Dissecting Cryptocurrency Scams — 22 Red Flags of Crypto Frauds

Listen to this as a podcast

But there’s some nuance to be found between the cryptocurrency skeptics who call the whole category a scam and unbridled enthusiasm. Here we’ll break down 22 red flags cryptocurrency scams, fraudulent initial coin offerings (ICOs), and Ponzi schemes.

Should the presence of one of these disqualify an opportunity?

It depends. As you’ll learn, not all the red flags fly at the same altitude. A multiplicity of red flags is a pretty good reason to back away slowly from an opportunity. There’s simply no reason to take a chance on something with a few tell-tale red flags because if it’s risk and volatility that you want you can just buy Bitcoin. If you want stability and a hedge against inflation just buy Gold-Backed Cryptocurrency which can be transformed into the shiny stuff in your hand whenever you want.

1. Charismatic cheerleaders

When I lived in Eastern Europe, in downtown Sofia, Bulgaria I used to regularly walk by the offices of OneCoin a “cryptocurrency” that turned out to be tremendous fraud to the tune of $15 billion.

Ruja Ignatova, the mastermind villain behind OneCoin was proclaimed a cryptocurrency visionary, and is sort of attractive, like Elizabeth Holmes the famous charlatan that headed Theranos (the blood-testing company) and scammed investors out of billions. Nobody can deny the charisma of the Bitconnect guy, Carlos Matos, and Bitconnect famously turned out to be a massive fraud.

Be suspicious of charismatic characters promoting a cryptocurrency opportunity, especially when they are wearing a lot of makeup.

2. Masses of irate customers

The good news about scams is that they usually aren’t terribly hard to sniff out. Scammers want to scam stupid, naive people — not really sharp, analytical people. Before you invest in a cryptocurrency check out what people are saying about it on TrustPilot, Reddit, and Youtube — are a lot of people saying that they got scammed by it?

For example, I don’t know if Goldmoney is a scam, but I’m glad that I got my investment out of their “vaults” because a troubling number of their customers on Trustpilot are saying that it is damn near impossible to get their gold from Goldmoney.

Now, anecdotal data is infamously unreliable, there are a lot of ways that 3rd party credibility can be faked. Companies have shadowy teams creating sockpuppet accounts praising them online and besmirching the reputations of their competitors. Dissatisfied customers are more likely to complain than satisfied customers are to compliment. So you have to apply a lot of critical thinking to the anecdotes you peruse online…

  • Do the reviewers’ profiles look legitimate — Other reviews? History? Recent profile? Profile photos?
  • Legitimate reviews of businesses tend to be thorough and more detailed. Fake reviews are shorter and more generic. Do reviewers provide evidence for their claims?
  • You have to consider the size of the business to the number of angry customers they have. I’ll say something controversial, I think Paypal is a pretty decent company — I’ve had a Paypal account for over a decade and overall I’m quite pleased with the online banking and e-commerce services they provide. Paypal has a pretty awful rating on TrustPilot (13,000 1-star reviews) but they have almost 300 million customers!

But the anecdotal sentiment surrounding a cryptocurrency should not be ignored. If a statistically significant number of people are calling it a scam and saying that they got duped that’s a red flag.

3. Cultish suppression of dissent

In the OneCoin and Bitconnect communities, anyone who asked questions or leveled criticisms was labeled a “hater,” mocked, and often censored. In online forums, moderators deleted posts casting skepticism or marginalized them calling them FUD (Fear, Uncertainty, Doubt) to suppress free discussion. Dissent, criticism, and skepticism underlie the scientific method and technological innovation, they are how we make progress. It’s a major red flag when a cryptocurrency community actively suppresses dissent and questioning.

CultResearch.org identifies the following attributes of cults…

  • Questioning, doubt, and dissent are discouraged or even punished.
  • The group is preoccupied with bringing in new members.
  • The group is preoccupied with making money.
  • The group has a polarized, us-versus-them mentality, which may cause conflict with the wider society.

