Fifteen Minutes with a Scam Coin: A Hands on Approach

Creating a scam coin doesn’t take much effort. You can fork an existing currency or create a new token through Ethereum, Stellar or Waves . Most of the work is in the marketing. In an unregulated market filled with inexperienced participants, peddling the right narrative can yield a decent profit. Using signaling mechanisms, advertising, market manipulation and social engineering, you can make a worthless bit of memory into a low cost, low risk, money making venture. Keeping this in mind, investors entering the space must make sure to take the proper precautions. Right now there are few consumer protections besides skepticism, paranoia and common sense. Taking the time to understand an investment is absolutely necessary. It may seem daunting at first, particularly if you’re new to cryptoassets, but scams wind up being fairly obvious if you know what to look for. Spending ten, or in our case, roughly fifteen minutes scrutinizing a currency can tell you the whole story. Let’s begin.

Beginning with a Blank Slate

We’ll research Skycoin (SKY), with a blank slate. Knowing little about it going in, we’ll find our way to the currency’s homepage by doing a simple Google search.

The SKY Homepage

In terms of first appearances the site itself looks fairly professional, suggesting Skycoin has all the the trappings of a legitimate cryptocurrency. We see they have a wallet (for security’s sake don’t download it), a whitepaper, fairly recent blog updates, a community section and links to the project’s social media pages. So far so good.

We’ll delve a little deeper and start with the white paper. Sky’s whitepaper section has several options. Let’s start with the first one: “A Distributed Consensus Algorithm for Cryptocurrency Networks”. If you’re following along give it a quick look and see if you there’s anything that strikes you as strange (if the doc is unavailable or you don’t feel comfortable downloading the pdf from the site itself, see the text in the site’s record).

Charts and Variables

At first glance we see a fairly formal document mimicking the format of a research paper. It’s written in an esoteric style, with a number of graphs. No one would fault you if on skimming it, you may be overwhelmed at what seems to be highly technical jargon and take it for granted that it’s expressing some bold new idea. If you’re an investor without a technical background, no one would expect you to delve so deeply into the technology itself — but that of course is the point. Because laced within the jargon, and blockchain related symbolism, things are a little odd to say the least. For instance, under the section 0.3.2 “Designing the Algorithm” you get something like this:

Agreeing to elect one’s leader (or a temporary ruler), we contend, is not a very intelligent behavior either. Here is why. Leader election is a natural adaptation in situations when group’s survival requires high intelligence, while the average intelligence of group members is low. Hence the group, in order to to survive, has to find a member who can make intelligent decisions for the group. Such behavior is modeled after sheeple, or after species that have a predilection for being led, which does not seem to be congruent with cryptocurrency community.

Does this sound like “algorithm design” to you? Or what are your thoughts on section 0.3.4 “Before Consensus Trials”:

The Algorithm does not use “wall clock” (i.e. calendar date/time). Instead, block sequence numbers that are extracted from validated consensus- and blockchain- related messages are used to calculate node’s internal time. This can be informally called “block clock”.
Oh yes, the old “block clock” (vs. the ”wall clock”).

Consensus, blocks, blockchain related messages, and clocks — a word salad of blockchain jargon. We’ve only begun our research and already we see numerous oddities. But let’s continue, Skycoin is, after all, listed on CoinMarketCap, and CoinCap, and the price has gone up over 200% in just the past month. Maybe we’re drawing conclusions a little too quickly.

Borrowing Legitimacy

Let’s read another paper. How about the next one on the list “Sky: an Opinion Dynamics Framework and Model for Consensus over P2P Network” (the record here). Do you see anything odd with this one?

This paper seems to be more developed. The language is coherent and focused. It’s authors are professors from the Tsinghua University, a fairly prestigous school who’s alumni include the current president of China, Xi Jinping. Checking the university website we can confirm the authors really are members of the faculty. So what’s the issue here?

If someone’s involved with a cryptocurrency, particularly if they’re professors from a prestigious university, who’s work appears as one of the project’s whitepapers, you would assume they would have a greater role in its development. And yet the authors are nowhere to be found as members, or even advisors of the Sky team. From the citation on the left we can see the paper is from the arXiv archive, a repository of research papers available for anyone to access. Pasting a research paper in your whitepaper section, without contextualizing its relevance, or clarifying the role of its authors, can create the false impression that it has any relation to your project. The paper having the word “Sky” in the title only adds to the confusion, but should confusion be your goal, you may have chosen the paper for that very reason.

Ghost Community

Since most cryptocurrencies are open source, they are very dependent on their communities, both for their development and their use. Besides the whitepaper, accessing the community will do the most to inform you of the current state of the project and its future prospects. These communities are typically easy to access and live on social media. You can find them on Facebook, Reddit, Twitter, Slack,Telegram and on forums like Bitcoin Talk. Doing a search for a cryptocurrency on any of the mentioned sites will typically return a number of conversations, arguments, apprehensions, accusations, promotions and the like. When looking at it, however, it’s often difficult to decipher who’s telling the truth…or who’s even real.

