Introduction
Unfortunately, I know a number of associates and clients that have been victims of cryptocurrency scams. In fact, most experts in the cryptocurrency space know at least one person that has been in the victim of a cryptocurrency scam. The rise of cryptocurrencies has created exciting opportunities for investors and innovators. However, it has also given rise to a surge in scams, fraudulent schemes, and worthless tokens. According to Chainalysis, a blockchain data platform, cryptocurrency scammers stole $14 billion in 2021, with rug pulls alone accounting for over $2.8 billion in losses. From Ponzi schemes to pump-and-dump scams, the crypto market can be a dangerous place for uninformed investors.
With over 23,000 cryptocurrencies in circulation as of 2023, it can be difficult to distinguish legitimate projects from scams. In this guide, we’ll explore the different types of crypto scams, how to identify worthless tokens, and provide actionable tips to help you protect your investments.
1. Common Types of Cryptocurrency Scams
a) Ponzi and Pyramid Schemes
Ponzi schemes, named after the infamous swindler Charles Ponzi, present themselves as legitimate investments that are actually scams. Ponzi schemes are also known as pyramid schemes. Ponzi scheme organizers attract new investors by falsely promising to invest funds in opportunities that will generate high returns with little or no risk to the investor. Instead of investing that money in a legitimate opportunity, the organizers use new investor money to
make promised payments to existing investors while keeping the “invested funds” for personal use. The last investors lose their money, because the Ponzi scheme no longer attracts investors to “invest new funds.”
Ponzi schemes promise high returns with little to no risk, using new investor funds to pay earlier investors. Eventually, the scheme collapses when there aren’t enough new investors.
Example: OneCoin Scam ($4 Billion Lost)
OneCoin, founded by Ruja Ignatova (the “Crypto Queen”), claimed to be a revolutionary cryptocurrency. However, it was later revealed as a Ponzi scheme, and Ignatova disappeared in 2017. The scam defrauded investors out of $4 billion, and authorities continue to search for Ignatova.
Recent Case Study: HyperVerse Ponzi Scheme (2024)
HyperVerse marketed itself as a metaverse investment platform, promising investors daily returns of up to 300%. However, investigations revealed it was a Ponzi scheme, and by early 2024, investors had lost over $1.2 billion. Several countries have issued fraud warnings, and legal action is underway.
How to Spot a Ponzi Scheme
If you are not sure how to identify a Ponzi scheme, here are three characteristics for every Ponzi scheme:
- Guaranteed high returns with no risk.
- No verifiable product or blockchain network.
- Heavy recruitment incentives (multi-level marketing structure).
I have used these three characteristics to successfully advise clients not to invest in cryptocurrency Ponzi schemes.
b) Pump-and-Dump Schemes
In pump-and-dump schemes, scammers artificially inflate a token’s price through hype and coordinated buying, then sell off their holdings, crashing the price. If you are not sure how to identify a Ponzi scheme, here are three characteristics for every Ponzi scheme:
- False or misleading information (The Pump): Perpetrators spread false or misleading information about the company through various channels, including social media, online forums, email campaigns, and even fake press releases. This information is designed to create a buying frenzy and drive up the crypto price.
- Rapid price increase: The stock price experiences a sudden and significant increase
due to the artificial demand created by the pump and dump scheme. This attracts unsuspecting investors who believe they are getting in on a hot crypto. - Insider selling (The Dump): As the stock price rises, the fraudsters behind the scheme begin to sell their own holdings, taking advantage of the inflated price.
This insider selling can happen in a day and often goes unnoticed by other investors.
Example: SaveTheKids ($100K+ Lost)
Sounds like great token for a great cause right? Nope. SaveTheKids, a “charity token” promoted by influencers, saw its price soar before collapsing after insiders dumped their holdings.
Recent Case Study: FTX’s FTT Token Collapse (2023-2024)
The rise and fall of FTX has been in the news for months. FTX, once a leading crypto exchange, heavily promoted its native token FTT, inflating its price artificially. When investigations revealed FTX was misusing customer funds, the token crashed by 97%, wiping out billions in investor money.
How to Spot a Pump-and-Dump:
- Sudden spikes in price with no real news.
