What is a Crypto Exit Scam?
For the crypto space to thrive, there is a need for new trust worthy projects to emerge continuously. While many of such projects have emerged and more are still coming, there are bad projects among them with the main purpose of scamming investors. One of the ways such projects achieve this is through an exit scam.
We will discuss what an exit scam is and how to spot and avoid one that you could potentially end up being a victim of.
What an exit scam is
If you read the history of any of the top cryptocurrencies today (except for Bitcoin), you will find out that most of them came by way of an Initial Coin Offering (ICO) or an Initial Exchange Offering (IEO). Just so you know, an ICO is a process through which new projects sell a token or coin to investors in exchange for fiat or other established cryptocurrencies.
It is a good thing that most of them have thrived and are now major projects like Ethereum. However, there are examples of some that ended up badly with investors losing their funds to the scammers behind such projects. A few are Confido, LoopX and Yfdex.Finance in which investors lost millions of dollars in investments.
How exit scams work?
Assuming a new token, X is launching, investors buy the token with ETH for instance, in the hope that the token will appreciate in value over time. The promoters of the project then take the payment and promise to issue the tokens to the investors on an agreed date.
This places the power to control their investments in the hands of the project promoters, which is fine if they are genuine. The problem arises when the promoters then take the funds of investors and disappear without keeping their own end of the bargain. Any amount the investors gave is therefore gone and irrecoverable. Even if the tokens are delivered, when the project team just disappear, the token will have no value, since they are most of the time not listed on an exchange.
This is one of the reasons that cryptocurrencies had a bad name, but the image is starting to improve as more mainstream investors continue to enter the space. Thankfully, exit scams can be avoided with the right understanding.
How to avoid falling into an exit scam?
The only way to avoid an exit scam is by doing your own research. This is a common slogan for investors in the space. It is basically looking for information on the project to validate its credibility, which anyone can do. The following are some steps to avoid falling into an exit scam.
Check the team behind the project
Every project has a core team responsible for its development and its management. Before you invest in any new project, it is best to check the team behind it. Check them on professional networks like LinkedIn. If the team does not have a team that is made up of reputable members, you should avoid such.
How do you know if the people are legit? They should have been on social media long before the token sale. If they have just signed up a few weeks ago around the time the token sale is coming up, that is a red flag and the project may not be a safe one to invest in.
Promise of unrealistic returns
Cryptocurrencies can bring unprecedented returns, no doubt about that. This is evident with the crypto market which has returned many times the investments this year alone. However, some projects promise unrealistic returns just to get gullible victims to send their hard earned money to them.
Check to make sure the promised returns are within reason and not too good to be true. For instance, an investment that promises any amount of ROI within a year is clearly a scam and you should run from it.
Check the whitepaper
Every genuine project has a whitepaper that is clear with information on the project clearly spelt out. For example, the Bitcoin whitepaper is a document that documents what Bitcoin is, the idea behind it, how it is designed to work and how it will evolve over decades. If the whitepaper does not have clear cut information about the project, it could be a death trap and you will do well to avoid it as an investor.
Exit scams are real, and investors fall into them every now and then. This is why do your own research is such a common phrase in the cryptocurrency space. You should take out time to do research on any project you wish to invest in as this could make or mar your investment. Following the few guidelines mentioned above can greatly help to ensure that you make the best investment decisions on any potential investment.
Investing in new projects is always a risk, even when everything checks out.