The activities of scammers within the cryptocurrency industry is on the increase. It is suggested that the increased popularity of Bitcoin and other altcoins such as Ripple, Ethereum and Litecoin may have stirred up some genuine curiosity in the faculties of newbies and other hopefuls around the crypto ecosystem. It is this growing curiosity that is milked by con artists who take advantage of the ignorance of their victims.

Knowledge is everything

When it comes to disruptive technology, knowledge isn’t just power, knowledge is everything.

The right knowledge about any given innovation will always offer genuine and sustainable benefits. On the contrary, a distorted idea of any given technology will not only be misleading, but it remains a metaphorical time bomb that will eventually explode when the time comes.

"In as much as Blockchain and the Distributed Ledger Technology (DLT) offers a huge platform for various kinds of innovations and investments, the promise of unrealistic returns on investment is a common characteristic that cuts across almost all cryptocurrency scams."

The camouflage

Hiding behind the veil of crypto related activities, a lot of Ponzi schemes have succeeded in enticing many unsuspecting participants.

One common characteristic of these setups is their ambiguous way of explaining their processes. They always flinch when confronted with direct questions and the quest for appropriate details of their investment schemes.

The basic life-cycle of every pyramid scheme is dependent on its ability to keep recruiting new members.

In other words, pyramid schemes can be regarded as Ponzis, where the investments of new recruits are used to pay existing participants.

Therefore, as soon as the rate of recruitment falls below a certain level, the system becomes unsustainable and a lot of people will end up losing their investment.

How to spot them

Bob Wood, CEO at Nexxus Partners, tells Cointelegraph that cryptocurrency scams abound from the perfect storm of a major disruptive technology and the uninformed public. Wood explains how the average non-technical person can identify these scams early on. Look at:

MANAGEMENT

Who are the people behind the cryptocurrency? Are they trustworthy and competent? Are their names and resumes published for the public to review? Do they have a Google trail of promoting other scams? Do they have an experienced technology team behind the cryptocurrency? These are some of the questions that should be clarified by an investor towards any given prospective venture.

VALUE CREATION

For entities that are out to promote a given cryptocurrency, questions should be asked about how they are creating value with their cryptocurrency? Are they providing retail products or services as a value to the marketplace to generate a profit? Why would anyone buy and use their cryptocurrency? What user benefit will be derived, outside of speculative trading?

RETURN ON INVESTMENT

Every investor should be wary of claims of receiving an unusually high and fast return on investment. Some scams claim 1-2 percent of daily earnings or 100 percent monthly earnings. Obviously, too-good-to-be-true, but it hypnotizes the greedy into irrational thinking. The reality is that all or most of the returns on investment are being paid from new investors money (i.e. Ponzi scheme), that always collapse eventually.

SPECIAL TECHNIQUES

Acclaimed methods for creating profits must be properly scrutinized. Profits from mining Bitcoins is a common claim that is fallacious due to the very competitive mining environment. Another claim is arbitrage, which is the ability to buy low on one public exchange and sell high on another. There is nowhere near the volume of opportunity to satisfy the promised profits. Finally, be wary of claims of widespread acceptance by merchants. When merchants accept a coin they typically have to sell the coin to pay their bills, which drops the coin price not increase it.

Wood concludes by noting that the best way for people to protect themselves from cryptocurrency scams is to invest in education to become knowledgeable about the potential and virtues of cryptocurrency.