When it comes to cryptocurrency, scams are all too common and can take many forms. Today, we are looking at a specific type of scam: the crypto exit scam. We’ll discuss exactly what they are, how they work, and some red flags to look out for to help you spot and avoid exit scams. You will also find out what to do if you are the victim of a crypto exit scam.
What is an Exit Scam?
A crypto exit scam, sometimes known as a ‘rug pull’, involves promoters of a new cryptocurrency profiting from early investors and then disappearing with the money they have invested. ICO exit scams involve a fake initial coin offering (ICO) in which investors are persuaded to invest in a new coin that never actually launches or becomes available to trade on exchanges. However, there are also other DeFi projects and NFT launches that can be classed as exit scams.
To implement a crypto exit scam, promoters launch a new crypto platform and market the new coin, project, NFT or other crypto asset, often very convincingly. The scammers raise money from investors, and may even run the business or project for a short time. Then they disappear with the money and abandon the project, leaving investors with no assets in return for their investment.
How do these scams work?
Crypto exit scams essentially work by building hype around a new project to attract investment. This may involve faking or plagiarising a white paper, and developing a feasible concept for the new coin or project. Some scams are less sophisticated than others and simply rely on a great sales pitch and creating a lot of buzz online around the project.
Once enough investors have been persuaded to put money in, the scammers will simply pull the plug on the project and disappear with all the funds raised so far. Crypto exit scams can be combined with a ‘pump and dump’ scam, where the price of a new token is artificially inflated by the scammers investing their own money. Then the scammers sell their coins at the top of the market and disappear.
It is often very difficult to trace the scammers or to recover any money invested, due to the nature of the cryptocurrency industry. The entire industry is decentralised, and unregulated, and also allows for a certain amount of anonymity.
How to Spot Exit Scams
While it is not always easy to spot an exit scam, there are various red flags to look out for. The first is extravagant projections that simply sound too good to be true. The promoters of new coins will always talk them up, of course, but projections should be realistic and backed by the details of how the project will actually work. Crypto scammers, like any other scammers, tend to over-promise, often suggesting that they can guarantee high or consistent returns.
With an industry as volatile as cryptocurrency, it is not realistic to make guarantees, and consistent returns are highly unlikely. For example, BitConnect promised a steady 1% daily return, which implied that an initial investment of $1,000 would return more than $50m within three years. Unsurprisingly this didn’t happen, and BitConnect ended up suddenly shutting down its lending and exchange services, leaving many investors with significant losses.
Another way to spot a potential exit scam is if the project’s team lacks credibility. Check the credentials of the developers and promoters. Do they have a good reputation in the crypto space, or as innovators in other industries? Are they generally well respected? Remember that superficial social proof can be faked. Just because the team have a big social media presence doesn’t mean that they have a genuine reputation. Followers, likes and Retweets can be bought. Check the actual background and reputation of the development team and those promoting the project.
It is not unheard of for people in the crypto space to remain anonymous. To this day, the person, or people, responsible for Bitcoin have somehow managed to maintain anonymity, known only by the pseudonym Satoshi Nakamoto. However, if everyone involved in the launch of a new coin seems to want to remain anonymous, then this is probably a project to avoid.
Be particularly wary of decentralised projects listed on decentralised exchanges, as this gives the scammers an extra layer of protection. Rug pulls have happened even with coins listed on the most popular centralised exchanges, so there is always that possibility, but using a less well-known decentralised exchange is definitely an extra red flag.
Another issue that should make you suspicious is if a coin or project is being launched without a white paper. A white paper is usually an important part of developing a new cryptocurrency and is the foundational document that lays out the main concept and details of the project. You should also be aware, however, that it is not unheard of for ICO scammers to steal or plagiarise white papers from other, genuine projects and simply change the name of the coin or project – so check that the white paper is unique and has not simply been plagiarised.
Before committing to an ICO or other crypto-related investment, make sure that you actually understand the concept, how the project works, and how the coin derives its value (or will derive its value in the future). Most ICOs will be launching a coin with little immediate value. That is part of the attraction for early investors as they can ‘get in on the ground floor’ and potentially make a lot of money as the project grows.
However, if the project lacks a working model, or a minimum viable product (MVP), this is something to be wary of. There should always be complete clarity around what the project is trying to achieve, how it will achieve it, and by when. The plan should clearly outline all the stages of the project, the objectives and milestones already met, and the objectives and milestones that the project will aim to meet in the future.
Be wary of heavy promotional activity around a new crypto asset or ICO. Of course, promoters have to create a desire for the new coin and a buzz online. Just be aware that if a project is all hype and no substance, it is probably a scam. Always do your own independent research into any crypto opportunity you come across online. It is possible that it’s a legitimate project, but if you hear a lot of talk about something online but then dig deeper and start finding some of the above red flags, stay away.
How to report an Exit Scam
You can report cryptocurrency exit scams, but it may not be as easy to achieve results or recover money as with some other scams. As we have already mentioned, the cryptocurrency industry is decentralised and unregulated, so you simply don’t have the same clear route to complain that you would have if you had invested with a fraudulent forex broker. It is, however, worth reporting a crypto exit scam to the relevant financial regulators and, of course, to the police. In the US, you can report crypto scams to the Federal Trade Commission (FTC), and in the UK, they should be reported to Action Fraud UK.
It may be worth reporting scam activity in the country that the scammers appear to originate from, even if you live elsewhere. So, report it to the police in that country, and any other relevant authorities. For example, if the scammer appears to be resident in the US, you can report it to:
- The FTC at ReportFraud.ftc.gov
- The Commodity Futures Trading Commission (CFTC) at CFTC.gov/complaint
- The US Securities and Exchange Commission (SEC) at sec.gov/tcr
- The Internet Crime Complaint Center (IC3) at ic3.gov/Home/FileComplaint
- The cryptocurrency exchange that you used (if one was involved)
The Biggest Exit Scams
Some of the biggest crypto exit scams reported to date include:
- The Titan Scam – The token experienced a price drop from $60 to a fraction of a cent in the space of a few hours.
- OneCoin – This ran from 2014 to 2019 but was ultimately revealed to be a $4.4bn Ponzi scheme.
- PinCoin – This scheme took around $660m from around 32,000 investors, and initially paid out some returns, before the team behind it disappeared.
- The Squid Game token – This token themed itself after the popular TV show and claimed to be partnered with Netflix, but it had no official connection with either and the token crashed as the developers all sold their tokens at once, conning investors out of $11.9m.
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Exit scams can con investors out of millions of dollars, so it is essential that you protect yourself from these scams by being aware of the danger signals. Always do your own independent research into the project and the founders before investing in any crypto opportunity. If you believe that you have been the victim of an exit scam, report it immediately to all the relevant authorities.