If you’ve been in the cryptocurrency space for any length of time, you’ve seen the scams – likely, you’ve even been scammed. This brave new world of unregulated finance has opened up a whole world of opportunity, but with opportunity comes charlatans and scammers in abundance.
I think it’s time to have an honest conversation about the problem, because clearly people aren’t learning. In 2019 alone, it’s estimated that crypto scams cost investors $4.26 billion.
Is Crypto a Scam?
The quick answer, no.
Cryptocurrency is just one more tool that scammers can use to deceive you. Some of the biggest scams to date have involved: cars, cash, and apartments in the Bahamas. But in and of themselves these things are not a scam. Scams require people.
The definition of ‘scam’ is: to deceive and defraud (someone)
Scams require two types of people. It requires a person who is willing to place the importance of feeding their own greed over all other things(the scammer) and a person who is going to fool for the lies these scammers tell. You need both for scams to exist.
Now, since we are going to struggle to end the scammer mentality, the only way to prevent people getting scammed is to educate people on how to spot these scams a mile off – because seriously, you can.
Spotting a crypto-scam
The first rule here is to assume all new cryptocurrency projects are going to scam you until evidence suggests otherwise. There are few cases where a new cryptocurrency project can be assumed NOT A SCAM from the outset.
Bitcoin is the best example of when a cryptocurrency is clearly not a scam. This is because there is no company, no CEO or spokesperson for bitcoin. It is an autonomous decentralized blockchain that cares not for what people say or do, it chugs along regardless. People can create scams around bitcoin; trying to dupe you out of revealing your private keys or selling you something that isn’t even bitcoin – but bitcoin itself is just a currency like any other.
Types of Scams To Look Out For in Crypto.
A rug pull scam is when a project developer abandons their project and pulls the first investors’ tokens off the market.
Typically a rug pull scam will operate something like this:
Investors fund a project that they believe will provide them with great returns on their investment. They’re then sold on buying into this new coin at an inflated price—so much so that many don’t even realize what they’re doing until after it’s too late. The developers of this ICO might be lying about who they are or what their product actually does; or they may be out-and-out defrauding people through false promises or misleading information (such as claiming other big names will join in if only you invest now). Whatever the case may be, once investors have given up their money, there’s no turning back from investing in an ICO that doesn’t exist.
Rug Pulls happen every day in the world of crypto, some involve the loss of a few thousand dollars, and others involve billions of dollars. Remember FTX? That was technically a rug pull, just a very elaborate and profitable one.
These days, most Rug-Pulls involve the use of ERC-20 tokens. Anyone can create their own token in minutes with just a few cents. Slap a quick wordpress website together with pretty graphics and a AI written whitepaper and da-daaa! You have yourself a new crypto startup.
It’s not hard to see how crypto has become the new hotspot for scammers, con-artists and charlatans. It has the perfect set of scamming tools all within a large unregulated space of inexperienced and money thirsty investors.
This is where the founders of a cryptocurrency reserve a large portion of the initial coins to themselves.
Premines can be innocent enough, it all depends on the quantity issued and the conditions applied to their future transactions.
For example if the founders reserve 5% of the total supply to be issued via a contract to developers over a period of time then it would necessarily be a scam. However, if the founders gave themselves 5% of the total supply at inception, with no spied restrictions on when or how they can be spent – this is pretty scammy.
Fake Exchange Scams
Some scammers may try to lure cryptocurrency investors with the promise of a great exchange—maybe even some additional bitcoin. Victims deposit their funds into the fake exchange with no hope of ever getting the funds back out.
The more elaborate versions of this scam will give the victim trading functionality on the fake exchange. Giving the users trading functionality and ensuring they do well in their trades, the exchange incentivizes victims to deposit even more funds into the exchange.
Only when the victim tries to withdraw their funds is the scam exposed.
Cryptocurrency exchanges such as Coinbase, Crypto.com, binance, Kucoin, MEXC are all reputable markets to purchase and sell cryptocurrency. But if someone contacts you about a new exchange that you’ve never heard of, do some research. If all seems legit, deposit just a small amount of funds and check the functionality of the site, including withdrawals.
Never assume everything is OK, always proceed with the utmost caution!
Social media cryptocurrency giveaway scams
People are often tricked into giving away their bitcoin by fraudulent giveaways on social media. Some of these scams also include fake celebrity accounts promoting the giveaway to lure people in. When someone clicks on the giveaway, they are taken to a fraudulent site asking for verification to receive the bitcoin. The victim can lose their payment — or worse yet, click on a malicious link and have their personal information and cryptocurrency stolen.
These scams spread like wildfire on social media platforms like Twitter.
