As we all know, 2018 was a difficult year for crypto and blockchain technologies and scammers exploiting the gullibility of individual investors were one of the many low points of last year.
Whenever there is an UP in coming new market, bad actors will always emerge with the goal of making millions overnight.
We saw that happen in the Dotcom Bubble and now we're seeing it again with crypto.
How did those scams work?
The most typical scam rely on fortifying the value of the token through social media, celebrity endorsement and the overall hype train. Once the token reaches a satisfying price, the owners would immediately sell their share, driving the price down and disappearing. It is also known as, "Cornering the Market", and is the reason why most such scams are referred to an ICO Exit Scams or Pump and Dumps.
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When it comes to typical, publicly available commodities, cornering the market requires a fair share of resources.
Imagine trying to corner the market of silver as a commodity, as the Hunt brothers tried during the 1980s by investing $4.5 billion in the commodity.
Their plan was ultimately cut short by the government and the brothers went bankrupt in 1988.
The price of a crypto asset, especially one launched by a bad actor, can be manipulated much more easily.
A few investors working in the conjunction with the coin issuer and followed by an intense social media campaign, can influence the price quickly and efficiently. Add to that the concept of pre-mining, where developers arbitrarily grant themselves a certain amount of coins, and you might have a problem on your hands.
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Other ways scammers exploit the market are Ponzi Schemes which pay profits to earlier investors by using funds obtained from more recent transactions. These are usually carried out in conjunction with misleading information about the asset and the team behind it.
It is important to know that Ponzi Schemes also frequently promise guaranteed returns.
In response to the increase in the amount of ICO scams, the SEC created their own fake coin, the Howeycoins, named after the Howey Test. The coin looked like a real proposition to revolutionize the travel industry, but when users clicked on the "Buy Now" icon, they were taken to an SEC website warning and educating them about the risks of imprudent investment. The website list "Guaranteed returns" and "Celebrity Endorsements" as the main red flags for ICOs scams.