How to Avoid a Cryptocurrency Scam

Not all cryptocurrencies are legitimate

OneCoin

PeopleImages/Getty Images

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

Examples of Cryptocurrencies

Many newly released offerings eventually fail, sometimes because they lack community interest or encounter codebase and developer issues. Some altcoins (any cryptocurrency that is not bitcoin) succeed, however, and gain market share over time. Other cryptocurrencies are launched with corrupt 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. However, the Swedish government closed its investigation without bringing any charges against the new cryptocurrency.

Red Flags

When researching a cryptocurrency, look for red flags — things that seem off kilter with a new cryptocurrency 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 the 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 to facilitate and regulate its transactions.

Electronic money mining concept
Diy13/Getty Images

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 commenters posing as crypto enthusiasts who 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 fees required to withdraw money.
  • Inability to use your machinery to mine a cryptocurrency. 
  • Any country's government branding of a cryptocurrency as a pyramid or Ponzi scheme.
  • Sites not secured with SSL and HTTPS.
  • Obvious spelling and grammar mistakes.
  • Anything that forces you to sign up right away.
  • Anyone asking for access to your computer or private signing keys.

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. There are steps you can take to protect yourself from falling victim. 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 and knowledgeable community.
  • The ability to purchase and trade currency through reputable, well-known exchanges.

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, but do your homework before investing.