A good rule to follow is this: if something seems too good to be true, it probably is. Think about it logically, and these scams are pretty obvious. Why would anyone need you to send them money so that they can then send you back more? It just doesn’t make sense.
Ponzi Schemes and MLM
Ponzi schemes pay older investors with the proceeds from new ones. To get fresh investors, cryptocurrency scammers will lure new investors with bitcoin. It’s a scheme that runs in circles, since there are no legitimate investments; it is all about targeting new investors for money.
While there is money to be made in these scams for those who get in and out before the inevitable collapse, any profits made are at the expense of those you refer to invest.
Bitconnect is probably the most famously known crypto ponzi to date. Luring in investors with the promise of instance returns on their investments. Those at the top of the pyramid got wealthier and wealthier until eventually they pulled the plug and left those at the bottom with a worthless token.
Scammers have been sending phishing emails for years, but the scammer’s goal remains the same: to gather your personal information and most importantly (for them), your private keys.
A common example of this is receiving an email from what appears to be Ledger or Metamask informing you of a security alert. The email looks legit, the logo’s are all in the right place and the email seems to be from the company in question.
The email will normally finish with a request to secure your account by clicking a link. The link takes you to a page which asks you to enter your private keys.
Again, think about this logically and the scam is obvious. Firstly, these companies provide private wallets where you hold your own keys. To use Metamask or Ledger no email address is ever required and so, how would they know where to send the email too?
But also, they will never need your private key. The only security risk with crypto private keys is you and where you expose it too. Never give your private keys to anyone, no matter who they are.
Top 5 Crypto Scams
Bitconnect’s multi-level marketing-led Ponzi scheme is estimated to have stolen $4B from investors who were lured in with claims of having an unbeatable trading algorithm, which of course, never existed.
The scam eventually collapsed, as you’d expect. Here is a little summary from the US Department of Justice regarding their investigation into Bitconnect:
According to court documents, Satish Kumbhani, 36, of Hemal, India, the founder of BitConnect, misled investors about BitConnect’s “Lending Program.” Under this program, Kumbhani and his co-conspirators touted BitConnect’s purported proprietary technology, known as the “BitConnect Trading Bot” and “Volatility Software,” as being able to generate substantial profits and guaranteed returns by using investors’ money to trade on the volatility of cryptocurrency exchange markets. As alleged in the indictment, however, BitConnect operated as a Ponzi scheme by paying earlier BitConnect investors with money from later investors. In total, Kumbhani and his co-conspirators obtained approximately $2.4 billion from investors.
The indictment further alleges that, after operating for approximately one year, Kumbhani abruptly shut down the Lending Program. Kumbhani then directed his network of promoters to fraudulently manipulate and prop up the price of BitConnect’s digital currency, a commodity known as BitConnect Coin (BCC), to create the false appearance of legitimate market demand for BCC. Kumbhani and his co-conspirators also concealed the location and control of the fraud proceeds obtained from investors by commingling, cycling, and exchanging the funds through BitConnect’s cluster of cryptocurrency wallets and various internationally based cryptocurrency exchanges. Source
Kumbhani was eventually charged with conspiracy to commit wire fraud, wire fraud, conspiracy to commit commodity price manipulation, operation of an unlicensed money transmitting business, and conspiracy to commit international money laundering.
If convicted on all these counts, Kumbhani is facing a maximum of 70 years behind bars. So what do you think Kumbhani did? He vanishes. This guy has over a billion dollars and lived in India – Vanishing required no magic, just a little cash. It is likely Kumbhani will elude justice forever, living outside US jurisdiction for the rest of his days.
In 2021, a cryptocurrency called SafeMoon went viral on social media. You might have seen it endorsed by several celebrities and influencers like rapper Lil Yachty, YouTube star KEEMSTAR, and boxer Jake Paul. Its flashy promotion, the promise of “safe” riches for investors using complex mechanics, and its sub-cent value all became emblematic of the then-emerging world of decentralised finance—a broad term for financial systems that don’t rely on any central authority, also known as Defi.
So, this is how it worked and what sold its promise of ‘going to the moooooon!’:
Each time someone sells the SafeMoon token, 5 percent of the proceeds go back to current holders and another 5 percent is destroyed. This system was designed to reduce the supply of tokens and drive up their price, encouraging investors to hold SafeMoon instead of speculating or day trading it.
“While memecoins might have a different purpose, SafeMoon isn’t a memecoin. We have a real mission behind us for a tech company. And again, our plan is to bring the future to now,” SafeMoon’s Karony told Motherboard in November.
But Safemoons’ real secret weapon for success was the Influencers that promoted it. Influencers with millions of followers promoted safemoon, effectively driving up the demand and hysteria to levels rarely seen before, even in crypto!
