The wide adoption of cryptocurrencies has attracted many con artists who are willing to take advantage of people’s unawareness or greed. As a result, numerous scams have emerged concerning ICOs and cryptocurrency trading platforms. There is no proven method on how to avoid fraud, but our analysis of multiple cases has shown that there are five signs to watch out for when searching for a crypto exchange.
Sign #1: Fake Trading Volume
A recent study by Tie showed that nearly 87% of cryptocurrency trading platforms fake their trading volume for marketing purposes because it helps them to get better listings on sites like CoinMarketCap. Recently, two major crypto firms in South Korea were accused of wash trading.
At Upbit, the country’s largest crypto trading platform, top-level executives were suspected of creating fake accounts and orders worth $226.2 billion. Executives at Komid were sentenced to three years in prison for inflating their trading volume by creating 5 million fake accounts on their site.
Many other companies, such as BitForex and Kraken, are also suspected of manipulating their trade volume. Users who do business with such sites often discover that there is no liquidity to satisfy their withdrawal requests.
Sign #2: Suspicious Hack Attacks
Hack attacks are a major litmus test for identifying something wrong with a crypto exchange. In many cases, they lead to so-called ‘exit scams,’ which is when a platform is shut down, and users are left with little hope of getting their money back.
One example of this happening was when MapleChange suddenly shut down its website, and all channels of communication with their clients after a hack attack. The combination of the exchange’s poor security and lack of communication has led many of their users to believe they were the victims of an exit scam.
To understand, whether an exchange has shut down due to a security breach or if it was shut down as part of a scam, it is essential to monitor communication from their management. Scammers will not update their website and social media accounts; however, a legitimate exchange will always keep its customers apprised of what is happening.
Sign #3: High Asset Centralization
High concentration of virtual assets in a particular wallet — often the one belonging to senior executives — goes against the core idea behind cryptocurrencies, which is decentralization and disintermediation. Asset centralization gives people the power to manipulate prices and, what is more important, they are also a honeypot for hackers. A perfect example of one such holder is Coinbase, whose management is reported to hold cryptocurrencies worth $5 billion.
Creating an offline cold wallet may protect against direct hack attacks but, even in this case, unexpected things happen. You might recall the notorious case of QuadrigaCX, whose young CEO died under mysterious circumstances. Upon his death, he took with him the key to the cold storage of cryptocurrencies worth $190 million.
Sign #4: Unrealistic Promises
They say that you always have to pay the piper. This is particularly true in the crypto sphere. There are countless airdrops, bounties, and giveaways, the purpose of which is to gain access to users’ accounts and funds.
There are also a lot of Ponzi schemes where users are offered unrealistically high yields and are pushed to attract new investors in exchange for a commission. This is also known as multi-level marketing. A good rule of thumb to follow is that if something is too good to be true, it probably is.
One notable case that shows how far crooks can go is the OneCoin scam. It is said to have generated €4.1 billion from 2 million users, all of whom were attracted via the selling of discount packages. Luckily for the users, the masterminds of this scheme were caught, and they face many years of imprisonment.
Sign #5: Opaque Communication
Transparency and openness are things that cannot be faked. It is very important to verify the contact information of a cryptocurrency exchange to avoid being scammed. If their social media posts are infrequent and messages are infrequent and one-way, this might mean that they are hiding something. If, however, they have group-like discussions, and they promptly address user issues, this shows that they are trustworthy.
An excellent example of when to start worrying is a Reddit user’s failed attempts to reach Bittrex by calling them, sending them emails, and walking directly to their office. If an exchange is not responsive to your attempts at communication, do not do business with them.
Cryptocurrency exchanges are associated with many risks, but you can feel more secure about your holdings if you pay attention to the above-mentioned characteristics: fake trading volume, suspicious hack attacks, high asset centralization, unrealistic promises, and opaque communication.