What is a Scamcoin

Scamcoins are one of the most widespread and most potent fraudulent schemes in the crypto space. They disguise themselves as legit investment opportunities and prey on unwary investors that hope to make a quick profit. However, once the scam runs its course, people are usually left holding a worthless bag of coins, and the perpetrators disappear into the ether.

Don’t want to be the victim of the next scamcoin? Well, you are in the right place, as this article will help you understand scamcoins and how to detect them. To this end, we explore the main types of scamcoins and their main characteristics. In the end, you should be able to see scamcoins coming from miles away and avoid them altogether.

Short Preface To Crypto Scams

In the long term, Bitcoin and Ethereum can be dependable investments with very little downside. That said, they also lack the incredible profit opportunities of less-known, low-cap cryptocurrencies. Altcoins can be a much better short-term investment, especially for people that want to grow their capital rapidly. And with more than 17.000 coins listed on Coinmarketcap, there’s an overabundance of choice out there.

This incredible profit potential of cryptos attracts novice investors that have little experience researching the market. At the same time, this draws in thousands of malicious actors and scammers. Through various artifices, they will take advantage of FOMO and the gullibility of crypto newcomers to strip them of their hard-earned cash.

The main culprit in this narrative is the lack of regulation of the crypto space. Since the advent of the Ethereum blockchain and smart contracts, anyone can create their own token, with little-to-no effort. This mechanism has a wide range of benefits for the blockchain ecosystem, with one major drawback. In the form of scamcoins, it provides scammers with a powerful tool to defraud investors for huge amounts of money.

What Is a Scamcoin? What does a Scamcoin Means?

A scamcoin is a cryptocurrency that is specifically created with the goal to steal money from uninformed investors. Their creators usually market them as having incredible profit potential and exorbitant passive income yields. However, a scamcoin will never deliver on these promises. Instead, the team will disappear with the invested funds shortly after the coin reaches peak interest from the community.

As such, scamcoins are one of the main reasons why the blockchain space is suffering from mainstream media backlash. For every innovative project, there are dozens of scamcoins and scam NFTs. Some are outright fake coins that don’t even run on a blockchain, while others have backdoors in their code that allow the creators to control the entire supply of tokens.

However, you shouldn’t confuse shitcoins with scamcoins. While both have no intrinsic value, at least shitcoins don’t have a premeditated goal of stealing people’s money. If you are careful, investing in a shitcoin can sometimes yield some good results, especially in the short term. Buying scamcoins, on the other hand, will almost always end up in losing all of your money. Worse, the scammers could hack your crypto wallet and you might lose much more than just your scamcoin investment.

Main Types of Scamcoins

To make things even more complicated, fraudsters have established multiple ways to push out their scamcoin schemes. There are three main categories, each one with different characteristics and red flags that you should be aware of.

Ponzi Scheme Scamcoins

A Ponzi scheme, by definition, takes money from investors and distributes them to others. This works until there’s either no more money to give out, or the creator of the scamcoin decides they have amassed sufficient funds.

These schemes are purely based on hype and always promise incredible ROI. Usually, they are built around a community of insiders that promote the coin on Telegram and share fake returns to pull in a maximum number of investors very quickly. In some cases, these schemes have no blockchain project whatsoever and fully rely on deceptive returns to draw in gullible investors.

Rug Pull Scamcoins

A rug pull is a crypto scam where the team behind the coin suddenly abandons the project and disappears with the investors’ money. A rug pull usually occurs on decentralized exchange (DEXes), where the scammers drain the liquidity of the coin, making it unusable.

To understand how a rug pull can be perpetrated, we need to open a short parenthesis on how DEXes such as Uniswap or PancakeSwap work. These platforms rely on liquidity pools to provide traders with sufficient liquidity for token swaps. To attract users to provide liquidity, exchange platforms offer various incentive methods such as liquidity mining or yield farming.

In the case of scamcoins, creators might get the coin trending on TikTok or Twitter and increase the liquidity themselves to provide a false image of a healthy market. As a result, users deposit both the token and ETH in a liquidity pool. They do this with the hope that the price of the token goes up and they will be able to trade them for more ETH in the future.

However, in our narrative, malicious developers can leave backdoor code in the smart contract allowing them to drain the ETH liquidity from the pool. Once there’s no more ETH, the value of the token drops to zero, leaving investors holding worthless bags of coins no one wants to buy.

ICO Scamcoins

An ICO scam is a presale of a token that has no real project behind the hype. The fraud relies on a promise that the token will bring incredible innovations to the blockchain space. However, in many cases, there’s no project to begin with, and investors buying tokens are left with worthless coins with no use case or value. While ICO scams were much more prevalent in the past, they still remain a point of concern in the current crypto environment.