Sounds like some cryptocurrency communities, doesn’t it? But a bit of cultish behavior doesn’t mean that something is a scam. Looking at history, one could certainly argue that cults are the most natural human organizational structure. All religions started as cults, politics is very cultish, sports are cultish — that doesn’t necessarily make these things bad. Speaking of cultish behavior, our next red flag is…

4. Wu-wu moralizing

“We’re changing the world!”

It should be a blip on your skepticism radar when there’s a lot of wu-wu language and mission statements orbiting a cryptocurrency…

Join our economic revolution for financial freedom! We’re changing the world! We are chosing abundance! We’re going to defeat the banks and take down “the system!” We’re going to empower women, minorities, and the underpriviliged…

You’ve heard it all before when you were roped into attending multi-level marketing pow-wows. It’s a red flag when you’re pitched an opportunity by a charismatic character espousing this sort of stuff. Genuine business people are frankly a bit more individualistic and pragmatic. They are more concerned with the technical details and how things work than fixing the world.

5. MLM/Network Marketing structure

Don’t worry! It’s definitely NOT a “pyramid scheme”

Bitconnect and OneCoin grew meteorically because they were fundamentally pyramid schemes. People made more money by selling their friends and family on investing in the scheme. Now you could call Bitcoin a pyramid scheme because your Bitcoins become (ever so marginally) more valuable if you could convince other people to buy Bitcoin. But Bitcoin and most cryptocurrencies do not have a network marketing structure, you don’t get paid a generous commission for recruiting new people into the opportunity and you don’t get paid commissions for people that they might recruit. Be highly suspicious when the ostensible economic opportunity is really in recruiting others and selling a pipe-dream of financial independence.

6. 1%, 2%, or 5% daily interest

Daily interest, GUARANTEED!

There are a number of cryptocurrency investment opportunities that accrue interest the same way that bank accounts accrue interest (or at least, used to). It’s hard to say which of these are legit, but a sure sign of a scam is when they claim that you’ll reap 1%, 2%, or even 5% daily interest. From a Coin Central article

The daily interest rate for BitConnect investments varies between 0.25% and 5.0% daily, with BitConnect guaranteeing an average of 1%/day. Over time, if users reinvest the interest, this daily interest can add up to significant returns due to daily compounding. For instance, a $100 investment compounded at 1% daily interest would be worth $107.21 after a week, $134.78 after a month, and $599.58 after 6 months! After a year, you’d have over $3700 thanks to compound interest off an initial $100 investment.

Of course, the interest rate varies day to day, and the BitConnect site only promises a return of 120% annually, not the 3700% we just calculated. Still, promising those kind of results should make you skeptical. If the 120% annual interest is true, then BitConnect is one of the best places you could possibly invest your money. However, promises of large returns like these are usually the sign of a pyramid scheme, and you’d be wise to exercise caution any time you see a program that advertises “guaranteed returns.” Investing is inherently risky and volatile, and any legitimate investment should expect to see losses and gains over time, not just gains.

1% (or more) daily interest is simply a fantastic and unbelievable claim; even the world’s smartest billionaire hedge fund traders with quantum computers at their disposal don’t make on average 1% daily. There certainly are investors in this world tripling and probably even quadrupling their money year over year, but we are a self-interested animal, nobody making that kind of return would also be in the business of evangelizing that opportunity and thereby diluting it. When you hear “1% daily returns” promised, don’t walk away, run!

7. Changing the value of coins

Cha-ching!

To much applause, Ruja Ignatova arbitrarily “doubled” the value of all OneCoins in existence, which of course means that the coins are in fact valueless. If the management or founders of a coin arbitrarily change the value of a coin that’s a red flag.

8. “Trading bot”

“You’re going to get rich quick because we have this super-secret, super-smart AI algorithm making super-human trades…”

Raise your hand if you’ve heard that before. Trading bots are a thing — some of the biggest financial institutions in the world employ them, but it’s a red flag when a “trading bot” is central to the pitch of a financial opportunity. Especially, when a trading bot is an explanation for fantastic daily interest claims, it’s a whole lot more likely that they are running a Ponzi scheme.

