How to spot a crypto scam

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Many people, some of whom are experienced crypto investors, get tricked by scammers every day. If you fall for their sophisticated traps, you could watch a fraudster soar into the sunset with your hard-earned money. Fortunately, these three warning signs will help you spot a scammer within a mile.

1. Dude, where’s my blockchain?

Cryptocurrencies operate on blockchain networks. You don’t need to know exactly how a blockchain works, but you should know that without it crypto tokens cannot exist.

Scammers like to cover up their frauds by pretending their blockchain is “in development” or “about to be released”. The OneCoin scam is a prime example of this. OneCoin executives claimed they kept their blockchain on their own computers, according to a BBC investigation.

Image source: Getty Images.

But bona fide crypto projects all operate on a publicly accessible blockchain. Some have theirs, like Bitcoin (CRYPTO: BTC). Others run on established blockchain networks, like the ERC-20 coins, which use the Ethereum protocol (CRYPTO: ETH).

Any legitimate blockchain will have an accompanying website that allows you to explore or scan transactions to verify its existence. Type the name of the token and “blockchain explorer” or “blockchain analysis” into a search engine to find it. If the token has its own blockchain network (or runs on Ethereum), you should be able to poke around and see if things look healthy there, with a lot of recent activity.

2. Beware of tips from “friends”

Multi-level marketing, or MLM, scammers typically use the language of crypto to persuade people to bring their crypto-curious friends into their pyramids, promising them bonuses for recruiting more “members.” But crypto projects don’t have “members” – they have investors. And in most cases, bringing friends and family on board won’t help an investment all at once.

MLM experts know that being at the top of the pyramid is a fast track to wealth. But getting involved in the lower echelons could be a fast track to financial ruin. Last year, a U.S. court convicted a Californian who duped investors around the world for $ 147 million. He ran a pyramid scheme that promised members access to tokens that he said were backed by actual gems, Bloomberg reported.

Don’t get your crypto tips from a long lost cousin or former coworker who just befriended you on Facebook. Go to price tracking websites like CoinMarketCap, CoinGecko, or CoinPaprika and look for large cap coins (or promising small or mid cap cryptocurrencies, if you prefer). These sites contain real-time and historical data on coin prices and transaction volumes. If the Cousin Jimmy Talks token isn’t listed on any of these tracking platforms, tell it to take a hike.

3. If someone starts talking to you about “guaranteed” returns, exit the chat.

There is no sure thing in crypto. Scammers who claim to have developed high-tech solutions that can guarantee gains for investors usually end up behind bars.

For example, four office workers are currently on trial in Japan for allegedly operating an “AI-backed” scam. According to Japanese newspaper Asahi Shimbun, police believe they devised a scheme that promised investors two-and-a-half-fold returns in just four months, claiming their AI bots could spot winning trades in real time. But angry investors claim that the robots did nothing of the sort – and that the funds that investors put into the project have gone around the world.

There is no supercomputer, AI tool, or magic wand that can guarantee anything in the extremely unpredictable crypto world. Tokens can collapse on the back of an Elon Musk Tweet or soar because a whale has moved a supply of coins from one wallet to another somewhere. If someone says they can remove the element of risk from crypto for you, they’re trying to sell you snake oil.

golden rules

To find legitimate crypto investments with a real chance of success, study development teams, their backgrounds, and activity levels to make sure that a promising project is actually going in a healthy direction. Confirm that the token is backed by a real, working blockchain that you and everyone else can follow in real time. Make sure its developers are constantly adding new forms of functionality, eliminating bugs, and trying to improve network performance.

Learn as much as you can about crypto and stay skeptical, and you’ll have a much better chance of stopping crooks in their tracks.

This article represents the opinion of the writer, who may disagree with the official recommendation position of a premium Motley Fool consulting service. Were motley! Questioning an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.

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