How to Avoid a Cryptocurrency Scam

Not all cryptocurrencies are legitimate

OneCoin

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The rapid rise in popularity of cryptocurrencies such as bitcoin and litecoin have spurred a whole new market, where different types of virtual coins using blockchain technology pop up on a seemingly daily basis. Some of these cryptocoins are simply rudimentary clones with not much to offer, while others present fresh, desirable features to a space that continues to grow exponentially.

Many of these newly released offerings eventually fail, sometimes because they lack community interest or encounter codebase and developer issues. A select number of altcoins (any cryptocurrency that is not bitcoin) do succeed, however, and gain market share over time. Still other cryptocurrencies are launched with nefarious purposes, designed to make money for just one group of people: its creators.

A fairly well-known altcoin that might fall into this category is OneCoin, which some news outlets have reported to be a Ponzi scheme rather than a legitimate cryptocurrency. Notably, however, the Swedish government closed its investigation without bringing any charges against the new cryptocurrency.

Red Flags

When you are researching a cryptocurrency, look for red flags — things that seem off kilter with a new cryptocurrency right from the outset. These oddities and inconsistencies raise alarms throughout the crypto community.

One of the main benefits of publicly traded cryptocurrencies lies in the transparency of their transactions, a feature made possible by blockchain technology. With a public blockchain, all peer-to-peer transfers (currency or otherwise) are validated and added to a ledger that anyone can view at any time. This openness adds accountability that precludes the need for an intermediary third party to facilitate and regulate its transactions.

Electronic money mining concept
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Any cryptocurrency should be backed by a private blockchain. In a new cryptocurrency, look for one that offers an open-source codebase and a decentralized architecture. Wallet software should be available, too. Everything should be traded publicly, not within a private system that is closed and centralized. 

Watch the websites that turn up in support of a new cryptocurrency. If several websites, YouTube videos, and social media presences pop up suddenly with fervent commenters posing as crypto enthusiasts who viciously attack anyone who speaks negatively about a new cryptocurrency, consider that a red flag.

Other things to watch for:

  • Promised commissions for signing up others. 
  • Promises that upsold memberships will alleviate exhorbitant fees required to withdraw your own money.
  • Inability to use your own machinery to mine a cryptocurrency. 
  • Any country's government branding of a cryptocurrency as a pyramid or Ponzi scheme.
  • Sites not secured with SSL/HTTPS.
  • Obvious spelling and grammar mistakes.
  • Anything that forces you to sign up right away or you'll "miss out."
  • Anyone asking for access to your computer or private signing keys.

The Fall of OneCoin

OneCoin has no active exchanges on which to buy or trade. The Italian Antitrust and Consumer Protection Authority (IACPA) fined the startup cryptocurrency 2.5 million euro for being, in the IACPA's words, a pyramid scheme. Other European and African countries may be following suit.

How to Avoid a Cryptocurrency Scam

OneCoin certainly won't be the last cryptocurrency to find itself fighting governments over its legitimacy. Thankfully, you can take steps to protect yourself from falling victim to a money grab. Here are a few things to look for:

  •  A public blockchain where all transaction records are freely accessible.
  • An open-source codebase.
  • Core wallet software from which you can send and receive coins.
  • An active, knowledgeable community.
  • The ability to purchase and trade currency through reputable, well-known exchanges.

Remember, if it sounds too good to be true, it usually is. Do not let a scam discourage you from participating in the exciting world of cryptocurrencies, of course, but do your homework before investing.