- High pressure sales (“buy now before it’s too late”)
- Promotion by anonymous or celebrity influencers.
- Low liquidity and small market cap.
I have successfully used these four characteristics to successfully advise clients not to invest in cryptocurrency pump and dump schemes.
c) Rug Pulls and Exit Scams
A rug pull occurs when developers abandon a project after raising significant funds, leaving investors with worthless tokens.
Example: Squid Game Token Scam ($3 Million Lost)
The Squid Game token (SQUID) launched in 2021, claiming to be inspired by the hit Netflix series. After attracting thousands of investors, developers locked withdrawals and disappeared, draining $3 million in liquidity.
Recent Case Study: Magnate Finance Rug Pull (2024, $6.4 Million Lost)
Magnate Finance, a DeFi lending platform, manipulated its smart contracts to drain user funds, stealing $6.4 million. The project had no external audits, and the anonymous developers disappeared after wiping liquidity.
How to Spot a Rug Pull:
- No team transparency (anonymous developers).
- No third-party audits or smart contract verifications.
- Liquidity is locked or controlled by insiders.
d) Fake ICOs and Token Presales
Scammers create fake initial coin offerings (ICOs), collecting funds from investors without ever delivering a real product.
Example: Centra Tech ICO Scam ($25 Million Stolen)
Centra Tech founders raised $25 million, falsely claiming partnerships with Visa and Mastercard. They were later arrested and sentenced for fraud.
Recent Case Study: JPEX Crypto Exchange Fraud (2024, $166 Million Lost)
JPEX, a Hong Kong-based crypto exchange, falsely claimed to be regulated and promised high staking returns. Authorities arrested multiple individuals in connection with a $166 million fraud, making it one of the largest exchange-related scams in Asia.
How to Spot a Fake ICO:
- No working product or prototype.
- Vague or plagiarized whitepapers.
- False claims of partnerships.
I always advise my clients to carefully research all tokens, especially ICOs. I have been able to identify fake ICOs within minutes of research. The fake ICO creators are counting on you not to do your research. Even if you do not have the skills to conduct research, ask at least one objective cryptocurrency expert for their advice on the ICO before you invest.
e) Phishing and Impersonation Scams
Phishing scams trick users into giving up private keys or login credentials through fake websites, emails, or social media impersonation. I receive different types of phishing scam emails almost everyday, so they are always looking a new way to obtain your private keys or credentials.
Recent Case Study: Fake Ethereum ETF Phishing Scam (2024)
Scammers launched fake websites claiming to offer Ethereum ETF investments, tricking users into connecting wallets and draining funds. Victims lost over $30 million in stolen assets.
How to Spot a Phishing Scam:
- Unsolicited emails or social media messages.
- Fake websites with minor misspellings.
- Forced wallet connections to unknown platforms.
If you are not sure about the credibility of the email, do not click on any links! That may be all they need to complete their scam.
f) Fake Airdrops and Giveaway Scams
Scammers impersonate famous figures (e.g., Elon Musk, Vitalik Buterin) and promise free crypto in exchange for small deposits.
Recent Case Study: Ethereum Merge Airdrop Scams (2023-2024)
Ahead of the Ethereum Merge, scammers launched fake airdrops asking users to send ETH to “verify” their wallets, leading to stolen funds.
How to Spot a Fake Airdrop:
- Requires an upfront payment to receive “free” tokens.
- Promoted by fake or impersonated accounts.
Most airdrops are scams, so don’t be fooled by the alure of “free” tokens.
2. How to Identify Worthless Tokens
a) No Real Use Case or Utility
Many tokens exist solely for speculation, with no actual purpose beyond trading. A legitimate cryptocurrency should have a defined purpose, whether in DeFi, gaming, payments, governance, or decentralized storage.
- Example: Meme coins that rely on hype but have no ecosystem, such as Dogewater or SquidCoin.
- Recent Case Study: Bitgert (BRISE) (2024) Bitgert promised a revolutionary blockchain with zero gas fees but failed to deliver any real adoption or utility. As of 2024, the token's value has plummeted due to lack of development and adoption, despite initial hype.
b) Anonymous or Unverifiable Team
Legitimate projects have transparent teams with verifiable public records. If developers remain anonymous, it significantly increases the risk of a rug pull or exit scam.