From an insightful Medium article

The sales pitch for Bitconnect was simple and smooth. Buy Bitconnect coins, deposit them to the ‘state of the art’ trading bot within the platform, and earn 1–1.5% returns per day. The returns weren’t guaranteed, but they were consistent. The platform was simple and user-friendly; the process you deposited and withdrew was also simplistic, designed specifically for those new to cryptocurrency. And of course, the referral bonuses were great.

As sexy and appealing as easy profits from a trading bot are, the notion doesn’t pass critical thinking about human nature. If you were a wealthy investor making great returns on your money — real passive income — thanks to a trading bot, you wouldn’t be interested in sharing that trading bot with a bunch of strangers. You would dilute the opportunity you’re enjoying capitalizing on by sharing your money maker. If you wanted to be altruistic you’d give your money to charity. Business people wouldn’t sell a trading bot if they could make more money just handing their own money over to that bot’s management. Furthermore, institutions like Goldman-Sachs pay the world’s smartest computer scientists millions a year to build and manage trading AI — more and more of these institutions are entering the crypto space. Do you really think that a $97 or $997 trading bot is going to compete with what they have built, running on quantum computers?

9. Mining opportunities

Cryptocurrency mining investments are often scams

Cryptocurrencies like Bitcoin come into existence by “mining” — solving a complex mathematical puzzle, which demands a lot of computing power. It can be profitable, if it wasn’t there wouldn’t be millions of expensive industrial-grade computers around the globe doing it. There’s no shortage of ostensible mining investment opportunities proffered. On its face, it makes sense; you don’t want the trouble of owning, storing, and maintaining mining computers that guzzle tons of electricity so you just buy into an operation that handles all the dirty work — it’s like owning rental property and never having to fix toilets, sign me up! But, if something sounds too good to be true, it probably is — the profit margins of cryptocurrency mining are actually pretty slim (just 9% on average) and why would they need your money if they already have mining equipment? Why wouldn’t they just re-invest their profits into their business? Why wouldn’t they just get a loan from a bank or use a high limit credit card? Why would they do a flashy internet marketing campaign to raise capital from random (dramatic, demanding, and opinionated) investors when there are so many better options for raising capital? All too often “mining investment pools” are scams.

Now, start-up companies raise rounds of capital to grow, purchase industrial hardware, and sometimes their early investors (and not-so-early investors) are really rewarded but cryptocurrency mining borders an amorphous legal grey zone. There’s really not a lot that you can do if they just take your money and run.

Order: Cryptocurrency Scams: Keep Your Crypto Safe

Matthew Gumke, a young entrepreneur, wrote a (short) tell-all book about how he lost $150,000 (ouch!) in USI Tech’s mining investment scam. He exhorts the reader…

Never invest in other people’s mining equipment

If they own loads of mining equipment, why do they need your investment? Why not just mine the coins themselves? It’s because they don’t have any mining equipment, they want to scam you!

Being scammed for six-figures resulted in a cascade of events culminating in him ending up homeless…

I decided to spend my last £40 on a tent and a sleeping bag. I took all my stuff and I went camping in Colinton Dell, a wooded area in Edinburgh, Scotland. I went hungry a few times and lost a lot of weight. During this time, I finally got a job and worked a lot. I was homeless, sleeping rough in the woods for 2 and a half months before I told the council.

My interview with Matthew is a MUST-LISTEN for anyone who wants to dabble in cryptocurrency.

10. No public blockchain

This may seem obvious but OneCoin duped many without ever demonstrating a functional public ledger — they ran their “blockchain” on their own private SQL server. It’s a red flag if they tell you that their blockchain is proprietary or patented and thus not publicly accountable.