These influencers were the true driving force behind Safemoons success. The moral of the story is, don’t trust influencers – for the most part they are glorified charlatans who care only for their own wealth, even if it’s at the expense of their loyal followers.
The Safemoon scam is a fascinating one to follow, if you have a little time, I’d highly recommend CoffeeZillas expose’ on the scam.
FTX & Alameda
This may not have begun as a scam, and I don’t believe the intention of its founders was to be a scam – but, the result was the same, investors got scammed.
You can read about this in greater detail in the next part of the newsletter, which is a feature on the SBF, Alameda and FTX.
But in a nutshell, FTX & Alameda took billions of investors’ money in through deposits to their FTX exchange and Alameda bank account. Eventually, the exchange closed its doors for business and left investors several billion dollars out of pocket.
Onecoin is a cryptocurrency that was created in 2014 by Ruja Ignatova. It was initially called “One Life”, and it’s supposed to provide a way for people to make money by recruiting other people into the program. Sounds suspiciously like a ponzi-scheme doesn’t it?
Ruja Ignatova had no previous experience in the cryptocurrency industry, although there are reports that she has been involved with other scams in the past.
OneCoin did not have any actual blockchain technology or miners; instead, it relied on “blockchain points” and “mining pools.” Which in reality means nothing more than an elaborate way for OneCoin to sell coins to people who believed they were investing in cryptocurrency when they weren’t really buying anything at all.
In 2016, the Bulgarian government investigated OneCoin for being a pyramid scheme based on fraudulent claims about its value as an investment opportunity.
It is believed that at least $2 billion was duped out of investors by OneCoin, though some estimates are double this.
Bitclub was founded by Russ Albert Medlin, Matthew Goettsche and Joby Weeks in 2014, and it promised to make its members rich by mining Bitcoin on their behalf (what could possibly go wrong…..)
The company claimed that it had access to an undisclosed high-tech mining facility with the latest ASIC chips, which would allow them to mine Bitcoin at a rate of 30 TH/s (terahashes per second). They also said that they would be able to keep the location of this facility secret so as to avoid having it confiscated by the government or stolen by hackers.
Bitclub’s business model was based on a membership fee of $600 per month, which included “mining hardware,” but not actual hardware. Instead, members were provided with an opportunity to buy shares in Bitclub itself for $100 each.
Members were encouraged to recruit new members and sell these shares in order to make money off of their own investments—a classic pyramid scheme. Some investors have reported making $10,000+ within a few months through these schemes.
Shock, Horror! There were no secret high-hash rate ASICs hiding away in Iceland being geothermally powered by volcanos and cooled by the Icecaps. They just didn’t exist. What did exist was a very profitable scam that left investors out of pocket by almost $1 billion.
Dollar Vigilante Jeff Berwick got duped by Joby Weeks with this little scam. Berwick on two occasions promoted Bitclub with his own affiliate link and extensive interview with Joby about the project.
Of course, on news of Bitclub being shut down as a scam and Joby Weeks getting banged up for fraud. Berwick now denies ever promoting the project and any videos associated with Joby and Bitclub have now been removed from all of TDVs channels.
Joby Weeks, who many in the anarchy movement will know, claims to have not known Bitclub was a scam….. But seriously, as a founder, how the freaking fiddle-sticks can you not know dude! Bitclub literally screamed ‘Ponzi scheme’ on every single one of its promotional pages. Nevermind the fact that Jobys co-founders were scrupulous characters.
Russ Albert Medlin who evaded the initial arrests following Bitclubs exposure, has now been arrested for multiple counts of sexual misconduct with minors.
Police arrested Medlin in South Jakarta in June 2020 after neighbours tipped them off about young girls who often visited his home.
When police arrested Medlin on the day of the sting, they questioned three women who had just left his house. The women admitted to being part of a prostitution ring with underage girls and one of their clients was — you guessed it — Medlin.
I know what you’re thinking – you can’t trust the words of sex traffickers or the government…. And you’d be right. However, these accusations against Medlin don’t exactly contradict his past behaviours.
Interpol also flagged Medlin as a child molester who had been convicted for the crime twice, in 2006 and 2008, the latter of which saw him serve two years in prison for the statutory rape of a 14-year-old girl and possession of child pornography.
Bitclub was a scam. Those involved who were not aware of this are either lying or so incompetent that it is difficult to sympathise for any wrongful charges against them.
Be careful out there. Crypto opens the doors for a world of new possibilities and has undeniably changed the world of finance. But with great change, comes great risk.
Do your own research, don’t listen to YouTubers, don’t part with more than you can afford to lose, and, if you are unsure about an investment opportunity in the crypto-space, or an email you’ve recieved – reach out to others before proceeding.