The crypto world is raw, unregulated and changing fast. Often this is a boon as it allows for rapid growth and new opportunities every day. At the same time though it sure can feel like there are 5 people trying to scam you for every honest offer there is. Scams have always been a huge part of the internet. Wherever there's money to be made there will be those that try to profit on their unsuspecting victims. A lot of those scams are quite obvious to detect while others are more elaborate. In order to protect yourself from being scammed it's important to understand what to look for.
Today I'm going to give you 4 things to look for in order to determine whether a site is a scam or not. I'll first describe each sign and than take a closer look at http://coin-farm.net/ to illustrate my point. This way we'll not only learn how to detect a scam but we're also going to find out whether coin-farm is legit or not.
1) Take a look at the dividend they offer
This is probably the most important thing to take into account. If an offer sounds too good to be true it usually is not. Let's just think about it for a moment. If a stranger you know nothing about offered to pay you 100$ in a year if you give him 10$ now, would you take that deal? Most people probably would not do that in the real world as there's obviously something wrong with the offer. Yet in the crypto world a lot of people fall for scams offering to double your investment in mere weeks. There obviously is no exact value to look for, but the more dividend a deal offers the more suspicious I get. Earning 20% in a year with an high risk investment is possible, earning 1000% without any risk is not.
Consequently, the first thing I do when evaluating a new site is checking the yearly dividend it offers. Many scam sites use complicated investment and payout systems that can somewhat obscure the actual return they offer. If this gets too complicated I usually don't bother with exact values and just go for the lower boundary. If this value is already too high I'm out. Now lets take a look at what coin-farm is offering over the course of a year.
In coin-farm you buy birds of different colors that lay eggs every x minutes. Those eggs have to be collected and sold for silver coins. These silver coins can be used to either buy more birds or they can be converted once more to crypto or fiat currency. Different birds lay eggs at a differing speed but generally the more expensive a bird the more efficient he's going to be. Already see a pattern here? The system is pretty complicated for what it does. Converting eggs to silver coins and silver coins to money obscures what you actually earn on your investment. Since different birds offer different returns we are going to take a look at the worst one:
The green bird costs 150 silver coins and lays 5 eggs each hour. That's a total of 120 eggs each day or 43,800 eggs a year. 100 eggs are sold for 1 silver coin so over the course of a year a single green bird will earn you 438 silver coins. Ignoring compound interest that's already a yearly return of 292%. I don't even need to look at the exchange rate of silver coins to see that this value is completely unrealistic.
2) Check if you are free to sell your assets.
This second sign is something that a lot of scam sites do. They obviously invite you to invest as much money as you want to, offering huge bonuses and additional rewards for investing more. This investment is then transformed into some sort of asset generating your income. A legit site would either allow you to sell that asset back to the site itself or at least to trade it to other users. Any site that permanently freezes everything you invested and only allows you to withdraw your earnings is very likely to be a scam. It's perfectly fine if you can only liquidate your assets after a given period of time or if you have to pay a fee for doing so. As soon as there's no way back though I'd never invest any money.
So how is coin-farm handling this? You might have already guessed it - there's no way to sell the birds you buy. The money you spent on buying birds is gone for ever. You can't sell them back to coin-farm and you can't sell them to other users. This obviously is very convenient for the site, as any money going into the system is going to stay there permanently thus allowing them to pay other users with it.
3) Check if you are forced to reinvest
Any scam site is ultimately trying to prevent their users from realizing they are being scammed for as long as possible. This realization often only comes when the users try to withdraw their earnings and don't receive anything. To prevent this, scam sites will often fulfill the first withdrawal request but they'll also try their best to keep their users from even requesting a withdrawal. The logical way to do this is to get them to reinvest their earnings. They'll offer special promotions, have sales and offer a bonus on anything you'll reinvest. As long as those offers are optional this is mostly fine. After all it's in the best interest of any site to keep as much of the money in the system so this is something that legit sites will do as well. Many scam sites take this one step further though. They not only try to encourage their users to reinvest, they actually force them to. This is usually done by splitting any earnings into two pools. One pool can only be used for reinvestment while the other pool can be used for withdrawal and reinvestment. Like the second point this is not acceptable and a clear sign of the site being scam. If a site forces me to reinvest what I earn I'm not going to invest in the first place.
