by Aziz Zainuddin, Master The Crypto
The technology underpinning cryptocurrencies can be extremely complex for many to wrap their heads around. The technical nature of cryptocurrencies and the usage of complicated computing jargon could easily confuse anyone, even tech-inclined individuals. The absence to date of any regulations and a general lack of understanding of cryptocurrencies further compound the problem, creating a conducive environment for bad actors to create coins and schemes that serve to exploit the ill-informed.
With the sheer number of cryptocurrencies and tokens to choose from, it is tough to sieve out the good ones from the more dubious ones. In an environment with few checks and balances, the crypto world is a fertile breeding ground for scammers. The most important thing to consider before delving into this potentially revolutionary yet still infant industry is knowing what NOT to invest.
It’s pretty common now to hear of investing opportunities in the crypto world that promises a daily or monthly rate of return. Offering fixed returns require a constant revenue source, and unless they sell a product or service to substantiate their revenues, the only way to sustain high, guaranteed profit rates is through a Ponzi scheme.
There are generally three common fraudulent schemes in the cryptocurrency community that promotes unrealistic claims, which includes:
Cloud mining services
Fraudulent cloud mining websites offer anyone the opportunity to get in on a Bitcoin mining operation and earn mining rewards by just providing initial capital upfront without the need for you to buy your own computing hardware. It’s a Ponzi scheme that pays you out as long as there is a continuous pool of new users, and if that dries up the whole thing collapses and you’ll lose all your funds.
Bitcoin investment packages (BIPs)
BIPs are high-yielding investment programs that promise high returns with small payout structures. You start by buying a subscription package which qualifies you to receive a constant payout every day or every week and are usually very profitable at first. However, due to the Ponzi structure it employs, BIPs have a limited life cycle and would shut down once there are little new users left. BIPs will tend use complex buzzwords to confuse those interested to know how they actually make the profits, so as to seem credible.
Multi-Level marketing (MLM) schemes
A common trait of MLM is the ambiguity of their actual offerings or services, depending mostly on referral schemes. Some typical referral structure entails individuals promoting a certain cryptocurrency-related investment scheme and the only way to participate is to click on their referral links. MLMs are extremely easy to identify since the main source of revenue generation is through affiliate marketing rather than dealing with actual cryptocurrencies.
In summary, here are the common features to look out for that may indicate a scam:
Guarantees of high profit/interest rates
Ambiguous details on how it actually works
Minimal to no information on founding team or company
Non-Existence of code base
Given that the majority of Cryptocurrencies are open sourced, projects that are close sourced, or those that do not reveal their code base can seem less credible. Although not all coins that are closed-source are scams, all coins that have been dubbed as scams did not appear to reveal their code base or simply didn’t seem to have one. A huge reason why these were closed source could also be due to the fact there is no code base at all. You can check out their codes at Github, and if the cryptocurrency doesn’t provide the links to the code, then this may be sign that the project is shady.
An open source code allows the code base to be made freely available to anyone and may be redistributed and modified. The nature of open-source codes is that it allows anyone to look at and review the codes. Not only is this more transparent, the community can inspect the protocol and suggest improvements to the code base. Leveraging on the community could be very beneficial to the project, since “a thousand brains are better than one”.
Absence of key information:
No white paper
A white paper detail all the information that you need to know about a particular coin or token, from its purpose to its mechanics to its coin dynamics. White papers form the bedrock of any coin, and its absence can signal a huge red flag. Given that a majority of coins do not have any track record of a working product, it’s even more important to conceive a white paper to publish the necessary information needed for investors.
Ghost team members
This refers to the absence of information on the founders and the developing team. The credibility of any project can depend heavily on the experience, stature and expertise of the founding developers. Fraudulent coins and schemes will not publicly disclose information about the founders and this can be sign to watch for.
All in All
There are certain unique traits of a cryptocurrency that includes decentralization, full transparency through a public ledger, and an open source code that anyone can see. Scams and ponzi schemes do not possess these common characteristics and are usually centralized and opaque. The best way to avoid falling into these various scams and shady schemes is to identify common characteristics as listed above. More importantly, it pays to acquire knowledge and understanding of how cryptocurrencies work and the underlying technology that powers them. It can also help to get independent financial advice before making any investment. Arming yourself with the right knowledge can help to safeguard you against the risk of scams.