8 Common Red Flags to Look Out for in Crypto Scams

Cryptocurrencies are an emerging asset class that has achieved incredible results over the last 15 years, but statistically, 70% of traders lose money. Why do people lose money on crypto? Usually, it reflects a combination of factors, including falling for  scams, investing in unreliable projects, trading irrationally without a clear strategy, and more. In this detailed insight, we’ll analyze the 8 most common red flags to look out for in crypto projects to avoid being victims of crypto scams and losing money.

8 Most Common Red Flags of Crypto Scam Projects

The allure of easy gains can even cause experienced traders to let their guard down, but remember, if it seems too good to be true, it probably is, and scammers are always ready to take advantage of your mistakes or negligence to steal your crypto assets. Let’s analyze the 8 red flags you should watch out for to DYOR (Do your own research) appropriately and verify the legitimacy of a crypto project.

1. Promises of high guaranteed returns

The first red flag is the promise of guaranteed high returns in a short time: This is a clear sign of a misleading and unsafe project. As you should know, exchanges and investment platforms cannot promise guaranteed and unrealistic returns since every investment carries risks of losses, and past performances don’t guarantee future performances. Consequently, if a crypto project or platform raises funds by promising easy gains, it’s likely a scam. 

The promises may come in bold claims like “Make 3x of your assets in a week!!” or “Earn 5% daily with no risk!”: Of course, these claims are not realistic, since returns are never guaranteed, especially in volatile and risky crypto markets. To easily understand if the crypto project is legit, try to use a critical thinking approach, asking the question: “How are these returns generated?”. If the project’s core business can survive and offer returns only thanks to funds of new investors, you can easily identify that project as a Ponzi scam, but there are a lot of alternative fraudulent schemes you should look out for, and Ponzi is only one example.

2. Anonymous team

If you’re building a legit crypto project, you would be proud of it, and you likely would never think of displaying an anonymous team in the “About us” section of the website. So, why do some crypto projects display an anonymous team on that website’s page? One reason for a crypto project to be backed by an anonymous team is because the project is a scam, is not regulated, or is unsafe. Isn’t it controversial thinking that Satoshi Nakamoto, the founder of Bitcoin, is anonymous? The crypto world has evolved since its creation in 2009, and nowadays, cryptocurrencies are considered mostly utility or security tokens that are useful for getting a share and/or participating in a crypto project or company. On the contrary, Bitcoin is considered a commodity, and consequently, the anonymity of Satoshi Nakamoto helped by highlighting its  decentralized nature, and another important aspect is that Satoshi was not selling Bitcoin in return for fiat money.

Closing this digression, remember that transparency is a cornerstone of trust in every investment; if a project lacks transparency regarding team members and business details, it should raise concerns about its legitimacy. DYOR (Do your own research) and research the team behind the project so that you can get a better overview and understanding of the potential of the project. Are the team members active on social media or other professional networks? Do they have a history of successful projects or experiences? Are they reliable people? Answering these questions can help you make better investment decisions and avoid losing money on crypto scams.

3. Lack of regulatory compliance

Another serious red flag is the lack of compliance, with crypto projects offering unsafe and non-regulated products to crypto investors. Legit crypto projects and platforms must adhere to and comply with local laws and implement KYC (Know your customer) and AML (Anti-money laundering) procedures to onboard new clients. Justifying the lack of compliance, claiming that they are operating in a “decentralized way” or that they “focus on privacy” doesn’t work in the long term, and the financial authorities will probably limit access to that website and take legal action against that company.

Investing in a non-regulated crypto project or investing platform carries serious risks since you can be involved in lawsuits, penalties, or, in the most serious cases, lose all your crypto funds. Moreover, using an unsafe platform will likely increase the risks of depositing money on a fake exchange that shows you a fake trading dashboard and does not let you withdraw your money if you make a profit.

4. Lack of use cases and utility

Not all the failed crypto projects were scams, some of them actually had some good ideas and missions. However, to be profitable in the long term, a company must have a solid business that generates returns by offering valuable services or products to demanding consumers. In many failed crypto projects, there was simply no demand for the product or services offered, and they failed because it was impossible to create a sustainable business in the long term. If there is a lack of use cases and utility, and so it is not possible to generate value by offering services or products, the crypto project will fail.

