An exit scam is a fraudulent practice by unethical cryptocurrency promoters who vanish with investors’ money during or after an ICO.
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 and anonymous operations of the virtual currency ecosystem, it is difficult to trace scammers who dupe the investors.
Though it is difficult to clearly identify a dubious ICO, investors can keep the following points in mind before making an investment decision.
- 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.
- Extravagant Return Projections: Is it too good to be true? Then it probably isn’t. For instance, BitConnect (BCC) 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.
Bitconnect closed in January 2018. The BCC token was still in circulation, and crashed in price. In September 2018, the token was delisted from the last exchange that traded it, Trade Satoshi.
- 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.
- 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.
- 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.
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.
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.