11. Only invest in open source

The future is open source

“Open source” means that everyone can see the code of a protocol or piece of software. Allowing a decentralized community of programmers to collaborate and improve the code — it’s what makes WordPress or PHP great. Blockchain is similar; everyone can see what’s happening. Be wary of investing in altcoins or crypto tech startups that are NOT open source. Nowadays, unfortunately, there are a lot of faux-blockchain based business. They run their tech on centralized private servers and only they know how it works — they can manipulate things however they want. When you’re doing your due diligence on an opportunity (while you may not be able to understand it) ask to see the code — it should live on a public GitHub page. If they give you some excuse about how they have proprietary code or tech that they can’t share that’s a red flag. They may be perfectly upstanding and well-intentioned but if they are running a private blockchain or database they are all the more vulnerable to being hacked in the future. The Bitcoin blockchain itself has NEVER been hacked (you’re welcome to try and if you succeed you could afford to vacation on Mars!) What makes it so airtight is it being open-source, public, and decentralized — be suspicious of any altcoin that is not!

12. Crypto give-aways (often celebrity-endorsed)

“Send Bitcoin to THIS address and we will send you back double!”

Should be such an obvious con that no sober person would fall for it. In 2020 an unprecedented Twitter hack compromised the accounts of Bill Gates, Elon Musk, Joe Biden, Barack Obama, and other celebrities promising: “All Bitcoin sent to my address below will be sent back doubled. If you send $1,000, I will send back $2,000!”

You can trust THIS GUY

And the scammers fleeced the naive for more than $100,000 the day the tweets were sent. Legitimate crypto giveaways are rare and they do not require that you send them crypto first, it’s most certainly a scam if they do.

13. Direct Message Solicitation

No, thanks random dude from a Facebook group with an “opportunity of a lifetime”

You can categorically disregard cryptocurrency opportunities that come from strangers in your social media direct messages. Go join a few cryptocurrency groups on Facebook and it won’t be long before random guys start sending you messages with fantastic claims about how they can double or triple your crypto. No legitimate business or investment opportunity would market itself this way. These guys sending you unsolicited messages are at best useful idiots in Ponzi schemes and at worst, not even human — spambots trolling for suckers so some asshole can afford his cocaine habit.

Apparently, scammers have also infiltrated dating apps (shocking, right?) It should be painfully obvious that you shouldn’t take investment advice from a stranger you met through a dating platform (no matter how hot their pictures are!)

14. “Account Manager” introduction (from a friend)

Less suspicious than an unsolicited DM but worthy of the same skepticism is an introduction to an “account manager” or insider opportunity by a friend, online acquaintance, or influencer that you follow. Ponzi schemes and scams rely on well-intentioned useful idiots and patsies — your friends, family, and coworkers probably don’t want you scammed, they just want to spread the word about what they think may be a real golden opportunity. If they invested in something without properly researching it, they want to validate their decision by you buying in too. What makes Ponzi schemes so insidious is that the early investors get paid out, they really believe in it because they got money in the bank out of it.

Also, people get their social media accounts hacked all the time. So when your friend sends you a message sharing some crypto opportunity, it may not even be them. Good entrepreneurs and savvy investors cultivate social networks, online and offline, that clue them in to deals and opportunities, so NOT everything shared with you organically is a scam. You want to remain open-minded to legit opportunities but be skeptical by default as opposed to trusting when you get pitched something by a friend.

15. Urgency!

Some things in life are urgent but it’s a red flag when you’re presented with an opportunity demanding your urgent investment; In a week we’re closing this investment round! We only have ten spots left! Better get in now! We’ve all heard this sort of thing before, and it’s usually not a good sign — don’t let anyone rush you through the due diligence that you need to do.

16. Recruitment pow-wow

You ONLY need to recruit THREE people below you!

Be very suspicious of businesses that rely on recruitment — selling a pipe dream of financial freedom and easy profits to the masses. If you’re invited to a recruitment pow-wow at a hotel conference room to be presented an opportunity you can be almost certain that it’s a scam, Ponzi scheme, or a time-wasting pyramid scheme. Bitcoin is proving itself to be the investment opportunity of the century — did “Satoshi Nakamoto” recruit early Bitcoin investors and spread the word by pitching people in a suit in stuffy hotel conference rooms? Of course not!

