4 Types of Token Offering Scams and How to Avoid them


Token offerings (sometimes called Initial Coin Offerings, or ICOs) are a way for crypto projects to raise funding, and an opportunity for investors to make money by buying new project tokens before their prices rise on the market. 

While many token offerings were legitimate, and many projects failed because of simple business or economic reasons, scams involving token offerings were widespread from 2014 onwards as scammers took advantage of the crypto hype, a lack of awareness of how crypto worked, and human flaws like greed and fear. 

Token offering scams have fallen significantly after Huobi launched its Huobi Prime token offering platform in 2017. This is also due in part to better public education about how cryptocurrencies work, but also because of the simplified and verified process that Huobi Prime uses to evaluate new projects before allowing them on our platform. 

Even though investors on the Huobi Prime platform can rest easy, many scams still happen outside of Huobi’s ecosystem and a savvy investor must learn now to identify and avoid them. 

Here are some of the most popular scams committed as a token offering: 

  1. The Exit Scam
  2. Airdrop Scam
  3. Phishing Scam
  4. Pump and Dump 

The Exit Scam 

The exit scam happens when an insider raises funds for the project and subsequently closes or exits the project with raised funds. This leaves the investor with a bag of tokens with no inherent value.  

This can either happen with a token project or an exchange which is raising funds. Like in the case of Thodex, where the founder, Ozer, disappeared with investors funds. 

Airdrop Scam 

Airdrop refers to free tokens given to investors in exchange for adoption of a new platform, purchase of new tokens or locking in of tokens. 

A project will usually allocate a portion of the token supply to be distributed to investors, by doing so, it allows the token project owners to gather mass audience with the pretence of giving out free cryptocurrency. 

The scam works by getting parties interested in the airdrop to submit personal information, private keys or purchasing tokens to receive more airdrops. The interested parties may get the airdropped tokens, but these tokens might not have value or very little value as compared to the information that the scammers have obtained. 

The OmiseGo airdrop scam is one of the largest scams in the history of crypto. OmiseGo (OMG) was supposed to be airdropped in September 2017, but it got postponed. Scammers took this opportunity, creating fake Twitter handles, Telegram chat group, fake Forums threads and sites, tricking unsuspecting users into submitting their private keys. It was reported that more than 300 Ether were lost to scammers. 

Don’t lose your tokens to scammers | www.pixabay.com

Phishing Scams 

Even today, phishing scam is one that many investors fall for. Scammers disguise as legit entities or a trusted source, deceives the victim into thinking that his or her account is getting hacked. Which subsequently, the victim will be brought to a fake site which resembles the legit entity. The victim is then prompted to change sensitive information like password and 2FA, of which, the scammer can access the victim’s account to perform malicious transactions. 

It is reported that such scams have rose more than 1000% and cost investors almost $80 million dollars. 

Pump and Dump 

During a token offering or token sale, investors exchange their cryptocurrencies for the new token. The project owner or team will share in their whitepaper how many tokens will be released for sale, set aside for future development and so on. 

Figure 1:Axie Infinity Token Breakdown | www.axieinfinity.com 

Most project have a soft cap and hard cap of how much funds they will be raising. Often, whales will enter this space to buy up majority of the tokens which leaves very little for investors who truly support the project. 

And upon exchange listing, these whales send signal to various social media group indication that the token is a “Buy” as it is undervalued and will spike in the next couple months. Following this, the whales will dump these tokens as the price start to rise, leaving investors with tokens that are worth a lot less than what they paid for.  

Smaller investors are on the losing of this because they are not able to leverage on ground floor prices when the tokens are released. 

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