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Apr 17, 2020
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Scam Guide — How to avoid a total loss!

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Scam Guide — How to avoid a total loss!

By Lukas Wiesflecker on The Capital

Photo by John Matychuk on Unsplash

The motivation of many people is money. Whether this is good or bad, I want to leave open. This can be discussed at length — but in many cases, it is a fact. And exactly this desire (one could also say greed) for fast money has already cost many people enormous amounts of money — invested in scam projects. In many other cases, it is not greed, but the hope to “make more out of life, to become financially free and to live a life others only dream of.” No matter how we turn the page, the story is always the same:

Make a person feel like they can do more with their life. Give him the feeling that everyone, but also really everyone, can make his dreams come true. Because with the right network, perseverance, discipline and of course the right business, anyone can make it happen.

A few years ago, the term “exit scam” was coined and almost a synonym for the crypto industry. We are talking about a time about 2–3 years ago when the market was full of cash grab companies that might look good on paper but had little or no substantial value behind them. We’re talking about companies like Bitconnect or OneCoin, where millions and billions of investor money were lost. And we’re also talking about companies like Plus or CloudToken, who are still trying to do it today.

Scam alert — how it all started

Let’s start with the definition of exit scams: in its basic sense, an exit scam is a fake system in which, after an initial ICO (or a permanent wave of deposits by MLM), the organizers disappear with the investors’ funds after a substantial amount of money has already been acquired.

To quantify the term ‘substantial amount of money,’ a small example: the Plus Token Scam alone cost investors more than $3 billion.

Bitconnect and OneCoin as scam pioneers

Other notable and prominent examples are Bitconnect and OneCoin, the former being probably the most famous Altcoin Scam ever. Through Bitconnect alone, investors lost more than 3 billion dollars — the scam was similar to the way some well-known companies currently on the market do it: a one-time investment is rewarded with (guaranteed) high returns or interest. We are talking about 5–10% per month. Now let’s assume 10% interest per month — a system can pay back the deposited money to the investor for at least 10 months until it needs ‘fresh’ money for the first time. This fresh money, in turn, can be the deposited money of other members. With this simple trick, companies can easily finance themselves over a period of several months (up to years).

Already here everyone should take a short break and ask the following question:

Would you give a stranger on the street, whose address and name you don’t know 100 Euros in your hand, if he tells you that you will not only get a brilliant pen, but that he will ring your doorbell every month and pay you back 10% interest. If you help him to ‘recommend’ pens for 100 Euros

Isn’t it? You wouldn’t be interested? Phew, lucky!

After this short introduction, we would like to take a closer look at the Red Flags and start with the Scam Guide.

Scam Guide — Important Red Flags

The principle behind an exit-scam is relatively simple. First, the leaders (often called Founding Members) start or propose a new crypto platform/software/technology based on a promising concept. Now there are exactly two ways to raise money:

Implementation of an Initial Coin Offering (=ICO). This way of raising money is actually a thing of the past since 2017. The negative experiences have alarmed many people and have removed the term ICO from the vocabulary of many scammers.

Marketing the product through multi-level marketing. No, MLM is generally not a scam. It is a (legitimate) special form of direct marketing. However, MLM is often (not always) THE sales strategy of scam companies.
The reasons for multi-level marketing are many and varied:

Shifting the risk to many ‘small businesses’ and individual sales partners
fast and efficient establishment of a large sales structure
‘performance-related’ pay → ‘those who do nothing, earn nothing’
Collecting large sums of money through the principle ‘small livestock also makes manure’.
Experienced networkers already have a large network and know how acquisition works.
Providing opportunities through active participation in sales.
Now that sufficient funds have been collected, the sham operation is maintained for a few months and finally closed. The investors have lost their money and the ‘leaders/leaders’ are living with the money collected. On the way there are usually a number of red flags that investors should look out for.

Let’s take a look at them now:

Scam note 1: a missing/bad white paper

A new technology, a new system or a new coin is advertised. The first question one should ask oneself regarding this: Is there a white paper (as usual in science) that describes the ideas of the system or coin in more detail? What about token metrics, for example?

How many tokens will there be and how exact is the distribution? Further questions are: What percentage will be distributed to the founding team and how much to the investors? Is the roadmap for the next few months clear and also realistic? These are all questions you should ask yourself.

Yes and if there is no white paper? Then often only the ‘transparent’ business presentations of the competent sales partners, who have many years of know-how in the IT and blockchain industry, can help. (Caution, irony).

