Our round-up of scams that have duped investors out of millions of dollars.
While Initial Coin Offerings (ICOs) have been lucrative for startups wanting to raise capital, they are not without their flaws. The lack of regulation often puts investors at risk. For instance, as of 2021, BitConnect, the offshore cryptocurrency lending program, duped investors out of over US$3 billion. The company promised investors 40% returns but, instead, subjected them to a Ponzi scheme. The U.S. Securities and Exchange Commission (SEC) said, “BitConnect operated a textbook Ponzi scheme by paying earlier BitConnect investors with money from later investors.”
In a lawsuit against BitConnect’s founders Satish Kumbhani and Glenn Arcaro, the department noted in a statement, “BitConnect and Kumbhani siphoned investors’ funds off for their own benefit, and their associates’ benefit, by transferring those funds to digital wallet addresses controlled by Kumbhani, Arcaro, other promoters, including the Arcaro Promoters, and other unknown individuals.”
While the SEC is redistributing the US$56 million it recovered to the investors, it is also advising investors to be careful while trading cryptocurrency on ICOs. Given that, let’s look at the top ICO frauds:
Exit scam
As the name suggests, in this scam, founders run off with investors’ money after the ICO. Founders launch the ICO, promote it, convince investors of its legitimacy, then take their money and disappear. For instance, in 2017, crypto “smart contract” startup Confido vanished with over US$350,000 from investors and then erased all their social media accounts, thus covering their tracks after deceiving people.
Phishing
Phishing is one of the popular methods used by scammers to target investors. They send out emails with subject lines and texts that promise high returns and other benefits if they choose to invest. When you click on the link within the email, these scammers often steal your personal information and other relevant details that allow them to take hold of your cryptocurrency trading accounts.
Pump and dump
In 2017, the late software engineer and entrepreneur, John McAfee, came under fire for pumping up altcoins and ICOs to profit off of innocent people. He would wax eloquently about the cryptocurrencies on Twitter, thus influencing his followers to invest in the same. Later, it was found that McAfee was paid millions of dollars to promote these tokens. His praise would increase the prices of the tokens. Afterwards, the cryptocurrency promoters and McAfee would cash out the money, and the price of the token would fall and leave other investors in a lurch. That’s how a pump-and-dump scheme works. These schemes have become all too common recently.
Ponzi schemes
In a Ponzi scheme, scammers dupe new investors into giving them money and then pass a part of the money to their earlier investors as dividends. All this while, the earlier investors are thinking that the money is coming from the successful business activities of the company and not other investors. Recently, OneCoin, a cryptocurrency with no blockchain, attracted millions of investors and raked in billions of dollars from their investments. Later, it turned out that OneCoin was nothing but a Ponzi scheme that used flashy marketing techniques to create credibility and deceive investors. 18 of the company’s founders were arrested during a raid. However, there are still many Ponzi schemes in the ICO world that plague the startup ecosystem every day.
Crypto market manipulation
That lack of regulation in the cryptocurrency world presents a host of challenges is indisputable. One of these challenges is market manipulation. ICOs use unfair practices to manipulate the market and trick traders and investors. Market manipulation is about creating a false and glorified image of a trading activity. For instance, in ICOs, founders would pump liquidity with lots of their unique cryptocurrency tokens, thus making it look as if the cryptocurrency is doing well. Intrigued, investors would buy these tokens with established cryptocurrencies, such as Bitcoin and Ether. Then, promoters of this cryptocurrency would cash out from the liquidity pool and disappear with the money.
Cryptocurrency abounds with ICO frauds, and it is more important than ever to be cautious while trading. To identify an ICO scam, read the whitepaper—an informational document that highlights the features of a company’s offering—of the company launching an ICO to ensure their legitimacy. Make sure that the whitepaper is not plagiarized. Additionally, keep an eye out for anonymous founders. That might be a red flag that the ICO is fraudulent, as you won’t be able to track its promoters later on.
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