Many blockchain-focused projects lack real and valuable use cases, and they build a business seeking to solve a problem for which there is no actual demand. In the worst cases, however, when the project is completely a scam from the beginning, scammers might claim their technology is “next-generation,” capable of solving complex problems that no other project has managed to address, coupled with “AI-powered,” “quantum-resistant,” or “unhackable”. Projects that boast about groundbreaking technology but fail to provide clear, verifiable details on how it works are likely trying to deceive investors.

5. Manipulative marketing tactics and urgency

Crypto scam projects, such as rug pulls, Ponzi, pump-and-dump, and other scams, can often raise millions of dollars from unsuspecting victims. In fact, they know very well how growth hacking marketing works and hire good marketing agencies to promote their scam project. These projects leverage human feelings and neuromarketing to establish a sense of FOMO (Fear of missing out) in people, creating urgency to invest quickly. Phrases like “limited time offer,” “only a few spots left,” or “buy now before it’s too late” are common in fraudulent schemes, implying that the new cryptocurrency is about to skyrocket in value.

These advanced marketing tactics are designed to distract you from your strategy, allocating a large amount of funds without carefully evaluating the risks and red flags. When you feel a sense of  FOMO, stop and think. Reflect on the investment with a critical thinking approach, ensuring that you research the project before investing in it. Sometimes, your best investments are the ones you don’t make.

6. Complex opaque investment structure

Another common red flag is the presence of overly complex and opaque token economy or investment structures. Scammers create and present complex schemes to trick users, making them believe that they are solving a complex and difficult problem, while in reality, they’re just intentionally obscuring their true intentions and the lack of actual innovation in the project.

A common tactic used in complex fraudulent schemes is MLM (multi-level marketing), which is also part of Ponzi schemes. In multi-level marketing schemes or pyramidal structures, participants are paid to bring in new investors rather than generating profits through actual useful business activity. Once the structure grows, it commonly becomes increasingly unsustainable, finally collapsing on itself and leaving most of the investors with significant losses.

7. Fake testimonials and review

Statistically, before purchasing a product or making an investment online, the majority of people consult the company’s reviews on Google, assessing the project’s reliability. However, scammers are well aware of this and use fake or paid testimonials to increase the credibility of the project and create trust in the project. Scammers often use generic language, for example saying things like, “This is the best investment I’ve ever made!” or “I doubled my money in just a week!” without any mention of how these results were achieved or what specific aspects of the project led to their success.

Another misleading tactic they use is creating fake videos or images featuring crypto influencers endorsing their project, often using AI voice tools or other advanced techniques. Approach every online news or claim with a critical eye, questioning the legitimacy of the testimonial and verifying it also on the influencer profile. In scams, the crypto influencer usually never endorses or supports the crypto project, and the claims are fake and artificially generated.

8. Poor or nonexistent customer support

Customer support is one of the hallmarks of a trustworthy crypto project since assistance must always be guaranteed for investors. As you can imagine, however, in crypto scams, there is a total lack of customer support, and the investor cannot receive help from a team member. In most sophisticated scams, they might initially offer what appears to be decent customer support, but it’s only to lure investors in and make them believe that they are a legitimate company. Once the deposit has happened, they reveal their real nature, disappearing into thin air and usually never answering you again.

Another warning sign occurs when customer support is reluctant or evasive in providing clear answers to easy questions, meaning that they are not transparent or well-informed about the company’s activities. A good strategy to test the legitimacy of the project before investing is testing the customer support to solve an issue and evaluating the quality of the answer you receive. 

Implement Advanced Security and Protect your Crypto Assets

At Trakx, we are always on the first line to provide users with the necessary knowledge and tools they need for a safe trading experience in cryptocurrencies. We recommend learning more about Web3 security and common crypto scams to implement a proactive approach against crypto scammers, avoiding unnecessary risks of losing money in fraudulent schemes. If you’re using an exchange, be sure that it implements institutional-grade security measures and that your assets are always backed 1:1 with the underlying cryptocurrencies.

To conclude, we strongly suggest to implement the following security measures:

• Store your long-term holdings in a cold wallet.
• Store your seed phrase offline in a secure place.
• For daily transactions, use a secondary wallet storing only a small part of your funds.
• Enable 2FA (Two-factor authentication).
• Update software regularly.
• Implement a secure anti-virus on your devices.
• Carefully verify addresses before making any transaction.
• Watch out for crypto scams.
• Always DYOR (do your own research) before investing in a crypto project.

We hope you have gained a solid understanding of the most common red flags of crypto projects, and we wish you a safe journey in Web3 and cryptocurrencies!