Scam note 2: unrealistic profit promises

This scam notice number 2 is probably the point with which most people are most attracted: the promise of high profits.

In short: a company that promises you guaranteed high interest earnings is mostly fraud. For example, Bitconnect promised its regular customers a daily return of 1% after launch — a figure that would turn an initial investment of $1,000 into just over $50 million in just three years.

Ethereum co-founder Vitalik Buterin already pointed out back then that this is a Ponzi scheme. Rightly so, because within a few months BitConnect closed down all its services and websites, resulting in a total loss of investors. As I already mentioned in the introduction, such systems can often exist for only a few months (at worst, a few years) in purely mathematical terms.

Ben Samcho, the CEO of the Israeli platform CryptoJungle, summarized this quite well:

Do a proper research. Don’t just blindly believe that someone guarantees you 6–8% per month. Search for basics and evidence: For example, do the partnerships listed really exist? Over what period of time could the promised profits be paid out? In addition, you should be especially careful with MLM systems that pay out commissions on several levels.

Scam Note 3: the team behind the project

As early as 2017, a number of ICOs were able to collect substantial sums of money from investors, although the organisers did not provide any concrete information about the actual management staff of the project.

In fact, the scammers were often so insolent that images and the corresponding identities were copied and adopted by various social media platforms — fictitious CEOs that did not even exist.

Internet research shows no hits on the management
there is little information on the founding members
the founders are praised as ‘holy’ and are the non-plus-ultra

Scam Note 4: a functioning product?

If a project does not yet have a marketable product but only a prototype, general caution is advised. Because an investment, as an expression of expectations for the future, is always associated with risk. However, most scam companies already have a working product — at least this is what they pretend.

As I already explained in the introductory section, interest rates of 6–8% can be paid out over a period of at least 12 months without any mathematical problems. From the moment a one-time investment has paid off, the fresh money of the new customers is used.

A supposed ‘live demo’ of arbitrage software or similar is therefore no guarantee for a functioning system or even proof. Such a promise of return in combination with a company that is still extremely young means danger squared. A brief thought experiment on this:

6 to 8 percent guaranteed per month: why borrow outside capital?
Let’s assume that a company has programmed an incredible arbitrage software and has equity capital of 50 million US dollars. In addition, we assume a promised return of 6 to 8 percentage points per month. If the software worked as stated, the program would generate $3 to $4 million per month. Let us now consider the following scenarios that may arise from the initial situation:

The company has no interest in bringing in additional investors because it is generating $3 to 4 million a month.

The 50 million dollars were not equity capital, but borrowed capital that was needed for the development of the software. The company has no interest in bringing in further investors, because after 12–18 months it has paid back the borrowed capital (= break-even point) and now generates 3 to 4 million dollars every month.

The company needs (for whatever reason) further capital. Since the 6 to 8 percent are guaranteed, it is looking for accredited investors who are just waiting to invest their millions profitably.

The attentive reader will probably notice that in all three scenarios mentioned above, no private investors and especially no retail investors are needed. The message behind this: no serious company with such a return system needs small investors. It either needs no outside capital at all or obtains it from a few, few large investors.

Scam note 5: no imprint

Last, but not least the classic among the scam projects: the missing imprint. From the mouths of scam promoters I can already hear the following phrase:

The company is not based in Germany, but on the Virgin Islands. This is due to tax reasons and the imprint is only required in Germany.

This is basically absolutely correct and I don’t want to contradict that in the first place. However, it is also clear that without an imprint, a private investor cannot obtain any further information about the management or its headquarters. In other words: the investor trusts 100% in his ‘upline’ and its promises. Legal claims cannot be asserted under any circumstances and so the missing imprint is the last piece of the puzzle.

With today’s (detailed) Scam Guide we want to give you a good overview of the Red Flags. We want to protect you from scams and sharpen your senses for possible projects.

Even if this guide does not contain all the clues and warnings, always be aware of one thing: if something smells like scam, tastes like scam and is marketed like a scam, then it is usually scam!

I share more intimate thoughts in a monthly newsletter that you can check out here. Please let me know in a comment and join me on various social media platforms:

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WHATEVER YOU DO, DO IT WITH LOVE AND PASSION!

The Capital


Scam Guide — How to avoid a total loss! was originally published in The Capital on Medium, where people are continuing the conversation by highlighting and responding to this story.

Article Categories:
Bitcoin · cryptocurrency · finance · money · scam
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