Due to the decentralized and anonymous nature of crypto, the incentive for scamming investors is a pervasive issue that isn’t easily solvable. Over the years all kinds of scams have been perpetuated, ranging from Initial Coin Offerings that dissapeared after raising money, to crypto-currency exchanges like Thodex which went offline and made-off off with their investor’s money. There’s even an example of a developer creating a “Ponzicoin” and making off with a few thousand dollars.
Investing in any type of crypto asset or project can itself be inherently risky, but the prospect of an exit scam (or rug pull as some people like to call it), means you have to be diligent when evaluating what to invest in.
There are ways you can spot an exit scam, although even these aren’t comprehensive and you can still find examples of investors losing money in what seemed like a reputable team with a solid project. The three things I look at when evaluating whether something could be an exit scam include team, returns, and model.
Team
The first thing I typically consider is the team. Do they have a history in the crypto space, with a proven track record? If not, what if any online presence do they have? While Bitcoin was famously started by an anonymous developer, and there are great projects out there supported by anonymous individuals, it still stands as a potential risk since the reputational risk of stealing is lower. However this isn’t the only pre-requisite, in some cases, real people with legit backgrounds can simply disappear, or even fake their own death (for example as some have speculated Gerald Cotten, founder of the Canadian exchange Quadriga had done)
Returns
If the returns being promised are very high, your alarm bells should be going off. Promising 1% daily returns (i.e. Bitconnect), means that eventually the music will stop and somebody will be left holding the bag.
Model
Typically projects will release white papers where they’ll outline the technology and the model/vision for the project. This is usually a good place to see if something is legitimate or if it’s something that’s been hacked together in an hour filled with buzzwords and empty promises.