A few years ago, the term “exit scam” became synonymous with the cryptocurrency industry.
This was during a period when the market (in general) was rife with cash grab ventures that looked great on paper but had little to no substantive value to back them up.
An exit scam is a fraudulent scheme in which the organisers of an initial coin offering (ICO) or a similar fundraising avenue disappear with their investors’ funds after acquiring a substantial sum of money.
What Is an Exit Scam?
Exit scams are unethical cryptocurrency promoters who disappear with investors’ money during or after an ICO.
The procedure is straightforward: promoters launch a new cryptocurrency platform based on a promising concept; the ICO then raises money from various investors; the business may or may not run for some time.
Then the promoters who collected the ICO money vanish, leaving the investors in the dust.
Tips to Identify An Exit Scam
Though it is difficult to distinguish a fraudulent ICO, investors should consider the following points before making an investment decision.
1. The Credibility of the Team
The most difficult aspect of the virtual world is accountability and ownership. An investor must verify the credentials of the crypto team before investing their hard-earned money in ICOs that appear to be very promising.
Remember that you can buy likes, tweets, and followers on various social media platforms to create fake online credibility.
As a result, you should conduct a basic background check on ICO promoters and cryptocurrency project backers, as well as the types of connections/followers they have.
2. Immense Return Projections
Is the offer too good to be true? Then it’s most likely true. For example, BitConnect promised a consistent 1% daily return, which would have turned a $1,000 investment into a return of more than $50 million in three years.
Ethereum creator Vitalik Buterin correctly labelled it a Ponzi scheme.
After experiencing a meteoric rise and a burgeoning client base since its ICO in December 2016, BitConnect abruptly shut down its lending and exchange services in January 2018.
BitConnect’s market cap, which had surpassed $2.9 billion at its peak in 2017, had plummeted to $17 million by March 2018.
3. Documentation Requirements
The white paper is a critical document that describes how a cryptocurrency project is designed and developed, how it has evolved, and how it will generate revenue.
White papers that are unclear, or ambiguous are a big red flag to investors about a potential exit scam.
4. Lack of an Existing Working Model
Is there a basic working model for the cryptocurrency project? If it is a concept-only, non-existent product, it is unlikely to succeed.
While some new-age technology may require complete redesign, promoters seeking millions of dollars should demonstrate that their project is worth investing in.
To be safe, investors must steer clear of dubious offerings from unknown individuals.
5. Promotional Offerings
Exit scams may also include large promotions. In populous countries like India, full-page advertisements for new ICOs by lesser-known founders are common.
According to reports, Confido also paid bloggers to spread the word on various online forums.
While not all ICO offerings with big promotions are suspect, an investor should proceed with caution and conduct background checks on the claims made.
What is the Biggest Crypto Exit Scam?
The biggest exit scam to date was reportedly committed on the darknet market Evolution in 2016, where the administrators allegedly stole $12 million in bitcoin that was being held in escrow on the marketplace.
Exit Scams and fraud are common even in the well-established, centuries-old, and well-regulated stock markets. Because cryptocurrencies are unregulated, they pose an additional risk.
Finally, it is the investor’s responsibility to avoid being duped out of their hard-earned money.
Before making any investment, non-existent teams, extravagant profit projections, and unclear business models should be thoroughly investigated.
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