What They Are, Some Examples And Tips To Spot Them

While the pseudonymous and decentralised nature of cryptocurrencies has its benefits, it also attracts the interest of bad actors. This is evident from the fact that crypto scammers took a record $14 billion in 2021, a number that is expected to rise even further this year.

What’s also alarming is the number of different schemes these miscreants run — it’s almost like there’s a new one every day. Fortunately, many of these attacks depend on human error to be successful. Therefore, with the right knowledge and diligence, they can be avoided.

Exit scams are an example of such schemes. They depend on hype and oversight to dupe several investors at once, often resulting in millions of dollars in lost cryptocurrency. But, once you know how these schemes work, it is much easier to spot and avoid them.

So, what is an exit scam?

An exit scam is a fraudulent practice where bad actors promote and/or run a fake crypto outfit and then vanish once they have accumulated enough money. One common type of exit scam is the rug pull, where scammers hype a project and abandon it after filling their pockets.

Another type of exit scam is where scammers run some Ponzi scheme under the guise of a crypto exchange or investment company. They keep the scheme running until the truth is uncovered, at which point they disappear with all the investor holdings.

They may also raise funds through an ICO and jump ship with investor funds. In some cases, they may even run the project for a while, promoting and pumping prices before exchanging their tokens for fiat currency and taking off. Either way, they head for the door once they’ve made their money, which is why these operations are known as exit scams.

Examples of exit scams

There are several instances of exit scams where investors have lost tons of money. For example, earlier this month, the Commodity Futures Trading Commission (CFTC) sued Cornelius Steynberg, the founder of Mirror Trading International Proprietary Limited (MTI) for fraud, misrepresentation, and misappropriation.

Steynberg had operated MTI for nearly three years before it was discovered to be a Ponzi scheme. During this period, Steynberg is said to have accumulated at least 29,421 BTC worth $1.7 billion in a scheme he was running through MTI, according to the CFTC.

However, once authorities began cracking down on the fraudulent trading platform, Steynberg fled the country, orchestrating a classic exit scam. A year or so later, he was arrested in Brazil for using fake identities.

Another example of a Ponzi scheme was Plus Token. Launched in May 2018, this fake cryptocurrency was very popular in China and Korea. It lured investors under the promise of high returns with low investments and even introduced fake products, such as the Plus Token Wallet. In reality, it paid old members with investments from new members.

Eventually, plenty of investors had issues withdrawing their profits in June 2019. Unable to make payouts, the entire team behind the project disappeared with $2.9 million in their pockets. A year later, the Ministry of Public Security in China arrested more than 100 people in connection with this scheme.

How to spot an exit scam?

Thorough research is critical when investing in any asset, more so in cryptocurrencies, given their volatile nature. And while evaluating a project, it is essential to look for any potential red flags, some of which include:

Sketchy credentials – Pseudonymous or questionable credentials are a huge red flag. A good project will have an established team behind it. They will have LinkedIn profiles where you can go through their past projects and work experience. Don’t judge the potential of the team based on social media, as followers can be bought, and fake profiles are more likely.

Patchy whitepaper – A good project will have a thought-through whitepaper explaining every single aspect of the project. It will detail the technology behind the project, including its consensus mechanism, tokenomics, governance protocols, etc. It will also have immaculate language and grammar. If it is lacking in any of these areas, it could be a red flag.

Use cases – With a blockchain-based cryptocurrency, valid use cases are extremely important. The project should be trying to fix some problems or offer to fill some gaps in the industry. Projects that do not have valid use cases could be fakes, and it’s best to stay away. Even if it isn’t a scam, it will eventually fizzle out, as it is not adding value in any way.

Excessive promotions – If a project is trying hard to sell itself, it could point to a scam. Good projects will bank on their whitepaper and launch presentations to make a good impression and attract investors. On the other hand, dubious projects will depend on crypto influencers and resort to strategies like shilling to build hype around their launch.