How To Identify A Scam In Crypto

Identify crypto scams

It seems that every month, a new coin or project makes its way into the market and with it the ICO or other offering method and the potential to strike gold. At least that is what investors are hoping for. The decentralized nature of cryptocurrencies is one of their most appealing traits: there are no commissions or overarching governmental bodies wagging fingers and creating arbitrary rules.

Crypto enthusiasts see this as a more organic and liberated system of exchange, however, these same characteristics also appeal to scammers and bad actors. Without an organization like the SEC creating guidelines and enforcing laws, who’s to stop someone from taking investor’s money and running? The answer is, usually, no one. A scam ICO can do a lot of damage, after all. That is why it is of the utmost importance that anyone interested in cryptocurrencies does their due diligence and learns everything they can about a project before they invest their hard-earned money.

No Centralized Body Governing Crypto: More Scam Crypto Projects?

Identify crypto scamSince there is no centralized governing body monitoring the cryptosphere even finding data on fraud and scams can be difficult, however, one statistic places the number of scams at 80% of the total ICOs currently out there. In 2019 alone there have been a number of crypto scams taking different forms across the globe. This year in Canada two developers, Kevin Hobbs and Lisa Chang are facing civil asset forfeiture after defrauding $30 million from investors under the guise of crowdfunding their FUEL token. They promised massive growth for this token, only to use these funds to buy cars, houses and other luxury items.

In Taiwan, several men have been accused of defrauding one thousand investors of over $50 million in funds raised for a crypto startup. Again, investors were promised massive growth, in this case, 335% returns, only to lose everything. The responsible parties are facing several years in jail and the Taiwanese government has introduced amendments to the Money Laundering and Control Act & the Terrorism Financing Prevention Act in an attempt to create legislation to fight the growing threat of these new financial crimes.

Despite governments finally taking these crimes seriously, they are fighting an uphill battle. The very nature of these technologies makes it difficult to police them and therefore, the onus is on the investor to find legitimate projects that they are confident to invest in. But where to begin? Here are a few helpful tips to point someone new to the industry in the right direction when investigating a crypto project. First let’s look at the method that many projects have used to raise money: the ICO, or Initial Coin Offering.

What Is An ICO?

In the traditional business world, there are several ways that a business can develop. One is by starting small and growing in accordance to profits and remaining beholden to a small group of owners and investors. Another way that a business can gain funds is by gaining the attention of outside investors in the hopes of creating a large influx of capital in order to cover startup costs and get the wheels turning. The trade-off of this method is that investors are usually given a portion of ownership in the company as compensation for their capital.

The ICO, or Initial Coin Offering, is the crypto industry’s version of this model. Interested parties are invited to buy shares of a new project in the form of coins specific to the project. Investors can buy tokens either in fiat or using an existing coin like Ether or BTC, and in exchange, they receive the tokens for the new project in the hopes that it will do well and the value of their new coins will increase accordingly.

Are ICOs Still Popular?

The ICO model has been widely adopted in the crypto sphere, and for good reason. This method allows for the rapid accumulation of capital while freeing developers to create a functional ecosystem for their new project. ICOs have been favored by crypto developers because it bypasses many of the regulations required of traditional banks or venture-capitalists regarding fundraising. The fact that ICOs are less regulated than other fundraising methods cuts both ways: an exciting new project can grow from an idea to a full-fledged cryptocurrency in a surprisingly short time. On the other hand, the lack of controls has made ICOs a scammer’s dream, and many an uninformed investor has lost their money on smoke and mirror projects.

Now that we know what an ICO is and why they are so popular amongst legitimate developers and scammers alike, let’s take a look at some of the ways an investor can inform themselves to become more confident in a project, whether releasing through an ICO or otherwise.

How To Check If A Project Is Practical

Does the project fulfill a need in the world? While this may sound obvious, it should be at the heart of every examination of a crypto project. Does the project answer a question that the market is asking, or does it seem too novel to be of any use? A successful project must have a compelling goal at the outset but it also must have the substance to carry it on into the future. Many projects have burst onto the scene with grand ideas and a persuasive vision only to fizzle out once the initial interest has faded and the use cases for their token prove to be too specific to function on a large scale.

