How To Recognize a Crypto Currency Scam

People often ask me advice about crypto investments. They have read about a amazing new coin, but wonder if this cryptocurrency is a scam.

In some cases, they’ve already invested and are trying to get their “investment” back.

It goes somewhat like this:

“Hey Wes, I’ve found this new XYZ coin. It is a new way of doing XYZ and it’s going to revolutionize the world. What do you think?”

Since this happens a few times each year, I’ve developed a few routine questions. Usually, it takes me a couple of minutes to figure out if it’s a scam or not. I might not even have to look at the website.

Some scams are setup quite well, and require a deeper look (but never to deep).

Investment Scams are Rampant

Look, these schemes can sound legit and convincing. They push the right buttons. And because investments are a private aspect of life, you don’t always hear it when people invested―especially when it went wrong…

But believe me, they are everywhere!

I have had the same discussion with a Dutch 60 year old aunt, ex-girlfriends (and their friends) in Asia, my closest circle of friends, my far away friends, colleagues, members of social clubs, etc.

I think this needs addressing.

Don’t think you’ll never fall for a scam. Bernie Madoff ran a pyramid scam based on the principles set forth in this article for decades selling to professional money-managers on Wall Street.1)“Madoff investment scandal,” (Wikipedia), accessed on July 7, 2019, https://en.wikipedia.org/wiki/Madoff_investment_scandal:
“Rather than offer high returns to all comers, Madoff offered modest but steady returns to an exclusive clientele. The investment method was marketed as ‘too complicated for outsiders to understand’. He was secretive about the firm’s business, and kept his financial Statements closely guarded.[43] The New York Post reported that Madoff ‘worked the so-called Jewish circuit of well-heeled Jews he met at country clubs on Long Island and in Palm Beach’.”

Luckily, investment scams display common patterns. I have written them down so you can spot them in the future. Hopefully it’ll save you your money.

But before we do that, let me define the two most common crypto-currency scams: pyramids and high-yield exit scams.

Pyramid schemes

With a pyramid scheme you, the investor, is promised a high return by investing into a (new) profit generating system. In order for you to be successful, you are encouraged to get your friends involved.

Pyramid schemes are often sold as network marketing opportunities. However, with network marketing a network is created to sell an actual (physical) product. With a pyramid scheme, you are the product.

Pyramid schemes often yield large returns in the beginning, but what investors often don’t fully understand is that these returns are paid by the new participants (attracted by the high returns). The system works until no new investors can be found. Then it collapses, and participants realize that what they invested in the system is gone.

Crypto Currency Pyramid Scam Example
This graph shows the value of famous pyramid scam coin Bitconnect in 2018. All went well until the overall crypto-markets started to tank and the community increasingly criticized the scheme. Next, the US regulators started probing. At one point, all the trading on the unique trading platform stopped. People scrambled to convert their Bitconnect coins for anything with value. A 10.000 USD investment turned into about 10 USD in a matter of weeks.

High yield investment schemes

High Yield Investment Schemes have many variations, but their goal is for you to throw money in opportunities that are too good to be true.

The sales techniques used for these types of schemes are similar to those used for pyramid schemes. But while a pyramid scheme thrives by large numbers of small investors over longer periods of time, a HYIS focuses on selling high-ticket investments as fast as possible and disappearing with the money.

Protect Yourself from Losing Money
We have this great pension scheme. All you have to do is pay 25% of your current wage into our fund and for a fee we’ll invest it in government bonds of bankrupt countries in Southern Euro… of wait, never mind!

It’s difficult to stop such scams, since from the outside it’s not always provable that what is being sold has no value. I attended an “entrepreneur boot camp” where they convinced housewives to go 16.000 euro into debt to buy a foreign exchange currency trading course to make “thousands of dollars a month from home.” In theory it’s possible, but it will never work in practice.

How to Recognize Crypto-Currency Scams

Now that we know the two most common scams, let’s look at how to recognize them. As mentioned, the often push the same buttons to convince people to join.

Vague products

A common feature of scams is that the specifics on how the investment works remain vague.

Examples are “automated coin trading software,” “coin trading software,” “secret systems normally only used on Wall Street,” “revolutionary new block chain application,” or a “unique new method for tokenizing the world.”

A vague investment is actually better; it enhances the mystery, tickles the fantasy, and obscures what’s really going on.