17. Barrier to withdrawal

The check is in the mail, it will be there in just 10 “business days”

Before investing in a crypto you want to read their whitepaper (or at least their website) and figure out if there are any barriers to withdrawal. You should be able to take your crypto out and walk whenever you want. It’s a red flag if their policy requires a week or a month advance notice for withdrawal. It’s a red flag if the crypto you invest is locked up in some kind of system and cannot be traded out at your discretion.

18. Spelling and grammar errors

Read their website and white paper with an eye for blatant errors. If there’s more than one or two that’s a sign that they were in a real hurry to throw things together which does not bode well. If they couldn’t even be bothered to run a spelling or grammar check on their copy should you really trust them with your money?

19. “Helpful” mentor

Lots of sad scam stories involve a mentor that reached out to someone who “reminded them of themselves when they were younger” offering experience, mentorship, and an “insider opportunity.” Be especially suspicious of mentors that reach out and proceed to brag a lot about how successful they are and how much money they’ve made. Actually successful people are a bit shy about talking about their wealth. “The lion doesn’t have to roar,” as the African proverb goes.

20. Domain recency

A real simple step to take before buying into anything is to check their domain with Who.is; if they’ve had their domain for at least a few years that’s a vote of confidence. If their domain is a year or less old be skeptical, especially if they tell you that they’ve been around for a while. Also, you can see on Who.is when their domain expires; legitimate businesses typically register their domains for years while scammers often just pay for a single year of registration.

21. Questionable management

Look into them…

Character and experience matter. You should look into the founders or management of a coin that you’re thinking about investing into. This should be easy as they should be listed on the websites’ about us pages. They should have business, technical, or academic experience relevant to the endeavor they are engaged in. It’s a red flag if the management bios are not easy to find or if the details about their experience are scant. But perusing their about us page is not enough…

  • Google them with the double-quotation marks (for accuracy — for example, “Jonathan Roseland”): look through the first few pages of search results — does it align with their experience described on the about us page? Are there media articles about them? Have they been involved in any scandals or lawsuits? Have they been called a scammer?
  • Look them up on social media (Facebook, Twitter, LinkedIn): What are they into? Do they seem like reasonable people?
  • Look for interviews: business people (especially in the crypto space) usually have a few podcast or Youtube talking-head-style interviews out there. Go find those interviews on Youtube or iTunes Podcasts and listen to what they have to say — often people will reveal interesting things in interviews.

22. Based in shady countries

Higher-risk crypto fraud countries

In the six years that I’ve been dealing in crypto, I’ve been scammed just a few times and it’s always been because I was naively trustful of guys from or in shady 3rd world countries. Crypto-veterans know from hard-won experience to avoid dealing outside of the western, English-speaking world. Which sucks, we’d all rather not be biased against anyone because of where they are from but a lot of cultures don’t share our universalist morality, they have tribal morality — it’s not immoral to scam someone if they are naive enough to fall for it.

You also want to look up where in the world a company is based. If they are based in a tax haven with poor rule of law that’s not a great sign. The authorities in places like Cayman Islands, Panama, Jersey Island, Ukraine, or Russia could care less if the financial institutions registered in their territory are scamming people.

Conclusion

Trust is important in your interpersonal relationships, but in your crypto-dealings with strangers don’t trust people. Unfortunately, in business (especially the crypto business) a bit of paranoia and cynism will serve you better than optimism and hope. Public blockchain technology has been called “the trust machine,” it removes the need to place faith in (hopefully) well-intentioned and morally upstanding strangers. If a coin, company, or investment opportunity is not properly utilizing a public blockchain to prove what exactly they are doing, be vigilant for the red flags described here and invest significantly less than what you can afford to lose, if anything.

In this tweet thread, I’ll share tips and strategies for avoiding scams and fraud in your crypto dealings, do follow @marketplacegld on Twitter!
Originally published on MarketplaceGOLD.com. I’m an independent researcher passionate about financial antifragility and economic philosophy, not a licensed financial adviser. This is not financial advice. Please practice skepticism and critical thinking.

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Jonathan Roseland

Jonathan Roseland

Adventuring philosopher, Pompous pontificator, Writer, K-Selected Biohacker, Tantric husband, Raconteur & Smart Drug Dealer 🇺🇸