- Example: Many rug pulls feature completely anonymous developers, such as SushiSwap’s initial anonymous creator, Chef Nomi, who cashed out millions before returning funds.
- Recent Case Study: Fintoch Scam (2024, $30 Million Lost) Fintoch claimed to be backed by major financial institutions but had an anonymous team. In 2024, the project disappeared with over $30 million in investor funds, proving the risks of trusting anonymous teams.
c) Poorly Written or Non-Existent Whitepaper
A strong whitepaper clearly outlines technology, tokenomics, team credentials, and real-world use cases. Many scams plagiarize content from successful projects or generate AI-written whitepapers to appear legitimate.
Example: Some scam projects copy Ethereum’s whitepaper with minor edits.
Red Flags in Whitepapers:
- Vague technical explanations.
- Unrealistic goals without a clear roadmap.
- Promises of guaranteed returns.
d) Low Liquidity and Trading Volume
Tokens with low liquidity make it difficult to sell without significant price drops. A healthy project should have high trading volume and liquidity spread across multiple reputable exchanges.
Example: Many low-cap tokens on decentralized exchanges (DEXs) have no real trading activity, often relying on bot-generated fake volume.
Stat: In 2023, over 60% of newly launched tokens had liquidity of less than $10,000, making them highly illiquid and risky.
e) Lack of Transparency in Tokenomics
If a large percentage of supply is held by insiders, it’s a major red flag. Legitimate projects disclose clear token allocations for developers, marketing, liquidity, and community incentives.
- Example: Pre-mined tokens where the team dumps their holdings on investors (SafeMoon, various Binance Smart Chain projects in 2022-2023).
- Recent Case Study: Velodrome Finance (2024, -95% Token Crash) Velodrome Finance promised decentralized financial freedom but retained over 70% of its token supply within its development team wallets. Once early investors sold their holdings, the token collapsed by 95% in early 2024.
f) Overhyped Marketing with No Development
If a project focuses solely on social media hype but has no working product, be wary. Excessive marketing without development updates is a major warning sign.
Example: Projects that rely on celebrity endorsements without real technological progress, such as Floyd Mayweather-backed ICOs that failed in 2018.
Case Study: Xinu Coin (2024, Total Collapse) Xinu Coin was aggressively promoted by influencers and Twitter (X) bots, but had no working blockchain, wallet, or dApp integration. By mid-2024, the project had collapsed, leaving thousands of investors with worthless tokens.
3. How to Safely Invest in Cryptocurrencies
Don’t let these scams scare you away from cryptocurrency investment. There are many legit cryptocurrencies with an impressive business case, solid fundamentals, credible and experienced leadership. How do you find these legitimate cryptocurrencies?
a) Do Your Own Research (DYOR)
In all of my trainings and speeches I preach “research, research, research!”. In addition, it is important to make sure you use credible sources for your research. Otherwise, your research is flawed which may lead to a bad investment.
Here are some very important research recommendations:
- Verify the team’s credentials by checking their website as well as LinkedIn, GitHub, and past project involvement.
- Read the whitepaper carefully for technological innovation, tokenomics, and roadmap feasibility. Also, look for spelling, grammatical and syntax errors. All of these are signs of a fraudulent cryptocurrency project.
- Check for audits and regulatory compliance by looking at CertiK, PeckShield, and OpenZeppelin reports.
- Check government websites including. SEC.gov, CFTC.gov and Treasury.gov. Government websites may have valuable information you can use in your research. For example, in 2024, the SEC flagged multiple projects as unregistered securities, leading to legal issues for uninformed investors.
b) Verify Smart Contract Security
- Use platforms like CertiK, SolidityScan, and Quantstamp to check for smart contract audits.
- Look for open-source and peer-reviewed smart contracts on GitHub.
- Case Study: Euler Finance Hack (2023) – Euler Finance suffered a $197 million exploit due to a vulnerability that could have been detected with thorough contract reviews.
c) Avoid Hype-Driven Investments
- If it sounds too good to be true, it probably is! Beware of promises of 100x gains with no fundamental backing.
