The 6 Red Flags of a Crypto Scam, According to the SEC
04.26.2019

According to a new warning from the SEC, there are six key “red flags” for which cryptocurrency investors should be on the lookout. They all sound incredibly obvious, but don’t be fooled. The crypto scam space is full of bizarre tricks.

Let’s start with the SEC’s warnings. First off, there’s the classic, impossibly fulfillable “guarantee” of a high return attached to a minimal risk investment. One of the basic standards of investing is that the higher your potential return, the more risk you’re assuming with your money. If investing was really no risk, all reward, we’d all be rich by now.

Next, the SEC warns of “complicated jargon” and opaque project pitches. Some investors, especially people just getting into the crypto space, may assume that if something sounds complex, that means it sounds smart. The two do not equate. Intelligent people who aren’t trying to hide anything will find the most straightforward way to explain something to you.

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Ultimately, a lot of these red flags are about scammers using a new and legally undefined space to take advantage of people. While the SEC’s next tip is to check—using this government website—whether a company is a licensed seller before buying into their crypto project, a lot of those projects have trouble getting licensed to do business (just think about how hard it is to get a BitLicense in New York). This maybe just means that a lot of these projects aren’t worth puttying your money in to begin with. There are also registered investment platforms that include some crypto projects, like Republic, which could offer a safer bet than investing directly with a little-known startup.

The next three warning signs listed by the SEC are eye-rollingly obvious. Does the opportunity “sound too good to be true”? It probably is. Did you get an email out of the blue, from an unrecognizable address, replete with spelling errors and the chance the send 1 ETH and, just days later, get 2 ETH in return? Yeah, don’t do that. What if you’re told that you have to invest RIGHT NOW, because if you don’t, you’re MISSING OUT? Then maybe you were reading Forbes’s CryptoAsset & Blockchain Advisor letter.

You may recognize these warning signs in a number of crypto scams that have been perpetrated since digital currency started gaining mainstream recognition. In August 2018, for instance, the SEC cracked down on the founder behind the Tomahawkcoin ICO, which would have somehow used to token investments to fund oil drilling in California. The company blatantly lied about its oil production projections—but its business plan was complicated and novel enough (due to the crypto twist) that investors may have nodded along, with a running internal monologue of, Welp, I don’t understand it, so it must be sophisticated.

Then there are the infamous promises, usually made on social platforms like Twitter, by celebrities and major companies “giving away” crypto. Target, Google, and Elon Musk impersonators alike have offered bitcoin to people willing to…give them bitcoin. A false BREAKERMAG Twitter account even posted about a “10,000 ETH giveaway” last year. To get that ETH, you’d have to send some. (Though Musk’s crypto “giveaways” come from false accounts, it’s important to also remain skeptical of genuine celebrity endorsements.)

Say it’s too late, and you’ve already thrown crypto at a dubious ICO. You may fall victim to an exit scam. In an exit scam, an ICO typically raises money then disappears without issuing any tokens to investors, or issuing worthless ones. However, it’s not just ICOs that do this. Sketchy exchanges can use similar tactics, claiming hacks or fund mismanagement while secretly squirreling away customers’ funds. (One particularly fishy example come to mind.)

All of these red flags are perfectly embodied in a site advertising HoweyCoins. Upon entering the site, wide-eyed crypto investing hopefuls are greeted with a seductive, tropical scene and a countdown to the startup’s token sale. As potential investors scroll down, they’re met with enthusiastic optimism: “We anticipate OVER 1% daily returns, with DOUBLE 2% returns on Tier 1 investors in pre-ICO stage secured purchases.” Then they see the glowing celebrity endorsements—@boxingchamp1934 says “This is going to pop at the top!” And finally, buried at the bottom, a note that HoweyCoins’ past two pumps resulted in returns of more than 225 percent.

The SEC made that website. Now that’s an effective warning.