You’ll find that investors most of the time cannot explain you how the money is made. How the value is created. All they see is that money is made and this is all they care about—and the promoters focus on…

Investment Packages

Another common theme, especially with pyramids, is investment “packages,” such as bronze, silver and gold. The more you put in, the higher your return.

In addition, there are incentives for “re-investing” the earnings. The ultimate goal is to keep money in the system, and let nothing out―the longer it can go on.

Poor Structuring

The people behind scams are usually salesmen without understanding of the frameworks real businesses work upon. The way a scam is setup and legally structured always reveals cracks upon closer inspection.

I once analyzed a “automatic trading system” profiting from the bull market in gold. However, the bull market had ended two years before!

The company claimed it sold gold in Germany, and as good citizens had registered for VAT. But the type of product they sold was VAT exempt in Germany.

Finally, it claimed it had an office registered as FANCY NAME LIMITED in Dubai in the commodities exchange free zone (DMCC). But to trade gold there you need a special license and a company ending with DMCC, not Limited. I know this because I lived in this free zone and my job was registering such businesses.

You might wonder why people invest in a bubble that’s already burst, but then you underestimate the power of investment scams. Often people have no clue what they invest in. They see friends make money and want a shortcut to the same result.

Unrealistic returns

Scams are attractive because they offer extremely high returns, such as 1% a day, or 20% a month. Beginning investors have difficulties understanding how unrealistic this is—since they don’t understand exponential growth.

Allow me to explain it with an example:

If you invest 1.000 USD for 20% a month, after 1 month you have 1.200 USD (+200) After two months, you have 1.200 + 20% = 1.440 (+240). After three months, you have 1.440 + 20% = 1.728 (+288).

As you see, the invested amount doesn’t increase in a straight line. Every month it grows exponentially bigger. It starts of slow, but goes parabolic fast!

After 12 months, you’re almost at 9.000 USD, and after 24 months it’s almost 80k. And yes, after 38 months, you’re a millionaire.

Question: do you think someone who created a revolutionary trading system with which he could grow one thousand USD to one million USD in little over three years needs your investment? Of course not.

Unrealistic Investment Returns
Our revolutionary trading system can turn 1.000 USD into 1.000.000 in little over three years. Instead of actually using it to trade for ourselves, we want you to give us your money and ask your friends to do the same.

You’re the product

Since no actual product is sold, the marketing of investment scams focuses on the investor… You!

They move the discussion away from the technical details, by painting a picture of massive future prosperity. A life of excitement, adventures, traveling, parties, expensive cars, and wild women. Instantly transform a struggling existence to a life of the rich.

Advanced scams include training programs, mind-mapping, aligning the universe, getting rid of scarcity mind-set, and other bullshit.

They prepare you for your soon to found riches, even going as far as having you imagine the houses you’ll own and charities you’ll support. After all, with great wealth comes great responsibility!

And remember: no work is needed, and it happens overnight!

Social proof

The main reason investment scams are effective is social proof. Again, this can take a variety of shapes. The standard pyramid relies fully on fresh blood, and they reward people for bringing it in by being vocal on social media and giving testimonials.

More advanced scams target trusted advisors, celebrities, or other opinion makers to get to their following. This can be done by convincing them directly, falsely using their name, or using what they said out of context.

I have even seen the use of paid actors standing up in the crowd as living testimonials. Everything to spread the word―and spread it fast.

Having regular people make a lot of money is a super effective way to lower someone’s defenses, since it demonstrated that “it works.”

Moreover, if someone close to you is convinced, it becomes difficult to resist when they have been making a small fortune for months. Not believing this equates to saying the friend cannot be trusted.

This makes talking about the subject delicate. You’ll often find that not only are you dealing with the person you talk to, but also their totally devoted best friend or lover in the background. You can come up with logic and reason, but people often are invested emotionally as well. It doesn’t matter what you say if someone “feels” the opposite.

And very few people readily admit their (financial) mistakes. Some refuse to believe they were scammed long after they lost their investments.

The Best Salesmen

Those promoting investment scams often themselves drank the cool-aid. Early investors in scams become religious defenders, unable to stop talking about their sudden riches.

There is clear evidence on their Youtube account that they went from a nobody being excited when using their first “profits” to buy a new webcam to being invited to parties in Thailand where Lamborghini’s are given away in 5 months time.

If a promoter is sufficiently high or early in a pyramid, they’ve helped others achieve financial success as well. This total devotion makes them such effective salesmen; they 100% believe it and have proof!

