We’ve all heard of Bitcoin and Etherium, but how do you sift through the hundreds of other coins, tokens, and altcoins that makeup the larger cryptocurrency market? How do you spot a scam coin? As with many things in life, history may hold the answer.
In the mid-20th century, the Gold Rush famously brought thousands of people to the west coast, risking it all in the hopes of striking it rich. A whole supporting ecosystem of businesses popped up to capitalize on the miners. But many unfortunate miners learned a hard lesson: “all that glitters isn’t gold.”
Opportunists took advantage of unwary miners selling fake mining rights and empty mines. The most infamous scam of all was fool’s gold: a mineral called pyrite which glittered like gold but was nowhere near as valuable or rare. A discerning miner could identify fool’s gold, based on its texture, brittleness, and the faint smell of sulfur (the chemical formula of Pyrite is FeS2).
How to Identify Fake Crypto Coins
In this post we’ll look at how you can identify fake coins and other scams in the cryptocurrency marketplace.
Remember when the price of Bitcoin skyrocketed just short of $20,000 a coin in December 2017? Or how about when Kodak announced its ICO, and shares jumped 335%? The news reels are filled with rags to riches stories, and fantastical investment opportunities. Instead of gold mines, we have cryptocurrency mining algorithms. So what’s the metaphorical scam coin equivalent to the tell tale smell of rotten eggs that gave fool’s gold away? This old adage may be a good place to start: “If it sounds too good to be true, it probably is.”
If you see an outrageous claim, but a lack of transparency regarding the details of an investment, it’s a good sign you’re looking at a scam. Let’s see how we can apply this old adage to common cryptocurrency scams, and develop a mental model for sniffing out scams.
How to Spot a SCAM Coin
The common identifiers of a scam coin are as follows:
- Outrageous claims. Get rich quick schemes that sound too good to be true usually are.
- Lack of a code base. Cryptocurrency developers are passionate and will usually have a white paper explaining the technology behind their coin that gives it an edge. Developers should have verifiable online personas.
- Convoluted investment schemes. The most efficient way to make money in the cryptocurrency space is to invest in an exchange or run your own mining hardware. Cloud mining services, investment packages, and MLMs (multi-level marketing schemes) that obfuscate details of an investment should be suspect.
Cryptocurrency scams rely on an ages old formula of a get rich quick scheme + lack of transparency.
How to Spot A Crypto Ponzi Scheme
This one deserves its own section because of how distinct it is. If an investor can only make money by signing on other investors, chances are good you’re looking at a Ponzi scheme. How does one sniff out a Ponzi scheme?
- Promises high returns with little risk
- Investments aren’t registered with the Securities and Exchange Commission (SEC)
- Returns occur regardless of market conditions
- Lack of transparency on investment details
The reason returns can occur regardless of market conditions, is that money flowing in from new investors is used to pay off older investors.
Fraudulent Cloud Mining Services Are The New False Mines
In a real cryptocurrency mine, you can support the blockchain by lending your processor power to the cryptographic validation of new blocks as new transactions are recorded. These complex mathematical equations require serious hardware and capital investment to run, but you can be rewarded with new cryptocurrency for helping the blockchain with its proof-of-work. Some mining services have moved their operations to the cloud. That in itself isn’t enough to make it a scam, but the fact that cloud participants don’t own the mining equipment is ripe for exploitation.
Scam cloud mining services claim to allow anyone to get in on that mining action by providing initial capital upfront, and receive a small reward for the perceived mining that’s occurring. In reality, earlier investors are getting paid by newer investors. Once the pool of new applicants stops, the returns are no longer sustainable, and the operation collapses. Sound familiar? It’s a Ponzi scheme.
GAW (Geniuses at Work) Miners is the most famous cryptocurrency Ponzi scheme. What started out as a legitimate operation selling old cryptocurrency mining rigs turned into a cloud mining service called ZenMiner. It all went downhill from there.
ZenMiner encouraged users to put some money upfront to be allowed into their cloud based mining operation. Investors would be paid in “hashlets” (pieces of the purported mining operations’ profits). However, as Bitcoin’s blockchain got longer, the hash rate increased, making it more difficult for all miners to make a profit.
GAW introduced an altcoin called PayCoin to keep paying their investors. PayCoin was purported to be backed by a $100 million reserve that didn’t exist. They continued to pay out customers consistently using the investments of new investors, until they were exposed by an investigation by the SEC, and their operation unraveled.
Sometimes fake coins are there just to serve as a front for collecting your information. These coins make big claims, may use false testimonials, and ask for sensitive information, like your private key. Advertisements are usually garish, gaudy, and make outrageous claims—the hallmark of a get-rich-quick scheme. Have you calculated your Bitcoin taxes?
A legitimate cryptocurrency operation will never ask for your private key. All they need to pay you out is your cryptocurrency wallet address which is derived from your public key. This is an immediate red flag. Lack of transparency is another red flag. Legitimate cryptocurrencies will be transparent about their technology, have an active community, and be tied to something of real value that you can verify.
Cryptocurrency scams will continue to evolve alongside the industry, but the red flags generally remain the same. If you see outrageous claims paired with a lack of transparency, chances are good you’re looking at a scam coin. As with all investments, it’s up to you to do your due diligence and research the technologies and funding behind a project.