Cryptocurrency Exit Scam

Cryptocurrency exit scams refer to fraudulent schemes in which project operators disappear after receiving funds from investors. These scams are primarily observed in the cryptocurrency world's initial coin offerings (ICOs). The founders of a crypto project deceive investors with the promise of high returns, but their true motive is to steal the funds.

Cryptocurrency exit scams have been prevalent since the inception of ICOs. Scammers create seemingly lucrative opportunities, enticing investors to invest. However, these promises are fake, and investors are left with no crypto tokens.

Cryptocurrency exit scams are a common type of crypto scam where project operators deceive investors by promising lucrative investment opportunities. These scams act as traps to collect money from investors and then suddenly disappear. Project owners typically promise to introduce revolutionary tokens into the crypto world, using extensive marketing and promotional tactics. Investors, enticed by the promise of high returns, invest significant funds. Once the project owners secure the funds, they exit the project, leaving investors with no tokens.

The mechanism often begins with a grand introduction by the project developers, who create high hopes for groundbreaking, technologically advanced tokens. They engage in aggressive marketing to build credibility and attract investors. As interest surges, they offer more promising incentives to lure more funds. Once they secure enough funds, the developers execute their exit strategy, which may include deleting social media accounts, shutting down websites, and closing support channels. This leaves investors with no recourse.

The cryptocurrency market has recorded various exit scams throughout its history. Notable examples include:

• Confido: This blockchain startup promised traditional escrow services to investors but disappeared with $375,000 collected through its ICO in 2017.
• ACChain, BioLifeChain, and Puyin: These projects also conducted exit scams during the ICO boom of 2017.
• Squid Coin: Leveraging the popularity of the Netflix show Squid Game, this project promised to create an online game based on the show but ran away with $6.38 million in 2021.

There are certain red flags or warning signs to note before investing in any crypto project. Although it may sound lucrative, it could potentially lead to losses. Here are some ways to detect it:

1. Guaranteed or high returns - One of the foremost red flags is the promise of guaranteed or high returns. If a developer promises unusually high returns, the likelihood of an exit scam is significant. Scrutiny is necessary to avoid losses.
2. Unrealistic claims - In addition to high returns, other unrealistic promises may be made. These can include claims of a revolutionary technology or growth potential that still needs to be achieved.
3. Lack of transparency - Legitimate crypto projects usually provide clear, concise, and accessible information about their technology and operations. Projects that lack transparency or provide incomplete information are warning signs of potential scams.
4. Whitepaper or website Issues - While marketing efforts may be robust, issues in the whitepaper or website, such as poor writing or mistakes in the technical architecture, can signal it.
5. Aggressive marketing - Aggressive marketing tactics to pump the value and create hype for the coin can be another red flag. Heavy promotion only sometimes reflects the project's actual value.
6. Pressure to invest quickly - Some blockchain projects may pressure investors to invest quickly by presenting the opportunity as limited or suggesting that prices will rise soon. This can lead to hasty investment decisions.
7. Unusual token distribution - Suppose a small group of founders or team members holds a significant stake in the tokens; the risk of this scam increases. They have the power to manipulate prices and could exit with a large share of funds.

Let us look at some examples to comprehend the concept in a better way:

Example #1

Suppose John has recently started investing in cryptocurrencies and NFTs (non-fungible tokens). A week ago, he came across an ad promoting a new blockchain project. This startup claimed to provide free airplane tickets to subscribers. Seeing this opportunity, John quickly invested $10,000 in the project. However, this investment turned into a disaster for investors.

As soon as the project developers received $1.35 million from investors, they shut down the company's website. When people tried to reach them, they found that the support channels were also disabled. This led to chaos among the investors, including John, who lost their money.

Example #2

According to the latest crypto news as of May 2024, Austrian, Cypriot, and Czech authorities successfully exposed a cryptocurrency scam that started in December 2017. This operation led to the recovery of $817,000 (EUR 750,000) and the arrest of six scammers. Authorities also seized assets, including luxury cars and a property valued at EUR 1,400,000. Europol and Eurojust supported this international collaboration to penalize crypto scammers.

Some corrective measures are possible to avoid this scam. Here are some tips:

1. Extensive research - Investors should conduct extensive research before investing in any project. This includes relying on external sources and company-related news. Examining whitepapers and audits can also provide insights into the project's legitimacy.
2. Secure wallets - Using reputable or cold wallets for storage can help avoid scams by preventing unauthorized access to your coin balance.
3. Community feedback - Investors can benefit from community feedback by learning about similar scams happening in the crypto world. Engaging with online forums and social media groups can provide valuable information.
4. Verify information individually - Individuals should verify information independently to avoid falling for scams. This includes checking the legitimacy of project claims and ensuring the accuracy of the information provided.