoft, FedEx, your bank, or many others. They’ll text, call, email, or send messages on social media — or maybe put a pop-up alert on your computer. Always ignore these, and go directly to the business website and your account.
- An online “love interest” wants you to send them crypto to help you invest it. As soon as someone you meet at an online dating site asks you for money or crypto, or offers investment advice, know that it’s a scam.
- Scammers make big claims without details or explanations. No matter the investment, find out how it works and ask questions about where your money is going. Honest investment opportunities want to share that information and back it up with details.
That last one is a good segway into today’s talk about “Indirect Crypto Scams”.
What are Indirect Scams to Avoid?
These type of scam affect many people all at once and tend to involve large sums of money. The two most well know are rug pulls as well as pump and dumps.
Indirect Scams to Avoid – Rug Pulls
The name comes from the expression “pulling the rug out” from under you.
There are three types – ICO, IEO, IDO:
- ICO. Initial Coin Offering. New coin
- IEO. Initial Exchange Offering. New centralized exchange
- IDO: Initial DEX Offering. New Decentralized exchange
The creator of a new cryptocoin, new exchange, or new DEX excites the possibility of high returns with their new project with the intention of raising money for their project. They talk it up on social media and even hire others to hype it up too. Once the price starts to pump (go up) they sell their holdings and take off with the money.
There are two types of Rug Pull Indirect Scams
- Hard Rug Pull. This type of rug pull is illegal because the developers intentionally write the code in such a way to dupe investors with the intention of stealing their funds. This is done most commonly by locking up the investor’s assets without having a clear reason for doing so.
- Soft Rug Pull. In this type of rug pull, a developer attracts investors to a new crypto project, enticing them with fantastic marketing slogans and such. Then they pull out of the project before it’s built or shortly after it’s finished. This leaves the investors with a worthless asset and the developers disappear with all the money. This type of rug pull is unethical but not illegal.
How to Spot a Rug Pull?
Here are some telltale signs of potential rug pulls:
- Low or No Team Credibility
Verify the team’s credibility by searching for their track records, social media, employment history, industry connections, etc.
- Ambiguous Cryptocurrency White Paper
Read the whitepaper! If the white paper is written in an ambiguous and unclear manner, it is often a red flag that it might potentially be an exit scam. An external audit is an indicator of the smart contract soundness, but not necessarily of the project’s soundness.
- Unrealistic Projections of Returns
As with other scams, if something seems too good to be true, it probably is.
- Large Amounts Spent on Promotion and Marketing
Although highly promoted ICOs may not necessarily be a scam, do exercise caution when deciding to invest in projects which are heavily promoted. This is because less credible founders tend to rely on promotions and advertising to attract investors.
More about Spotting a Rug Pull
- Few Wallet Holders and Listing only on DEX Platforms
Verify the number of token holders via a block explorer tool like Etherscan. Check whether it is listed and traded on other popular exchanges. A quick search on Coingecko or Coinmarketcap can reveal more information about the coin.
- The tokenomics and demand for it in crypto
Understand the tokenomics of the cryptocoin and determine whether it aggressively favors founders or users.
- Investigate the founders of the project
Believe it or not, there are projects founded by people who don’t share their true identities openly. These projects are more likely a scam.
In addition, be sure to go beyond looking at just the founders of a project. Why? Because it is now quite common for scammers to create fake founders with solid backgrounds and experience. However, you’d protect yourself from falling into a fraudulent scheme if you research thoroughly each individual on the team (LinkedIn and Twitter profiles, online portfolios, etc.).
- Misspellings and grammatical errors
Look for bad English on websites and in emails as well as social media posts or any other communication.
Indirect Scams – Pump and Dumps
Pump-and-dump in crypto is an orchestrated fraud that involves misleading investors into purchasing artificially inflated tokens that have been marketed and hyped by paying celebrities and social influencers.
More often than not, the positive news that is marketed is completely made up.
How to protect yourself from Pump and Dump Indirect Scams?
Before investing your money into any crypto project, verify that the individuals and firms offering an investment are legitimate. Carefully review all materials about any investment opportunity and ask questions.
Here’s what the SEC (Securities and Exchange Commission) suggests to look out for:
- “Guaranteed” high investment returns. Promises of high investment returns with little or no risk are a classic warning sign of fraud. Fraudsters may post fabricated historical returns on their websites showing high investment returns.
- Unlicensed/unregistered sellers. Unlicensed, unregistered sellers commit much of the securities fraud targeting retail investors in the U.S. Check out the background (including license and registration) of any securities broker offering you an investment in a security or crypto. Use the search tool on Investor.gov.
- Skyrocketing account values. Depictions of investment accounts rapidly increasing in value and providing large returns are often fake. This is a tactic fraudsters use to entice investors with the prospect of great wealth.
- Sounds too good to be true. If an investment “opportunity” sounds too good to be true, it probably is. Remember that the potential for high investment returns usually involves high risk.
- Fake Testimonials. Also, never rely solely on testimonials in making an investment decision. Fraudsters sometimes pay people – for example, actors to pose as ordinary people turned millionaires, social media influencers, and celebrities – to tout an investment on social media or in a video.
Summary
As you now know there are lots of crypto scams in the world. There’s direct scams and indirect scams and you want to avoid all of them. Please review all our blog posts on scams and if you have questions about whether an exchange or project is a scam, please join our Facebook Group and create a post to ask your question. One of our moderators will respond.