What's a Cryptocurrency Exit Scam? How Do You Spot One?

In November 2017, an escrow-related cryptocurrency startup called Confido disappeared overnight after collecting $175,000 through its initial coin offering (ICO). Following the news of the Confido exit scam, the market cap of the cryptocurrency fell from about $6 million to $70,000 within a week.

LoopX is another crypto startup whose ICO promised “guaranteed profits every week thanks to the most advanced Trading Software out there to date.” It abruptly shut down in February 2018 after raising $4.5 million from investors through a combination of bitcoin and Ethereum.

Welcome to the exit scams - the new form of forgery now lurking in the anonymous and decentralized cryptocurrency world. (For more, see $9 Million Lost Each Day In Cryptocurrency Scams.)

An exit scam is a fraudulent practice by unethical cryptocurrency promoters who vanish with investors’ money during or after an ICO.

The modus operandi is simple – promoters launch a new cryptocurrency platform based on a promising concept; the ICO then raises money from various investors; the business may or may not run for some time; and then the promoters who had collected the ICO money disappear, leaving the investors in the lurch.

Due to the decentralized, anonymous and regulation-free operations of the virtual currency ecosystem, it is difficult to trace scammers who dupe the investors. (For more, see Steve Wozniak: Bitcoin Scammer Stole My Cryptocurrency.)

Though it is difficult to clearly identify a dubious ICO, investors can keep the following points in mind before making an investment decision.

1. Team Credibility: The biggest challenge with the virtual world is accountability and ownership. Before investing your hard-earned money in ICOs that may look very promising, an investor must verify the credentials of the crypto team. Keep in mind that you can purchase likes, tweets, and followers on the various social media platforms to build fake online credibility. Therefore, you should do a basic check on ICO promoters and on the backers of cryptocurrency projects, and the kind of connections/followers they have.

Blockonomi mentions about this about the LinkedIn pages of Confido teams: “The dead giveaway was the fact that the pages of the four main scammers involved – two developers and two executives – were brand-new and had barely any connections.”

2. Extravagant Return Projections: Is it too good to be true? Then it probably isn’t. For instance, BitConnect promised a steady 1% daily return, which would have transformed an initial investment of $1,000 into a return of more than $50 million within 3 years! Ethereum founder Vitalik Buterin rightfully called it a Ponzi scheme.

In January 2018, BitConnect abruptly shut down its lending and exchange services after experiencing a meteoric rise and burgeoning client base since its ICO in December 2016. The marketcap of BitConnect, which exceeded $2.7 billion in December 2017, suddenly tanked to $17 million by March 2018.

3. Documentation Standards: The white paper is a key document that details how a cryptocurrency project is designed and developed, how it evolved, and how it will generate business. Incomprehensible, unclear and ambiguously written white papers are a big red flag to investors about a potential exit scam.

4. Non-existent Working Model: Does the cryptocurrency project have a bare-bones working model? If it is a concept-only, non-existent product, then it probably won't work. It is true that some new-age technology may need to be designed completely from scratch, but promoters who want to raise millions of dollars should prove their project is worth investing in. To be safe, investors should avoid dubious offerings from obscure individuals.

5. Heavily Promoted Offerings: Big promotions may be another sign of an exit scam. It is common to see full-page ads of new ICOs by lesser-known founders in the print media in populous nations like India. Confido also reportedly paid bloggers to spread the word on the various online forums.

While all ICO offerings with big promotions may not be dubious, an investor needs to take a cautious approach and do the background checks of the claims made.

Essentially, it boils down to the simple and age-old investment advice – if you don’t understand the business of the company, and don’t trust the people behind it, don’t invest in its shares. The same goes true for cryptocurrency projects.

Scams and frauds are common even in the well-established centuries-old stock markets which are well-regulated. The anonymous world of cryptocurrencies adds more risk due to its non-regulated nature.

In the end, it is the investor who shoulders responsibility to not get scammed out of his/her hard-earned money. Non-existent teams, extravagant profit projections, and unclear business models should be closely scrutinized before making any investment. (For more, see Beware of these Five Bitcoin Scams.)

Investing in cryptocurrencies and Initial Coin Offerings ("ICOs") is highly risky and speculative, and this article is not a recommendation by Investopedia or the writer to invest in cryptocurrencies or ICOs. Since each individual's situation is unique, a qualified professional should always be consulted before making any financial decisions. Investopedia makes no representations or warranties as to the accuracy or timeliness of the information contained herein. As of the date this article was written, the author owns no cryptocurrencies.