How To Spot a Crypto Investment Scam: If It Sounds Too Good to be True, It

Key Takeaways

• Crypto investment scams use the allure of easy profits to embezzle victims out of their money.
• Types of scams include fake projects, pump and dump schemes, rug pulls, and exit scams.
• Protect yourself by avoiding red flags like unaudited contracts and anonymous key holders.

For as long as people have invested in cryptocurrencies, scammers have sought to swindle them out of their money with various fake projects, rug pulls, exit scams, pump and dump schemes, and more.

Increasingly sophisticated fraudsters target crypto newcomers and veteran investors alike. But thankfully, there are some best practices you can follow to protect yourself.

If It Sounds Too Good to be True, It Probably Is

The golden rule for all investments, not just crypto: If a project promises unrealistic returns or guaranteed profits, it is probably too good to be true.

While there are some relatively safe fixed-income opportunities built on stablecoin deposits, anything promising an APY above 5% should be treated with suspicion.

When the crypto market is buoyant, it is perfectly possible to generate double-digit returns from staking, lending protocols, or even just by holding tokens.

But profits aren’t guaranteed, and responsible projects will always remind you that future performance may not match previous returns.

Real-World Utility vs. Speculative Hype

In an important sense, speculative trading underpins huge swathes of the crypto ecosystem. Nevertheless, it is important to distinguish between pure hype and legitimate utility.

A good way to separate the wheat from the chaff is to understand where the value comes from.

Are earnings rooted in staking, mining, or lending? Or do they rely on automated trading algorithms? These approaches can generate attractive returns. But they also introduce unique deposit risks that don’t apply to traditional financial products.

Historically, native blockchain tokens like Bitcoin and Ether have generated significant returns for early investors. However, both were technical innovations that supported new economies and use cases.

On the other hand, projects that purely rely on speculative hype have a poor track record for leaving investors high and dry.

Memecoins are especially risky because their value rests on fickle social traction and volatile market dynamics.

Even among those that aren’t outright scams, the vast majority of memecoins end up worthless. With few exceptions, the best most investors can hope for is a short-lived pump, and even professional traders often miss the boat.

Red Flags To Look For

To help protect yourself from crypto investment scams, watch out for these red flags that may indicate a fraudulent project.

Unaudited Contracts

Legitimate crypto projects will always have their smart contracts audited by a reputable blockchain security provider.

Look for audits by companies like Hacken and CertiK, which both maintain up-to-date lists of smart contracts, platforms and apps they have reviewed, along with any vulnerabilities they discovered.

Anonymous Key Holders

Decentralized Finance (DeFi) platforms typically use multi-signature wallets to ensure one bad actor can’t run off with user deposits.

Before investing, look up who holds the keys to any multisig wallets. If all key holders are anonymous, there is no way to be sure they won’t collude to embezzle deposits.

The most secure multisig systems distribute keys to trusted third parties like blockchain foundations or public figures who don’t have a stake in the project.

Fake Endorsements

There’s nothing wrong with using genuine testimonials to promote an investment scheme. But many fraudulent crypto projects generate fake endorsements to gain credibility.

To verify if an…