The cryptocurrency industry has experienced rapid growth over the past decade. However, this expansion has been accompanied by a significant increase in scams. In 2024 alone, crypto crime saw an estimated $51 billion in illicit transactions, with $40.9 billion received by known illicit addresses, accounting for 0.14% of total on-chain transaction volume.
High-yield investment program (HYIP) scams and “pig butchering” scams contributed 50.2% and 33.2% respectively.
With new digital currencies and investment opportunities emerging daily, it’s crucial to recognize the warning signs of fraudulent schemes to protect your investments. Here are the biggest red flags that indicate potential scams in cryptocurrency projects
Unrealistic Promises of High Returns
If a cryptocurrency project guarantees high returns with little or no risk, it’s likely a scam. Scammers often lure investors with phrases like “Get 10x returns in a week” or “Zero risk, maximum profit,” which are unrealistic in legitimate investments.
For example, the infamous Bitconnect Ponzi scheme promised investors high daily returns and ultimately collapsed, costing investors over $2.4 billion.
Lack of Transparency and Anonymous Founders
A legitimate cryptocurrency project has a transparent team with verifiable identities. If the founders, developers, or key members are anonymous or lack an online presence, it’s a major red flag, many crypto scams involve hidden or fake teams.
Always check if the founders are public and active on professional platforms like LinkedIn, have a proven track record in blockchain or finance, and whether their profiles appear fake or were recently created.
ICO Scams and Fake Whitepapers
A whitepaper is the fundamental need for any legitimate cryptocurrency project. It should detail the outline of the coin’s purpose, technology, and future roadmap. If the whitepaper is missing, plagiarized, or filled with ambiguity, that’s a huge warning sign.
In 2018, research found that over 80% of ICOs (Initial Coin Offerings) were scams, many with copy-pasted whitepapers.
A prime example is the PlexCoin scam, which raised $15 million by falsely promising 1,354% returns in a month before being shut down by the SEC (Securities and Exchange Commission).
To stay safe, investors should verify the team, analyze the white paper, and check for audits before investing.
Excessive Hype and Paid Celebrity Endorsements
Scammers often employ marketing strategies such, as creating social media hype and utilizing paid endorsements, from celebrities to attract unsuspecting investors’ interest.
In 2021 The Squid Game Token experienced a surge of 2300 times within a days before its developers vanished with the funds invested by people in what’s known as a typical “rug pull”.
This incident underscores the significance of conducting research and exercising caution when dealing with projects that primarily depend on a buzz of openness and credibility.
Requests for Upfront Payments or Private Keys
No legitimate crypto project will ever demand sensitive information. This can be your private keys or wallet seed phrase, as these grant full access to your funds. Scammers often disguise themselves as trusted platforms, requesting an upfront fee before allowing “withdrawals”.
They may also demand payments through untraceable methods like gift cards or wire transfers.
A common scam involves phishing emails pretending to be from reputable exchanges like Coinbase, tricking users into revealing their login credentials or wallet passwords. If you ever receive such a request, it’s a red flag.
No Real Utility & Pyramid Structures
If a project requires you to recruit others to earn, it’s likely a Ponzi scheme. Legitimate cryptocurrencies do not rely on referral-based earnings. Research shows that 90% of new crypto projects fail within the first year due to a lack of utility.
OneCoin is a classic example, of scamming investors out of $4 billion by using a fake cryptocurrency and rewarding recruitment instead of real utility.
Red flags include high referral commissions and earnings based on new users joining rather than a working product. If profits depend solely on recruitment, stay away.
Pump-and-Dump Schemes
Pump-and-dump scams involve artificially inflating the price of a coin through false hype, only for insiders to sell off their holdings, leaving investors with worthless assets. In 2021, rug pulls and pump-and-dumps accounted for over $2.8 billion in losses.
To spot these scams, watch out for sudden and unexplained price surges, as scammers often create artificial demand to lure in investors. Large transactions from unknown wallets can indicate that insiders are preparing to cash out.
Additionally, if a coin has low trading volume before a massive price spike, it could be a sign of market manipulation rather than organic growth.
No Clear Exchange Listings
Cryptocurrencies that are considered fraudulent are typically found exclusively in decentralized exchanges (DEX) which may not have the level of oversight and protection as established platforms such, as Binance and Coinbase.
Here are some warning signs like- being listed on unverified trading platforms, having limited liquidity or low trading activity, and encountering challenges in withdrawing funds from the platform itself.
If a token is not easily accessible, on exchanges it could suggest a risk of fraudulent activity.
Fake Partnerships and False Claims
Many fraudulent schemes deceitfully suggest collaborations, with corporations or influencers to establish trustworthiness. Hence it is essential to validate assertions before making any investments.
A case in point is the SaveTheKids token which was endorsed by influencers for credibility before it was abandoned by its developers.
Avoid tricks by verifying information on the websites of the mentioned partners and keeping an eye out for announcements on their confirmed platforms. If a venture fails to offer evidence of a collaboration ,it should raise concerns.
Unverified Smart Contracts
If a coin’s smart contract is not publicly audited, it could contain hidden exploits allowing developers to steal investor funds. In 2023, nearly $1.7 billion was stolen from DeFi projects due to smart contract vulnerabilities.
Always check if the project’s smart contract is publicly available for audit. Legitimate projects undergo reviews by trusted security firms like CertiK. If there’s no audit or transparency, it’s a red flag.