Thankfully, today you can participate in legitimate ICOs through platforms such as the Binance Launchpad or Coinlist. These platforms carefully scrutinize the projects before they are listed, which considerably decreases the chances of investing in a scam.

How To Detect Scamcoins

The first thing you should understand is that scamcoins mainly target people that believe they can get rich with crypto very quickly. While cryptocurrencies do have great investment potential, they are far from being get-rich-quick schemes. Successfully investing in crypto requires patience and a cool head. So, to avoid investing in a scam, you will have to do some proper research beforehand, which includes:

  • Checking out the website and token whitepaper. This will be your first step in checking out the legitimacy of the project. Every genuine crypto project has a well-written and informative website. Additionally, the whitepaper should provide details about the goals of the project, its architecture, and tokenomics. Avoid coins with whitepapers that have an overabundance of technical mumbo-jumbo and are confusing to read.
  • Investigating the team. Equally important is to check out whether there are any names attached to the project. Track the team’s previous work and achievements in the industry. Do a reverse google image search to ensure these are real people and not impostors.
  • Doing the math. Be mindful of surreal promises of short-term returns on your investment. If the numbers sound too good to be true, they usually are. Check out the total supply of tokens and see what USD price the coin could realistically reach compared to BTC or ETH.

All in all, to avoid scamcoins, don’t blindly follow internet advice. Always do the required legwork before you commit to investing in a new, unproven cryptocurrency.

Notorious Crypto Scams With Scamcoins

To slowly wrap up this scamcoin article, let’s mention some more notorious schemes that have happened in the past. This should allow you to have a more hands-on understanding of the terrible effect of scamcoins.

Bitconnect

This scam was carried out during the ICO craze of 2017, when everyone was looking for the next big thing to invest during the bull run. The team behind Bitcoinnect managed to convince investors to put in $2 billion by selling BCC tokens for Bitcoin. They promised BCC holders incredible triple-percentage returns, refundable in BTC through a highly convoluted mechanism. Driven by hype, BCC tokens skyrocketed from $0.17 to over $450 on the open market.

However, shortly after the coin reached this all-time high, Bitconnect simply shut down, taking investors’ Bitcoin with them. The value of BCC crashed to almost zero, leaving backers with a bitter taste in their mouths.

SushiSwap

In August 2020, every DeFi enthusiast was closely following SushiSwap, a new decentralized exchange that promised unprecedented yields for providing liquidity to its protocol. Everything seemed to be going incredibly well for this platform, which was gaining significant clout in the DeFi ecosystem. Even reputable firms had audited the smart contracts to ensure that it was safe to use.

It was at this point that the anonymous developer of SushiSwap, Chef Nomi, pulled 50% of the SUSHI/ETH liquidity and immediately sold these funds. The developer had left a backdoor in the smart contracts giving him access to 10% of all the liquidity of the protocol. As a result., the price of SUSHI tanked and caused a good chunk of DeFi aficionados to lose faith in the system.

Later on, Chef Nomi returned the funds, but the damage to the reputation of the platform was already done. Today, SushiSwap remains one of the leading DeFi platforms, but many only remember it for its creator’s notorious rug pull.

Squid Game Token

One of the more recent scams in the crypto space is the Squid Game Token that ran on the Binance Smart Chain. A typical scamcoin, it was created following the hype of Netflix’s extremely popular Squid Game TV show. This scam flashed multiple red flags, like an unprofessional website, an amateurish whitepaper, and a completely anonymous team. The final sign that something was wrong with this project was that users could only purchase SQUID tokens for BNB, but weren’t allowed to sell them.

Nevertheless, the timing couldn’t have been more appropriate. During this period (November 2021) meme coins were taking off and people investing in them were making millions. As such, investors saw a fresh opportunity in SQUID.

The price of the tokens skyrocketed to $2.861 which was the sweet spot for the creators to unload their tokens to unsuspecting market participants. They pulled all liquidity and took off with millions, crashing the token’s price to $0.0007926 in mere minutes.

Conclusion

By now, you should be aware that the crypto markets are rife with thousands of coins that have no other goal than to steal your money. And with the rise of the DeFi marketplace, scamcoins have become even more commonplace than before. With new blockchains like BSC and Avalanche running smart contracts, falling into the pitfall of purchasing scamcoins has never been easier.

Moreover, scamcoins aren’t exclusive to decentralized exchanges either. Even thorough reputable exchanges like Coinbase and Binance do their best to avoid listing them, you should always do additional research before buying any cryptocurrency.

We know that it can be very easy to get excited by a new crypto opportunity. However, taking the time to apply due diligence will allow you to have a much safer and more rewarding crypto journey. Hopefully, this article will help remain on the safe side regarding scamcoins.