Searching for Skycoin on Reddit yields a number of links, I’ll pick one of the more popular ones: “a new decentralized internet is being built, take back the power from corporations and giving it back to the people.” It has ~380 points with 95% upvotes and a healthy number of responses from users with accounts older than 1 year. Seems legitimate enough, let’s read some of the responses.

Reading into comments is difficult since there’s no set rules for authenticity. Some may read them and see something off immediately, while others may not see anything at all. Rather than definitively cast judgement, I’ll just say this: since most adults have been around advertising for a good portion of their lives, they’ll typically know an ad when they see one.

Ads are typically one note. Ads only cast doubt as a lead into certainty. Ads are repetitive. Ads attempt to manipulate. And finally, ads are fairly numerous and consistent. There are many posts on Skycoin like here, here and here, where the tone is consistent and most submitters stay on message. Posts that question Sky’s practices (like this one), who you can assume are not authored by a Sky supporter, are commented on by other users who keep the Sky narrative on message, downvoting any competing criticism.

It doesn't take much to add an account on Reddit, Twitter, Facebook or any other form of social media. You can create a hundred accounts on Reddit and add as many comments as you like (or pay others to do it for you). Online communities aren’t policed and misinformation is easy to spread. Just because a community exists on a website doesn’t mean it exists in real life. One user said it best here:

The Business Plan

Sometimes the best way to identify a scam coin is seeing signs of a business model based on fraud. From what we’ve seen so far, members of Skycoin have definitely put in some investment. They’ve either forked an existing currency or at least generated the trappings of one, they put together a fairly decent website, and are administrating an active marketing effort. These things take time and money, so how do they hope to make a profit?

The first is inventory. There’s no reason the issuers of a scam coin wouldn’t own most of the currency. Not only would it provide a payout should they be able to sell any of it, but it would also allow the owners to manipulate the price. When you own the majority of your own currency, you can create bogus demand by opening fake accounts on exchanges that lack any KYC requirements, and create the illusion of demand by trading with a small group of associates (or even just yourself). Investors may be tempted by the performance and trade on the inflated price. They may also unwittingly market it to others as a good investment. Typically if you see a currency that’s only trading on a couple of small time exchanges, and it has a sudden dramatic rise in price, with no accompanying announcements to justify it, you can assume there’s something strange happening.

Chart Marketing

Many exchanges have a low barrier for entry so don’t assume that being listed on one proves any legitimacy. On the handful of exchanges where Skycoin is actually traded, it can only be purchased with Bitcoin, making any trade a swap between a worthless currency and the most valuable cryptocurrency we have so far. Exchanges, particularly ones willing to sell pretty much anything, will do little to help . Once the trade is made, its irreversible, and while Bitcoin addresses can be blacklisted, the scammers can quickly exchange Bitcoin for a currency that’s more difficult to trace.

Investing according to JJ:

The Business Plan Part 2: Mining

Skycoin has also taken a more nuanced approach at acquiring Bitcoin from unwitting investors. Like many currencies, Skycoin can apparently be mined, and the Skycoin team themselves are selling the mining equipment, but with a fairly unique offer:

In order to buy one of their miners, Skycoin is asking you to send what is ~$10k worth of Bitcoin for what they estimate is a $600 machine. They will then supply you with ~$9.4k worth of a currency that is actually worth nothing at all. The ridiculousness of the offer is further exacerbated by the miner itself:

Most of the $600 must be the shipping

For anyone doing their own DIY electronics projects the boards used in this machine may seem familiar. They’re Orange Pi’s selling for roughly $25 online. As you might expect, they aren’t particularly powerful, leading us to question why mining Skycoin needs a dedicated miner using eight of them. This might of course be besides the point, since its likely the only miner that’ll ever be created was made for the photo above, and that whoever decided to purchase one has simply lost 1 BTC, with not even a faux miner as a souvenir.


No this wasn’t a particularly deep dive, but scams rarely go particularly deep. You don’t need to be an investigative journalist to identify, or at least choose to avoid, a potential scam. Never take anyone’s word on the legitimacy of a project, see for yourself. Yes, cryptocurrencies can be fairly complicated, but scams rarely are. There are cracks in the facade. Creating a seemingly legitimate currency tends to be almost as hard as creating an actual legitimate currency, and scammers rarely have the patience for it. It pays to be highly critical in this environment in general. Take the time to look at everything, as you can see, it doesn’t even have to be too much of your time.

Easter Eggs

Skycoin also has sister scams. If you want more experience deciphering scam coins feel free to explore the below (with caution):

Note: Active scams work fairly quickly, the site referenced in my example may be changed/no longer exist, in which case please refer to it’s record.

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