Major cryptocurrency scams and how to avoid them. Part 2: investment scams

In the first half of 2023 alone, the damage from hacks and scams in the crypto industry amounted to more than $650 million. According to the analytics company Beosin, fraudsters stole $108 million due to phishing, which we wrote about in Part 1, and $75.87 million in 110 episodes of ragpool (liquidity theft).

1. Scam projects with high profitability

These projects include typical pyramid schemes masquerading as blockchain projects. The idea is usually always standard: the project is super innovative, and investors are guaranteed huge profits.

However, due to the peculiarities of DeFi protocols, it is not easy to recognize such scams. The fact is that many DEX exchanges and other liquid protocols offer high APRs to liquidity providers at the start.

Here are a few signs that will help you identify a scam:

Guarantee of high returns. Investments are always associated with risks, and only scammers can guarantee income;
Unchanging returns of 1% to 10% per day. As we have already mentioned, some DeFi projects can provide such yields at the very start to attract a lot of liquidity quickly. However, the yield starts to drop as liquidity grows;
The project is not listed on services such as DeFi Llama or DApp Radar;
There is no information about the team, its partners and investors. Every promising project has well-known partners in the crypto industry and funds that finance them.

Note that even some well-known projects can be a simple scam — this also happens, although much less often. For example, one of the most significant blockchain projects in 2017, BitConnect, turned out to be an ordinary pyramid scheme under the guise of a crypto-loan platform with a yield of 1-2% per day.

You probably already guessed that BitConnect is a pyramid scheme just by the size of the returns, but at the time, many people who came to the crypto market didn't think so. Scammers were able to steal more than $3 billion from users. In October 2017, BitConnect was among the top 15 cryptocurrencies by capitalization.

2. Rug-pull

Another standard method of crypto fraud is rug-pull or, as it is called "pulling the rug". Also, sometimes rug-pull is called new token fraud. The essence of this method is as follows:

Fraudsters create a new token and a liquidity pool for it. Often, to fuel the interest of potential victims and even cause greed (FOMO), scammers "pump" the price of the token at the expense of their investments;
While the liquidity is rapidly increasing, the creators of the scam project continue to promote their tokens actively. To do this, they often use fake information about listing on a major exchange, such as Binance;
As soon as the inflow of new investors starts to wane, the project creators withdraw all liquidity and disappear, i.e. rug-pull. This is similar to pulling the rug out from under your feet, which is why the scheme got its name.

These simple tips will help to protect yourself from this type of scam:

It's better to wait for confirmed listing information from the crypto exchange itself;
The lack of audits is a red flag;
The token is not listed on CoinMarketCap or CoinGecko services. Also, the token's lack of an icon indicates that the project creator placed liquidity on the DEX exchange rather than going through the listing procedure.

It should be noted that there have been cases when fraudulent tokens appeared on CoinMarketCap. One of the most vivid examples is the SQUAD token, created based on the popular South Korean TV series The Squid Game. It is still unknown how the scammers managed to guide the CMC team. After publication, the token grew by several thousand per cent, and sometime later, the Squad team made a rag pool and fled with the funds stolen from investors.

The peculiarity of the SQUAD token was that the attackers put a feature in its smart contract that prohibited investors from selling the token. In other words, users could only buy tokens. Therefore, if you doubt the reliability of a token you buy on a DEX exchange, buy it for a small amount first and try to sell it immediately — that way, you will avoid more significant losses.

3. Pump & Dump

The Pump & Dump scheme is no less popular among scammers. It works like this:

Scammers choose a low-liquidity token and buy it;
Then attackers start forcing through various channels, forums and chat information that this token is growing and will soon give a lot of Xs, so you need to buy it urgently. Due to active purchases, the price of the token grows. In other words, it is being "pummeled";
As soon as the price rises enough and the growth rate drops, the fraudsters who bought tokens earlier start to "dump" them, as a result of which the price collapses or is "dumped".

Several signs indicate the Pump & Dump scheme:

Calls to buy the token;
The chart shows that someone has already bought the token and has "pumped" the price a bit;
Rapid growth of the token despite the absence of news or any fundamental reason for it;

4. Fake tokens and airdrops

If you are interested in cryptocurrencies and follow the news, you might have heard about projects like LayerZero, Starknet, zkSync and Linea. These are large crypto projects that have yet to release their tokens, and many who participate in them expect them to drop (give out tokens for activity).

Of course, scammers take advantage of this and create fake tokens, such as ZRO or STRK. The scammers then sell the scam in two ways:

Trying to sell the counterfeit tokens through social networks or fake websites;
Give them away for free to get potential victims to sign a fraudulent transaction after clicking on a phishing link (we discussed this scam method in detail in the first part).

To avoid falling victim to scammers, follow these simple tips:

Trust only information from official sources and reputable news resources such as Cointelegraph, Coindesk or The Block;
Check the information on CoinMarketCap (CMC) or CoinGecko services. As a rule, pages of popular tokens are created even before the airdrop. For example, pages for the real tokens ZRO and STARK are already published on CMC;
As a last resort, ask experts in themed chat rooms or forums before buying something or signing a transaction on a suspicious site.

5. Fraudulent ICOs

The success of ICO projects, whose boom started in 2017 and continued in 2018, has expectedly attracted the attention of many scammers. ICO, or initial token sale via smart contract, has become a popular way for projects to obtain funding, but it is an unregulated area that opens up a vast scope for fraud. According to research by consulting firm ICS Statis Group, over 80% of ICO projects launched in 2017 are fraudulent.

Later, new ICOs emerged, such as initial token exchange offerings (IEOs) and initial decentralized exchange offerings (IDOs). Projects participating in these types of token sales are already undergoing a strict selection process by exchange teams, so their reliability depends on the companies' integrity.

Nowadays, IDOs and IEOs are held more often than ICOs, as they help raise more funds due to their higher reliability. However, the old format of token sales is still relevant — they are often promoted via Twitter (X) or Telegram. It's not uncommon for scammers to exploit newcomers' ignorance and lure victims by having their tokens listed on a significant DEX exchange like Uniswap or PancakeSwap. Users can post liquidity for a token they create on any decentralized exchange.

Here are a few criteria to help you identify fraudulent ICO projects and avoid investing in them:

Weak or unoriginal Whitepaper. "The Whitepaper is the primary document describing the technical aspects. Scammers often either simply copy someone else's Whitepaper with minor changes or create it to tick a box;
Lack of roadmap. Projects often conduct ICOs without a finished product or at least a prototype. However, the team should, in any case, have a roadmap with a specific description of the stages of project development for the coming year;
Inactive GitHub. Even if the developers don't have a finished product yet, they should at least have a profile on GitHub, where there is some development and activity. If there is no such thing, the project can most likely be called a scam;
Anonymous team. The presence of well-known crypto industry persons in the team who have previously participated in popular projects increases the chances of successful token sales. Fraudsters, on the contrary, tend to hide their names or provide false information about the team;
Lack of audits. This is a clear red flag, although projects are often audited after they have raised funds. Note that the mere presence of an audit does not guarantee security: the reports may indicate, among other things, critical vulnerabilities that the project team needs to fix;
No known partners. Any somewhat successful ICO projects have partnered with well-known companies in the crypto industry, such as Binance and HTX (formerly Huobi).

Scammers are constantly coming up with new ways to scam you, and it's essential to stay alert always. If the points mentioned in this article do not help you determine whether the project is fraudulent or not, ask for help from experienced users on forums and chat rooms — perhaps someone is already familiar with this project and will be able to advise you. Just remember that scammers may be operating there, too, so listen to several different opinions to be sure.