Be weary of these telltale signs of scams and projects destined to fail

Sean Youra

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Nov 22, 2019 · 7 min read

The hard lessons learned in investing

No one likes being ripped off and losing their hard-earned money. Unfortunately, we’re all bound to be ripped off at some point whether it’s overpaying on an item worth a fraction of the cost or investing in a project or idea only to find you’ve been scammed.

This is especially true when investing in high-risk assets like stocks or crypto, hence part of the reason they’re considered high-risk. This is also a topic I’ve discussed in a previous story about why we should probably use the term “gambling” rather than “investing” for these types of assets.

Regardless of the terms used, as you become more familiar with investing in a particular space, you begin to identify certain patterns among projects that end up succeeding and those that do not.

What follows is what I’ve learned during my extensive research of the crypto space for the past couple of years. There are five telltale signs I’ve noticed among crypto projects that have ended up being scams or have failed miserably leaving investors in those projects high and dry.

For all of these signs, we’ll pick on the now infamous BitConnect crypto company and their BCC token to illustrate how these signs could have been used to realize the project was a scam before it was too late. If you haven’t heard about BitConnect before, here’s a good primer.

The only problem the founders of Bitconnect were trying to solve was how they could create more money for themselves. Hence, a pyramid scheme was born.

1. Lack of real utility or need

Whether the project has real utility or addresses an unmet need are probably the most important factors to consider when deciding to invest. There are far too many projects out there that fail in this regard because they assume that just because you create something, people will buy it, which is, of course, a false assumption. At Crypto Spotlight, only projects that meet these criteria of having real utility and addressing unmet needs are analyzed, since these are the projects that tend to do well in the long run.

Bitconnect, on the other hand, did not meet these criteria. Their lending platform required that users lend their Bitcoin for Bitconnect’s native token, BCC, and receive payouts — averaging one percent daily and forty percent per month — in the BCC token. These earnings would then have to be converted back to Bitcoin and subsequently to USD if the user wanted to deposit said earnings into their bank account. Essentially, it was just money being converted from one form to another with the added incentive of earned interest depending on how much a user’s initial deposit was.

There was nothing revolutionary or innovative about Bitconnect’s lending platform nor was there a real need for it. By tying their BCC token to the usage of the lending platform, they successfully created utility for the token, but did not achieve utility in a larger sense. Any investor of the project should have asked themselves one simple question:

What real-world problem is Bitconnect trying to solve?

The only problem the founders of Bitconnect were trying to solve was how they could create more money for themselves. Hence, a pyramid scheme was born.

2. Unreasonable and unsustainable ROI (i.e. “too good to be true”)

The saying “if it seems too good to be true, it probably is” should always be a reminder to investors that they need to temper their expectations of exciting projects and analyze them with a rational eye.

It might sound exciting to hear about forty percent returns per month, as Bitconnect advertised, but does that really seem reasonable and sustainable for the company to continually pay out to investors?

One way to determine whether returns like this are actually reasonable is to look at returns for other types of assets. For example, an average dividend-paying stock in the financial sector yields about four percent, and this number is about the same for all other sectors as well. You could also look at the highest rates offered by banks for savings accounts (around two percent) or CDs (also around two percent) for comparison purposes.

If the returns are so much higher than for investing in any other types of assets or rates offered by other institutions, then you need to ask yourself a second question:

Where is the company getting the money to be able to pay out such high returns?

In the case of Bitconnect, the payouts to investors were supposed to be generated through Bitconnect’s “trading bots and volatility software”. However, in actuality, the money to pay the existing investors had to come from money lended by new investors, since it was not possible to generate their exorbitant advertised returns otherwise, which makes sense when you consider that they offered even higher returns for investors who were willing to lend more money.

3. Always downplay the bad news to maintain investor confidence

A company that has nothing to hide will always be up front with its investors and will admit to its mistakes. Ideally, when things aren’t going so well for the project, investors should be notified in advance and not when the company is facing bankruptcy, or worse.

Alas, with Bitconnect, investors faced much worse. It started with the British Registrar of Companies, which deals with breaches to UK company laws, threatening to shut down Bitconnect’s operations and dissolve it. Instead of taking the threat seriously and addressing their concerns, Bitconnect’s marketers and influencers downplayed these threats in an attempt to maintain investor confidence.

Even as the mainstream media latched onto the story and questioned the viability and legality of Bitconnect, their marketing team continued to act as if all was fine, even going as far as to hold ridiculous celebrations at conferences like the one depicted in the video below.

This was just the beginning of the end for Bitconnect, as it would later face cease and desist letters from the Texas Securities Board, among others, leading to the eventual shut down of its lending operations and the plummeting of the BCC token price from its all-time high of approximately $460 to an all-time low of $0.25.

4. Inexperienced team and lack of transparency

For many new startups, including in the crypto space, far too much attention is paid to the innovative technology they are offering and not enough to the team that is leading the project. You could have the most revolutionary tech the world has even seen, but still fail to achieve mass adoption if you don’t have the right team assembled who actually know what they’re doing.

In the case of Bitconnect, investors didn’t even know who the founders were or who was overseeing the lending platform’s development, since it was anonymously-run. In fact, in the filings for Bitconnect’s incorporation as a legal company on the British Companies House website, it was revealed that the location of business, founders, assets, and even the company name were all either concealed or misrepresented purposefully.

If you go to a new company’s website and it doesn’t list the founders or the core team that is working on the project, consider that a bad sign. The team should also not be a random assortment of people, but rather include experienced members with proven track records of success in their respective industries.

5. All hype and nothing to show for it

If a company has spent the majority of its revenues on marketing and hyping itself up rather than investing into R&D and infrastructure, building partnerships with other companies, or hiring new resources to support its growth, then the company is most likely on the wrong track and should be a clear warning sign to investors.

The BCC token’s staggering rise in value from less than a dollar after Bitconnect’s Initial Coin Offering (ICO) to an all-time high of approximately $460 less than a year later should be a glaring sign of the extreme hype that surrounded the project.

This meteoric rise can be attributed to two primary factors:

1. The expansive multi-level marketing of the project
2. The purported ROI from using the Bitconnect lending platform

By engaging in multi-level marketing (aka pyramid selling), Bitconnect’s lending platform and their BCC token were marketed to individuals who invested in the project and essentially became marketers (or promoters) for Bitconnect themselves. Thus, the hype bubble only got larger as new investors were turned into marketers and that cycle continued to repeat.

As discussed, the exorbitant and unrealistic ROI that was advertised continued to funnel new investors’ money into the platform helping to sustain its growth in the short-term, but a company built on hype atop a great pyramid scheme will inevitably crumble in the long run.

Memorize the signs and don’t get scammed

Despite the lack of utility or need for the project, the outlandish ROI offered to investors, the sketchy and unethical marketing tactics, the extreme lack of transparency, and the excessive hype, investors from around the world still forked over their Bitcoin to Bitconnect as greed clouded their judgement.

We all dream of life-changing money, which is why many of us play the lottery or invest in high-risk assets. However, life-changing can be positive or negative, and for Bitconnect investors, it turned out extremely negative in the end.

Be smart with your investments and avoid companies that exhibit any of the five telltale signs of a crypto scam. If you’ve been reading this and thinking about a company you’re invested in right now with a worried look on your face, you know what to do.

Disclaimer: The content provided is for informational purposes only. You should consult a financial professional before making any major financial decisions. Do your own research and invest at your own risk.