Get To Know The Team

crypto scamsThe next step when looking into a new crypto project for investment is to learn about the team behind the project. If you can only spend your time looking at one aspect of a project—although hopefully, this is never the case—this is what you should take your time to investigate. There are several major players within the crypto sphere, superstars if you will, and if you see their names on a project it is a good sign. For example, if Vitalik Buterin, the founder of Ethereum, has attached his name to a new project it is a safe bet to say that it is not a scam. This is not the end all be all, however seeing familiar faces can prove to be a positive sign.

There are other things to look for in a team as well. Often times scammers will create fake names and biographies with outlandish credentials for their team leaders in order to appear legitimate. This is why the best step is to research the individual members of the team: social media platforms, especially LinkedIn and Facebook are great tools for this. A lack of profiles on these sites is a major red flag. If profiles exist, it is also worth examining them more closely: do the likes, comments and followers align with the industry and lifestyle they portray? These days falsifying profiles through comment farms and other means is a real tactic, however, with a bit of investigation, most incongruencies should become apparent.

If all the information points to a real person behind the profile it is time to look into their background. Do they have experience in the fields their project is concerned with? What kind of credentials do they have? Do they have all the experience they claim to have? All of these are important questions and you should never move forward with an investment unless you feel fully confident in the answers you get.

Examining A Cryptocurrency White Paper

The white paper is a document that is used to promote and spark interest in a project. However, it differs from other means of promotion in that a white paper eschews flashy gimmicks for facts and details specific to the success of a project. A white paper for an ICO should lay out the background, goals, strategy and a timeline for all of these factors related to the project.

Ideally, a white paper should also have complementary materials like financial models, SWOT analysis, and detailed information on any associated legal concerns as well as a time table for all developments and implementation of the token. Surface level resources, like flashy websites can be faked, but white papers are much harder to falsify: the concrete details about a project that should be contained within a whitepaper make it more difficult to fake and are much more useful for ascertaining the legitimacy of a project than just about any other resource.

This is not to say that some thorough scammers have not created convincing white papers for their Ponzi schemes. This was the case of Plexcoin, a fraudulent company that was able to raise $15 million from investors before the U.S. Securities and Exchange Commission were able to step in and shut it down.  

Needless to say any project without a white paper should be avoided at all costs.

Researching A Token Sale

Another step in your investigation should involve examining the token sale of a project; this is how developers raise funds for the project. A legitimate project will have a process that is transparent and easy for any investor to access and investigate. Another useful tip is to look at the progress of the token sale over time. Again this data should be easy to access and a legitimate project will show growth over time, although the rate of growth will vary depending on the popularity of the project.

Scam ICOs have also tried hiding the progress of their token sale using individual contribution addresses which prevent investors from seeing how much capital has been raised as well as how much time is left for the funding process. This can be used to create a sense of urgency in order to rush investors into depositing funds without showing the data itself. Any of these things are red flags and should immediately cause concern for any potential investors.

Why Researching A Crypto Project Is Important

The world of crypto investments can be daunting to newcomers, and with good reason. This technology is still relatively new and while many argue that the Wild West gold rush days of crypto are a thing of the past there will always be bad actors looking to capitalize on the weakness of others. Traditional financial investment provide the security of oversight and regulations, but they also lack the potential for ground floor investment that is available in the cryptosphere, and because of this people will continue to place their bets on new and exciting projects. However, it cannot be stressed enough that thorough research into a crypto project, self-education and healthy caution are the greatest tools that any crypto investor can have as, in the end, the only person responsible for your money is you.



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Frankenfield, J. (2018, December 20). Initial Coin Offering (ICO). Retrieved from:

Hayes, A. (2019, June 12). White Paper. Retrieved from:

Huillet, M. (2018, September 26). US SEC Seeks Sanctions Against Individuals Behind Alleged Crypto Scam PlexCoin. Retrieved from:

Malwa, S. (2018, March 7). Investing In Crypto To Make Money? A Strong Team Is What You Must Invest In. Retrieved from:

Seth, S. (2018, April 2). 80% Of ICOs Are Scams: Report. Retrieved from:

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