Even when deep down they know it is all to good to be true, they see the daily profits for themselves and the people around them. Friends send them thank you letters for changing their lives―it’s hard to stay rational in this situation.

I had a friend who invested in a scam, fully aware it was a pyramid scheme. He started rationally, but at one point his words changed, and he was going to make 100k USD a year by “pumping” his profits back in. Shortly after, the bubble popped and we didn’t hear about it anymore.

Signs of a crypto-currency scam
When someone is screaming from the top of their lungs that they made 100k USD in a few months it might be time to buy some popcorn and wait for the shit to hit the meme-fan…

Legal problems

Investment scams are not only a way to lose money; they can have legal repercussions as well. In Western countries, there is experience with pyramid schemes, and governments are (a little) active in tackling them.

Developing countries are wising up also. And for good reason. Especially Asia is a haven for this stuff. It has a growing middles class which suddenly has money to spend. Moreover, they are social media addicts, have no previous experience with investing, and far more sensitive to what friends and family do.

Regulation

Pyramid schemes violate securities laws in countries around the world, especially without proper registration or a license to solicit investments from the public.

Look, I am not naively saying that something “regulated” cannot be a scam. In fact, I’ve seen it being used as a sales argument.

Nevertheless, it’s quite a large legal dragnet a promoter can get tangled in. A lot of them do end up with legal problems.2)One of the more successful pyramid scams has been Onecoin, promoted by a Bulgarian woman named Ruja Ignatova. She is now (April, 2020) on the run for law enforcement, her brother and others participants have been convicted for their role in this cryptocurrency scam. Read more here: https://www.bbc.com/news/technology-50417908 This can include you if have been raving about the scheme on social media.

Sometimes, when it comes to legal matters, victims are contacted for funds to start a legal recovery action against the original scammer. The victims who were burned once, are scammed again! After all, they already proved to be the ideal group to approach.

Social Life

And that’s not all. Promoting scams can reflect terribly on your social life, especially when your friends lost money through your recommendations.

And not all investors call the police. A crowd of angry investors in South Africa set the house and cars of a promoter of a pyramid scam ablaze.3)Nivashni Nair, Alleged Ponzi scheme mastermind’s Ladysmith home torched, (Times Live, 10 July 2019)
https://www.timeslive.co.za/news/south-africa/2019-07-10-alleged-ponzi-scheme-masterminds-ladysmith-home-torched/
And an angry investor in an investment scam in Dubai real estate resorted to cutting the promoter’s fingers to persuade him to give his money back.

Conclusion

Unfortunately, some parasites like to take advantage of inexperienced investors by selling them investment scams.

This problem has been magnified by crypto-currencies because they are new and exciting and few know how they work anyway. They are also easy to set-up and the profits can be moved anywhere without third-party involvement.

Just know that when you’re asked to invest in anything with a…

  • Pyramid structure;
  • Super high returns;
  • An unclear method of how money is made;
  • With an emphasis on you making lots of money rather than you adding value to the world;
  • Where you are the product;
  • And where promoters act like religious zealots…

…you’re probably dealing with a crypto-currency investment scam.

 

If you ran into a scam, or are being pushed by someone don’t hesitate to forward this article.

Other than that, good luck investing in REAL crypto-currencies…

 

 

References

1“Madoff investment scandal,” (Wikipedia), accessed on July 7, 2019, https://en.wikipedia.org/wiki/Madoff_investment_scandal:
“Rather than offer high returns to all comers, Madoff offered modest but steady returns to an exclusive clientele. The investment method was marketed as ‘too complicated for outsiders to understand’. He was secretive about the firm’s business, and kept his financial Statements closely guarded.[43] The New York Post reported that Madoff ‘worked the so-called Jewish circuit of well-heeled Jews he met at country clubs on Long Island and in Palm Beach’.”
2One of the more successful pyramid scams has been Onecoin, promoted by a Bulgarian woman named Ruja Ignatova. She is now (April, 2020) on the run for law enforcement, her brother and others participants have been convicted for their role in this cryptocurrency scam. Read more here: https://www.bbc.com/news/technology-50417908
3Nivashni Nair, Alleged Ponzi scheme mastermind’s Ladysmith home torched, (Times Live, 10 July 2019)
https://www.timeslive.co.za/news/south-africa/2019-07-10-alleged-ponzi-scheme-masterminds-ladysmith-home-torched/

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