What Is a Cryptocurrency Exit Scam?

A cryptocurrency exit scam is a fraudulent practice where a cryptocurrency is promoted via an initial coin offering, and the promoters disappear with the money raised. Another name for this scam is "rug pull" because the scammers essentially pull the rug out from under investors.

Crypto Exit Scam Red Flags 

Though it is difficult to clearly identify a dubi𒐪ous 🍷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 ꦑinvesting 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 likes, tweets, and followers can be purchased on various so🧸cial media platforms to build fake online credibility. Therefore, you should do a basic check on ICO promoters and the backers of cryptocurrency projects and the kind of connections/followers they have.

Developers should have credentials that are easily identifiable. For example, LinkedIn pages should have verifiable work and project history, possible connections to others in the same industry, and list their qualifications. It's possible that someone new to the industry could work on these projects with experienced people, but this should be clearly pointed out in the documentation or on the project's website.

2. Extravagant Return Projections

Is it too good to be true? Then it probably is. For instance, BitConnect promised a steady 1% daily return, which would have transformed an initial investment of $1,000 into a ret🌠urn of more than $50 million within 3 ♐years.

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 company's market cap, which exceeded $3.4 billion at its height, suddenly tanked.

3. Documentation Standards

The project's white paper is a key document. It should be a research paper, written as a proposal to ad𒐪dress a problem with clear methods for designing a blockchain and cryptocurrency. Many investors may not understand the language used in these research papers because it will be data science jargon, math, cryptographic techniques, and networking and computer science terms.

However, if the white paper reads like a pitchbook or doesn't appear to be addressing a problem, an eyebrow should be raised. Many crypto whitepapers mimic the white papers of popular and successful cryptocurrencies, so it helps to become familiar with them.

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 exitꦕ scam.𒈔 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 various online forums.

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

6. Project Pages or Websites

Valid blockchain and cryptocurrency projects normally create൩ websites that clearly explain how the blockchains and techniques used work. They are very obvious in their intent to communicate and be transparent about what they are doing.

Many also use a GitHub page for collaborativ꧋e development, and you should be able to view these pages unless it is a private, proprietary blockchain and crypto. If this is the case, the business should be very transparent about its activities.

7. Registration

A cryptocurrency that is being offered to investors likely meets the conditions to be considered a security offering. If it is being used to raise funds, it will need to be registered with the state it operates in and with the Securities and Exchange 🐬Commission.

These requests should be available on the issuer's website and in the SEC's . If they are not registered, it's best to avoid them.

Cryptocurrency Exit Scam Examples

In November 2017, an escrow-related 澳洲幸运5官方开奖结果体彩网:cryptocurrency startup, Confido, disappeared overnight after collecting $375,000 through its 澳洲幸运5官方开奖结果体彩网:initial coin offering (ICO).🌱 Following the news of the Confido exit scam, the cryptocurrency's𝕴 market cap 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.

And in 2020, the decentralized finance project Yfdex.Finance (Yfdex) made off with $20 million of investors' money after only two days of promoting itself online.

The Bottom Line

Scams and frauds are common even in the well-established centuries-old 澳洲幸运5官方开奖结果体彩网:stock markets, which are well-regulated. The a🎶nonymous world of cryptocurrencies adds more risk due to its non-regulated nature.

In the end, it is the investor who shoulders the responsibility to not get scammed out of their hard-earned money. Questionable teams, extravagant profit projections, explaining a business model or how🍌 a project will use funds, and a lack of tra♐nsparency and registration are all indications that a cryptocurrency or blockchain project is likely a scam.