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The Dark Side of Crypto: Scams, Shills, and The Smart Investor’s Defense

3 days ago6 min read
Dark Side of Crypto, Rugpull, Scams
Dark Side of Crypto, Rugpull, Scams

The cryptocurrency space has seen explosive growth, with over 300 million people worldwide owning some form of crypto, as reported by Comparitech. However, this growth has been accompanied by significant risks, including fake coins, rug pulls, and shills, particularly those involving famous names.


Prevalence of Fake Coins and Rug Pulls

Fake coins and rug pulls represent a major threat to crypto investors. Rug pulls, where developers abandon projects after raising funds, have resulted in substantial losses. Comparitech estimates $27 billion lost to crypto and NFT rug pulls and scams to date, with notable examples like OneCoin, which stole $4 billion through a Ponzi scheme.


Solidus Labs reported over 117,000 scam tokens deployed in 2022, a 41% increase from 2021, with 15 new scam tokens detected hourly, affecting nearly 2 million investors. Chainalysis noted $2.8 billion in illicit activity from rug pulls in 2021 alone, accounting for 37% of all crypto-related scams.


Fake coins often mimic legitimate cryptocurrencies, using similar names or symbols to deceive investors. Avalanche Support explains that anyone can create tokens on blockchains, leading to counterfeit versions that exploit the reputation of established coins. 


This creates a challenging environment for investors, with Mass.gov noting a nearly 200% rise in investment fraud from $907 million in 2021 to $2.57 billion in 2022, per the FBI’s annual Internet Crime Report.



Unexpected Rug Pulls and Figures

Some rug pulls have been particularly unexpected due to the apparent legitimacy of the projects or figures involved:

  • OneCoin: Founded by Ruja Ignatova, this Ponzi scheme raised $4 billion, surprising investors with its scale and the founder's background in consulting (IRS). Ignatova, dubbed the "Cryptoqueen," disappeared in 2017 and is on the FBI's Most Wanted list.


  • EthereuMax: Promoted by Kim Kardashian, this project was charged by the SEC for unlawfully touting the crypto asset without disclosing her $250,000 payment (SEC). The involvement of a high-profile celebrity like Kardashian, known for her media empire, was unexpected.


  • Floyd Mayweather and Centra Tech: Mayweather, a boxing legend, was fined for promoting Centra Tech without disclosing payments, part of a broader pattern of celebrity endorsements in scams (The Guardian). His involvement in multiple crypto promotions raised eyebrows given his sports fame.


  • Caitlyn Jenner and JENNER Token: Jenner, an Olympic gold medalist and media personality, faced lawsuits for allegedly misleading investors in her memecoin project, surprising given her public profile (Bloomberg Law).


These cases highlight how even seemingly reputable figures can be involved in scams, changing the perception of trust in the crypto space. And sadly this is just the tip of the iceberg.


Shills by Famous Names

Shills, individuals promoting projects for personal gain without disclosure, often involve celebrities, amplifying the risk. Business Insider details celebrities like Kim Kardashian, paid $250,000 to promote EthereumMax, and Floyd Mayweather, accused in pump-and-dump schemes. 


Cointelegraph highlights cases like Caitlyn Jenner and Jason Derulo facing backlash for token price manipulation, with lawsuits alleging fraudulent solicitations. CCN.com notes celebrities like The Rock and Lindsay Lohan entangled in such scams, often through social media promotions.


The use of celebrity endorsements raises transparency concerns, with Reddit discussing cases like Kevin Hart promoting Lil' Bit Cash, which ended in a rug pull. Santander UK reported a surge in celebrity-endorsed crypto scams, with average losses of £11,872 in early 2022, expecting an 87% increase in cases compared to 2021. This involvement not only misleads investors but also damages market integrity.


The Smart Investor Project

The Smart Investor is designed to create a pool of vetted investors who share insights, helping retail investors access reliable information without being influenced by shills.


The platform uses ML tools to:

  • Vet Project Quality: Analyze team experience, project transparency, social media activity, and trading volume.


  • Detect Shills: Use social media analytics to identify paid promotions and disclosure patterns.


  • Validate Projects: Scan for low-cap or untrustworthy projects, ensuring safer investments.


The ML model focuses on features like team background, whitepaper quality, community engagement, and code audit reports, providing a reliability score for each project, enhancing investor confidence.


Platform Architecture and Operation

The Smart Investor platform's architecture, as illustrated in the attached flowchart, integrates four key components to achieve enhanced investment insights:

  • Real-Time Data: Immediate access to current financial market data ensures timely decision-making.


  • AI & ML: Advanced algorithms for predictive investment analysis help in identifying potential scams and vetting projects.


  • Community Access: A collaborative platform for shared investment strategies allows vetted investors to share insights.


  • Expert Access: Professional guidance for strategic investment planning provides expert advice.


These components work together to deliver enhanced investment insights, helping retail investors navigate the crypto market safely and profitably.


Tools and Resources for Investors

To support investors, The Smart Investor integrates several tools into its API, enhancing project vetting and scam detection:

  • CoinGecko: Provides market data, including project details and social media links, aiding credibility assessment (CoinGecko).


  • Nansen: Offers on-chain analytics, labeling wallets to identify potential rug pullers, as seen in their role in tracing FTX outflows (Nansen).


  • Glassnode: Delivers on-chain and off-chain metrics, useful for understanding market dynamics and spotting anomalies (Glassnode).


  • TRM Labs and QLUE: Assist in detecting suspicious activities through blockchain analytics (TRM Labs, QLUE).


  • Messari: Provides deeper market insights for comprehensive analysis (Messari).

These tools, combined with ML models, help investors make informed decisions, reducing exposure to scams.


Impact and Future Directions

The impact of The Smart Investor could be significant, reducing investor losses and improving market integrity. Hypothetical results might show a reduction in scam exposure by 50%, based on ML accuracy rates from existing studies.


Future research could explore integrating real-time data feeds and expanding to other blockchains beyond Ethereum.


Table: Summary of Key Statistics

Category

Statistic

Source

Scam Tokens (2022)

Over 117,000 deployed

Solidus Labs

Total Losses (To Date)

$27 billion

Comparitech

Rug Pull Losses (2021)

$2.8 billion in illicit activity

Chainalysis

Celebrity-Endorsed Losses (Q1 2022)

Average £11,872 per victim

Santander UK

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