- Be skeptical of promises of guaranteed returns or high staking yields (common in Ponzi schemes).
- Example: Terra/LUNA’s collapse in 2022 was fueled by unsustainable 20% APY rewards, leading to a $40 billion loss.
d) Use Reputable Exchanges and Wallets
- Stick to established exchanges like Binance, Coinbase, Kraken, and Gemini, which follow strict regulatory requirements.
- Avoid connecting wallets to unknown platforms. Only use MetaMask, Trust Wallet, or hardware wallets on verified platforms.
- Case Study: FTX Collapse (2022-2023) – Investors lost over $8 billion in customer funds when FTX mismanaged assets.
e) Enable Security Features
- Use two-factor authentication (2FA) and enable multi-signature wallets for added security.
- Never share private keys or seed phrases. Always back them up in a secure, offline location.
- Store assets in hardware wallets like Ledger or Trezor, which provide better security against online hacks.
- Stat: In 2023, over $3.7 billion in crypto assets were stolen through cyberattacks, reinforcing the need for strong security measures.
f) Join Crypto Communities for Insights
- Follow discussions on Twitter (X), Reddit, Discord, and Telegram to stay updated on market trends and potential scams.
- Be wary of paid promotions and influencer shilling, as many influencers were involved in fraudulent token promotions in 2023-2024. For example, celebrities like Kim Kardashian, Floyd Mayweather and DJ Khalid were fined by the SEC in 2022 for promoting unregistered crypto securities and they did not disclose they were paid
for their promotion.
4. The Future of Crypto Regulations and Fraud Prevention
A new regulatory enforcement structure under way in the US as a new administration is appointing new leaders for enforcement agencies; specifically, SEC, CFTC, Treasury and Justice. However, the statements from the leaders under consideration for these leadership positions have indicated that they still intend on fighting cryptocurrency fraud. Here are some of the actions that has been taken so far to fight cryptocurrency fraud.
- Governments are introducing stricter regulations (e.g., U.S. SEC, EU’s MiCA, UK’s FCA), with a focus on consumer protection, stablecoin oversight, and anti-money laundering (AML) compliance.
- More exchanges are enforcing KYC/AML policies to curb scams, with Binance, Coinbase, and Kraken leading the charge by strengthening identity verification and transaction monitoring.
- Blockchain analytics tools (e.g., Chainalysis, CipherTrace, Elliptic) are improving fraud detection, assisting law enforcement in tracking illicit transactions and stolen funds.
- Increased legal action against scammers, with 2024 seeing major crackdowns on fraudulent projects, including the U.S. SEC’s lawsuit against unregistered DeFi lending platforms and the DOJ’s indictment of multiple NFT rug pull schemes.
- Stronger regulations on influencer promotions, following 2023 cases where influencers like Logan Paul faced lawsuits for promoting scam tokens without disclosure.
- Regulatory sandboxes expanding in countries like Singapore and Dubai, allowing innovation while ensuring compliance with security and investor protection laws.
- Improved security frameworks in DeFi and smart contracts, with the rise of decentralized identity (DID) solutions and AI-powered fraud detection mechanisms.
Recent Case Study: JPEX Crypto Exchange Fraud (2024)
In 2024, Hong Kong’s JPEX exchange was exposed for defrauding investors of $166 million by falsely claiming regulatory approval and locking user funds. Following mass arrests, Hong Kong’s Securities and Futures Commission (SFC) tightened its crypto regulations, making exchange licensing mandatory to prevent future fraud.
As the industry matures, crypto regulations will continue evolving, aiming to balance innovation with investor security while reducing fraudulent activities in the market.
Final Thoughts
Cryptocurrency scams remain a serious threat, but with proper due diligence, investors can find legitimate cryptocurrency investments and avoid costly mistakes. Don’t rush your investment decisions, take your time, if someone is trying to rush you into an investment, run! By staying informed, verifying projects, and following best security practices, you will increase your chances of crypto investment success. Remember, if something seems too good to be true, it probably is.
Have you encountered a crypto scam? Share your experience in the comments!
