What to look out for.
A lot of us have heard about Bitcoin and cryptocurrencies. Some of us are interested in learning more, some of us are interested in investing.
But because it is new, and shrouded in controversy and misinformation, some unscrupulous people take advantage to defraud us.
To protect yourself and stay safe so you do not get scammed, here is a quick guide on 2 common structures and forms of scams, how to avoid them and some examples of scams from East Africa.
Broadly, there are 2 types of Cryptocurrency SCAMS in Kenya and East Africa since 2014 to date:
- Outright scams
- Exit scams
Outright scams are projects or clubs that pitch themselves as investment and membership networks. They promise high returns, or cash flows or some form of pay off, but with a catch; you have to give up something of value, such as a membership fee, or regular recurring payments into an account or to an agent or asked to send money somewhere.
Outright scams tend to market themselves heavily and hide their true intentions through tried and tested marketing gimmicks. Their agents and marketing front is known to be excellent at sales and marketing.
So do not be afraid to be thorough, by asking tough questions.
A lot of them also have an element of referral, inviting others or promoting it to others for some reward. This pattern is similar to network marketing and uses some elements of network marketing to grow and scale.
Avoid this type of cams by:
- By testing and by looking up the project online extensively
- Checking out reviews of the project from trusted sources
- Take your time in making a decision
- If you are still not sure, then stay away until you are ready
Examples of Outright scams in Kenya:
- Brazil bitcoin con scheme goes down with Kenyans’ cash
- Clients Lose Shs 10billion in Cryptocurrency Scam
Exit Scams can be tricky to identify because they are dressed up to look like a real company with real ambitions.
The founders usually offer coins or tokens that are intended to represent some aspects of the project – sometimes cash flows, sometimes nothing, sometimes, rights, sometimes equity.
The project promoters are careful not to promise too much and not corner themselves to the promises backing the token.
Exit scams will typically ask you to send cryptocurrency like Ethereum or Bitcoin or Bitcoin Cash to an account they control and promise to give you cryptocurrency tokens in the project.
Some even go as far as to ask for money via Mpesa, then give you cryptocurrency tokens in the project with promises of high returns.
They are hard to identify because good projects also use cryptocurrency technology and blockchain to issue instruments of debt and equity.
They are known as exit scams because the founders will often make way with the money after selling the cryptocurrency tokens to investors. They never get back to completing the project and the project never matures.
Hence the EXIT scam.
To tell if it is a scam or not, we recommend using this checklist to assess if the project fundamentals are good enough to consider. You can assign a score to each point and come up with an average to help you decide on whether to invest or not.
Checklist on what to look at/what should be of interest
- Who is the founder or team behind the project and what is their experience and reputation
- What year was the project founded?
- How many cryptocurrency tokens were issued?
- What are the legal terms of distribution and allocation of cryptocurrency tokens?
- What is the Issue price of the cryptocurrency token?
- Who are the backers of the project and what is their reputation?
- How much money has been raised so far by the project?
- What is the real use case of the cryptocurrency token that gives it value?
- Is the cryptocurrency blockchain project regulated? Or verified by the Blockchain Association of Kenya
These are only guidelines. Remember to evaluate this project as you would any other investment venture.
Examples of Exit Scam projects in Kenya:
This guide is only but a start to Making Sense of the Risks and opportunities in Bitcoin and Cryptocurrencies.
To learn more, sign up for the Making Sense of Bitcoin and Cryptocurrencies program by Cryptobaraza and Centonomy. Class starts on July 31st.
Michael Kimani is the Creator of Cryptobaraza