What is an Exit Scam?
An exit scam is a type of financial fraud where a project or firm opts to steal the money collected from investors. In this case, investors are lured in to bet their savings on fraudulent projects using different types of tactics and schemes.
There are various different types of exit scams and investors should collect information regarding these methods in order to identify and avoid them.
What is a Cryptocurrency Exit Scam?
A cryptocurrency exit scam works in the same way as crowdfunding events for traditional firms. Startups or firms operating in the blockchain sector may use ICOs, IDOs, or IEO namely Initial Coin Offering, Initial DEX Offering, or Initial Exchange Offering.
The firm issues cryptocurrencies for early investors with a promise of considerable price appreciation. However, once the issuers have collected all the funds they do not invest it in the development of the project and opt to run away with the money.
In the crypto sector, there is another type of exit scam where illegal vendors operating at the darknet receive funds from buyers. However, they do not deliver the services or goods and disappear after receiving payment in advance.
In that same manner, Rug Pulls are also a popular type of exit scam. In this scenario, fraudsters list a new token at a centralized or decentralized exchange platform. As soon as the token in question gains enough traction, the issuers holding the majority portion of its total supply sell all their holdings and devalue it instantly.
Signs of an Exit Scam
Here are some signs of an exit scam that cryptocurrency investors should look out for before investing in any cryptocurrency:
Blockchain projects are based on programming and coding. However, it is possible for non-technical users to issue new cryptocurrencies at economical costs. This is a positive development but it also allows fraudulent actors to not have any type of stake in a project that is created with the purpose of generating losses.
Usually, this type of project is subjected to hack attacks and technical exploits. Therefore, even well-meaning projects that lack technical audits may pose a threat to investors.
In many cases, blockchain technology allows developers to publish new projects while remaining anonymous. Such a situation can be problematic if the investors do not have any other way to ascertain the long-term viability and stability of the project.
Experienced investors usually look for project reports such as technical audit, programing repositories, and other documentation to ensure that the project is safe for investment.
A visible red flag of exit scams is when a project makes unrealistic claims about appreciation and growth potential. For example, the issuer of a fraudulent cryptocurrency may promise to yield returns that are many times bigger in comparison to the overall market.
Investors should be skeptical if the project issuers do not provide a clear and defined roadmap or investment strategy to support their promise.
Scammers usually make up for their lack of honesty with aggressive marketing tactics. Every legitimate project should have a sufficiently funded, organized, targeted, and effective ad campaign.
However, if a project is only invested in marketing rather than solving a real-life problem, or offering a solution, or bringing utility for its consumers and investors, the chances are that it is a potential exit scam.
A sound blockchain project should have strong technical foundation and infrastructure. Blockchain networks are characterized by decentralization and are usually open-sourced.
Furthermore, proper projects also publish detailed white papers, sound road map, audit reports, and other documents to assure the investors about its legitimacy. Whenever all these factors are missing from a project the investors should classify it as an exit scam.
Problems with Tokenomics
Tokenomics is the process that defines the distribution mechanism of a cryptocurrency. Reputable blockchain projects utilize a sound and reliable policy to ensure to maintain the total supply of a project to maintain its value. However, if the scammers are the biggest bag holders of a relatively new digital currency, it could point towards probable rug pull or exit scams.
Exit scams are one of the most prevalent and detrimental scams in the cryptocurrency sector. Investors can prevent this type of scam by sharing information within their community as an effective preventive measure.