This is exactly what coin-farm is doing as well. 70% of your proceeds go to the buying account while only 30% go to the withdrawal account. Silver coins cannot be moved from buying to withdrawal, but they can be moved in the other direction. If you convert withdrawal coins to buying coins you receive a 20% bonus on the amount converted. This obviously keeps a lot of the earnings from ever being paid out, again helping coin-farm to pay those that actually get to make a withdrawal.
4) Take a closer look at their referral system
A referral program is something that a lot of legit sites have as well and it's nothing bad per se. Just think of Publish0x's ambassador program. You earn 5% on all tips earned by your referrals. This is a cool way for the site to encourage its users to actively help to promote the platform. Still, taking a close look at the workings of the referral system implemented by any site is a great way to determine whether it's a scam or not.
Many scam sites are a simple ponzi scheme at heart. They work by having a steady influx of the new persons investing into the scheme and thus allowing them to pay the earnings for members that already are with the scheme for a longer time. That's why it's so important for most scam sites to recruit as many new users in the fastest way possible. They'll often implement multi level referral programs with high payouts and have a referral calculator right next to it. I'm sure most of you have already seen something like that: "If you only refer 10 persons and than they each refer 10 persons who will refer 10 persons referring 10 persons (...) then you'll be a millionaire by tomorrow". This is obviously bullshit yet a lot of people fall for it, not only wasting their money on the scheme but also their time and sometimes even more money on promoting it.
When I examine a referral system I look at 3 key features:
- What are you paid for exactly?
- How much are you paid?
- How many levels are there?
A sound referral program will look like the one Publish0x has. You earn a little something every time your referral earns a tip. So if a person that was not referred they have to pay 100% of the tipped amount while this increases to 105% when that person was referred. This way the sum Publish0x has to pay for referrals always stays manageable. This wouldn't work for a scam site though. This reward structure is not scalable and you can't generate that millionaire by tomorrow calculation. So what scam sites do is having more levels added and instead of having a small bonus on top they'll promise you huge rewards for your referrals. Instead of paying a fixed sum they'll pay you parts of all money spent by your referrals. This can lead to situation where only half the money spent by a referral would actually go to the company and the rest would be split among the referral levels. Obviously that's not sustainable in any way. Having such a referral system is a clear warning sign.
Coin-Farms referral system is a perfect example of such a dysfunctional structure:
Just look at those numbers. 30% of the money spent by your first level referrals are paid to you. If you follow that through to level 4 a crazy 50% of the invested money is going to people on that ladder instead of the site. A reward structure like that can only work if these persons never actually get to withdraw the money they earn this way. If their partner program only consisted of the last line (250 Silver Coins for each unique registration) than I would consider it to be a fair system. The way it is, it's looking a lot like a scam.
In my opinion the amount of scams in the crypto world is one of it's biggest problems and it's definitely something that's obstructing mainstream adaptation. There are some seriously elaborate scams out there and no matter how careful you are, there's always a residual risk of being scammed. The points I've given provide great tools to determine whether a site is trying to scam you or not. There are always things to look for if you want to dig deeper. Do they offer an imprint? Is there any explanation of how their business is actually working that goes further than telling you to give them your money? Also I'd encourage you to at least always do a quick google search before registering with any site. Simply googling "Is xxx legit?" will often help to protect you from all too obvious scams.
Talking of all too obvious scams: With everything we found out about coin-farm, this site looks like a pretty obvious scam to me and I'd strongly advice you to stay as far away of it as possible.
Thank you all for reading and stay safe - both in the real and in the crypto world.