Exit Scam Meaning

What Is an Exit Scam?

While the lack of entry barriers and gatekeepers in crypto is a feature, not a bug, it does create an environment that scammers are eager to take advantage of. One such fraudulent activity common in the crypto space is the exit scam.

A cryptocurrency exit scam is an event in which dishonest developers abscond with investors’ funds, abandoning the project entirely. It often occurs before, during, or after an initial coin offering (ICO) period. In some cases, the start-up founders disappear after operating for a brief period, resulting in a type of exit scam known as a rug pull.

How Do Cryptocurrency Exit Scams Work?

In November 2017, Confido, a blockchain start-up that promised to give traditional escrow services and transactions hell, disappeared after collecting $375,000 through an ICO. 

In 2021, another group of fraudulent founders exploited Netflix’s hit show, Squid Game, to create a cryptocurrency called Squid Coin. The venture lured unsuspecting investors with the prospect of engaging in an online game based on the show. However, the project only operated briefly before ultimately resulting in a rug pull, where the founders vanished with approximately $6.38 million. 

Typically, the scammers conceive an intriguing novel concept that promises substantial returns to lure in unwitting investors. The unscrupulous founders often enlist crypto influencers to help create a dedicated following by advertising and promoting the project on social media platforms. This creates hype and enthusiasm, appealing to investors’ fear of missing out (FOMO) on a promising project.

The investors purchase the project’s cryptocurrency tokens during the ICO sales before the project launches. However, the project often abruptly disappears or shuts down during or briefly after the ICO sales, or operates for a brief period. The developers pull a Houdini with investors’ funds, leaving them holding worthless cryptocurrency tokens.

Some of the most common red flags of a potential exit scam include a lack of independent project code audit, unrealistic return projections, aggressive marketing, a non-existent working model, uneven token distribution, and a vague or overly ambiguous whitepaper (or no whitepaper at all).