2019 is coming to a close, and, as a project aimed at helping investors navigate the crypto space without major disappointments and losses, we would, unsurprisingly, like to give an overview of where things stand with respect to scams and other dubious projects.

Losses due to scams: 2019 vs 2018

The passing year featured a lot of activity and important trends in the blockchain and crypto space: the rise of DeFi, continuing infrastructural improvements, the launch of multiple blockchain 3.0 projects such as Zilliqa, Algorand, Hedera Hashgraph and others. However, those things did not bring back to the industry the sort of public attention that it briefly captured in late 2017.

Nonetheless, the activity of various crypto scams continued unabated and, sadly, probably caused a lot more damage than in 2018. Crypto investigators from Ciphertrace publish quarterly reports on crypto activities resulting in illegal gains. The report for the fourth quarter is not yet available but by the end of the third quarter, various participants in the crypto space had lost around $4 billion to illicit actors. This is up from $1.7 billion in the whole of 2018. Of this, a large part is attributable to scams, the most spectacular of which was Pluscoin.   

Scam of the year: Pluscoin

Pluscoin was a scam that was busted in June. It was primarily aimed at China and other South-East-Asian countries.  While it is not operational anymore, some of the persons behind it continue to be at large, and according to Ciphertrace, its investors may have lost around $3 billion in deposits.

Another crypto security firm Chainalysis recently suggested that perpetrators behind Pluscoin may have been causing some of the recent decline in the BTC prices through attempts at cashing out their illicit gains on OTC markets. Moreover, according to the analysis by Elementus, the Plustoken scheme also siphoned around 10 million ETH, which represents around 9.2% of the whole ETH circulating supply. 

Notable ongoing scams: Dagcoin, Zynecoin and Sestrel

The crypto scams that have caught our attention since the launch of the Testacoin projects are Dagcoin, Zynecoin and Sestrel. We covered the first two in our articles (here and here).

Dagcoin is, basically, the successor of the notorious Onecoin using the same educational packages-based MLM pyramid scheme run by a separate organization called Success Factory. However, the Onecoin veterans who run it have apparently become savvyer in terms of marketing, and the project has a running clone of the Obyte/Byteball DAG and sleek promotional content on Youtube.

Zynecoin is an apparently Morocco-based project initially vigorously promoted by controversial French comedian Dieudonné M’Bala M’Bala. It promises to develop a specifically African cryptocurrency. This is already a major red flag because it is unclear what this could even mean. The project plainly does not have either a team or a technology to create an innovative blockchain platform. Nonetheless, the Zynecoin team has announced that after its success with the French-speaking investors, it is on the verge of a significant expansion into other countries, especially Japan.    

The Sestrel project has recently been launched by Dieudonné himself. One could imagine that he observed the success of Zynecoin and decided that it would be even more profitable to launch his own scam rather than benefit from merely being the biggest Zynecoin affiliate. This project is even bolder than Zynecoin in its brazenness. Its web-site allows one to buy sestrel tokens and receive the project’s whitepaper. Which, in contrast to a normal whitepaper, is an almost purely rhetorical document containing nonsensical or empty promises, such as the claim that sestrel will reunite the French local currencies and that its underlying project will at the same time restore the French cultural vitality, freedom of expression and so on. Not surprisingly, there are zero technical details about the actual implementation of the project and there is no information about the team. Despite all these transparent flaws, according to Dieudonné, already around 3,000 people have invested. 

What the crypto space needs to help people avoid dubious projects

Clearly, given the scale of the past and ongoing crypto scams and dubious projects, the current state of affairs urgently needs improvement. Not only does the reputation of the blockchain space as a scam paradise need to be embellished but it is probably also desirable to prevent scams from accumulating large parts of the supply of major crypto assets like BTC and ETH.    

Finally, it is important to consider the ways in which the blockchain community could help move the space forward with regard to outright scams and dubious projects. In this article, we will focus on two of them: educating people on the need to verify projects and tackling fake trading volumes.

Lack of public awareness

As we can infer from the estimated amounts of funds lost to crypto scammers, while we are far from the late 2017 cryptocurrency boom, there are still a lot of people investing considerable amounts of money into crypto assets with the hope of getting significant returns. This may be making the threat from scams and dubious projects even more urgent because in the absence of large upward price movements for legitimate crypto assets, people seeking high yield may be easier to spoof by promises that it is not yet too late to do what the early investors in BTC and ETH did.

In this regard, it is genuinely worrying how little people are searching for the information about crypto scams or checking whether particular, clearly suspicious crypto projects could be scams. 

Consider the chart below depicting the Google trends data for searches for the words “ethereum” and “crypto scams”. Given that the searches for the word “ethereum” are only a small fraction of the searches for “bitcoin”, the fact that the searches for “crypto scams” essentially do not even register on the chart suggests that extremely few people actually try to get themselves informed.

One could of course object here that, perhaps, people are mostly just trying to invest into Bitcoin, and that protects them against most crypto scams. However, this would be to misjudge how the information about crypto scams spreads. The most successful crypto scams are either MLM schemes with no real product like Onecoin, Dagcoin and (probably) Pluscoin or schemes promoted by big social media influencers like Zynecoin and Sestrel relying on the popularity of the controversial French comedian Dieudonné.

What unites both of these scam types is that people do not generally learn about them by googling, reading the crypto media, checking the popular crypto subreddits and so on. Rather, they tend to either know someone who has already invested (usually in a scammy MLM scheme) or follow certain unscrupulous social media influencers.

Another way to show that people who are targeted by scammy projects rarely check whether those projects are legitimate is to consider the example of Dagcoin-related videos on Youtube. Dagcoin’s latest major video (admittedly, well-made) has, sadly, accumulated almost 90 thousand views in 15 days.  In contrast, the view count of the most popular recent video in English unambiguously classifying Dagcoin as a scam currently stands at around 3,000, and the video was published in April. 

The need to tackle fake trading volumes

We already touched upon the issue of fake trading volumes and how to spot them in one of our past articles. Coinmarketcap’s attempt to address it through introducing the liquidity metric is laudable. However, it is probably insufficient to help investors here and now avoid scams and especially dubious projects that are not clear scams.

We already wrote previously about how the suspicious ABBC Coin project’s token was only traded on dubious exchanges, despite its high position in Coinmarketcap’s rankings. An even more egregious example is Mindol. This mysterious purportedly Japanese cryptocurrency without any clear technical fundamentals has shot up from nowhere to the market capitalization of $855 million in a matter of weeks. However, if one looks at its trading pairs, the only two major ones are hosted by the Cointiger and Coinall exchanges.

It is entirely possible that Mindol’s market capitalization is entirely fictitious and based on wash trading or outright transaction fabrication but if someone searches for the project on Coinmarketcap, one will first find its high market cap.

Of course, there are alternatives to Coinmarketcap such as Messari that publishes the real volume metric based on trades conducted on 10 crypto exchanges recognized as providing reliable volume data by Bitwise. Messari rightly does not even list Mindol. However, Coinmarketcap remains by far the most popular crypto asset data aggregator, and especially newbie investors are overwhelmingly likely to just use it. While Messari’s approach to calculating real volumes is perhaps too radical, Coinmarketcap should probably at least avoid calculating market caps for tokens listed only on dubious exchanges like Cointiger and Coinall. The blockchain community at large should start holding Coinmarketcap more accountable about how it handles this issue.

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In future articles, we will do our best to come up with the additional proposals on how to improve the situation with crypto scams and dubious projects. We wish you a Merry Christmas and a scam-free 2020.  

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