According to a report by CipherTrace, cryptocurrency-related crimes saw a staggering $1.9 billion in losses in 2020 alone, with scams like honeypots contributing to the majority of these figures. As digital currencies gain mainstream traction, understanding how these scams work is crucial to protecting your assets and ensuring a safer investment journey.
In cryptocurrency, fortunes are made and lost daily. As such, a new breed of scam has been wreaking havoc on unsuspecting investors: the honeypot crypto scam. These deceptive schemes lure in crypto enthusiasts with promises of quick, high returns, only to trap them into losing their investments. Curious about how honeypot crypto scam works? Continue reading.
Key Takeaways
- Honeypot crypto scams trick users into investing by allowing buys but blocking withdrawals, using manipulated smart contracts to trap funds.
- Red flags include promises of high returns, lack of transparency, suspicious token behavior, and fake audits, all designed to mislead investors.
- Common tactics include exploiting trust in DeFi platforms, using fake influencer endorsements, and creating fake liquidity pools to appear legitimate.
- Scams often take the form of fake ICOs, airdrops, and high-yield DeFi protocols, all structured to attract and lock in investor funds.
- Real-world examples like the Squid Game and PoodleCoin tokens highlight how fast such scams can gain traction, and collapse, leaving investors with nothing.
What Is A Honeypot Crypto Scam?
Source: Freepik
A honeypot crypto scam is a fraudulent scheme designed to trick crypto investors into thinking they are making a legitimate investment, only for them to lose their funds when attempting to withdraw.
The scam relies on offering seemingly attractive returns or opportunities, which, in reality, are part of a deceptive plan to lock up investors’ funds. These scams often exploit the trust and excitement surrounding decentralized finance (DeFi) protocols and other crypto ventures, preying on those eager to participate in the rapidly expanding digital asset market.
“A honeypot crypto scam is not just a fake investment, it’s a trap coded into the very foundation of the token, rigged so that you can buy in, but never cash out.”
How Does a Honeypot Crypto Scam Work?
Source: Napkin
Honeypot scams typically operate under the guise of a lucrative investment opportunity. The underlying mechanism is designed to deceive and trap investors. Investors are drawn in by promises of high returns or early access to new tokens, only to realize that they are unable to access their funds once they invest.
Here’s how they usually unfold:
Fake Investment Opportunities
Scammers often present a crypto project or token as an opportunity to participate in a highly profitable investment.
These projects may claim to offer unique features or groundbreaking technology, like high-yield returns or an exclusive ICO (Initial Coin Offering). The reality is that these opportunities are entirely fabricated to deceive potential investors.
Trapping Investors with False Promises
Once an investor buys into the scam, the promise of enormous profits or huge returns on their investment keeps them engaged.
However, the scammer has rigged the system in such a way that investors can only deposit funds but cannot withdraw them. The scam often uses fake smart contract functionalities or exploits design flaws that trap funds in an inaccessible state.
Manipulation of Smart Contracts
In a honeypot scam, the scammers typically manipulate the smart contract of the token to make it appear like a legitimate decentralized investment. The contract may allow transactions such as buying or transferring tokens but blocks or prevents users from selling or withdrawing them.
As a result, while users think they can freely trade or sell their tokens, they’re unable to do so, leaving their investment stuck in the scam.
Red Flags of a Honeypot Scam
While honeypot scams can be sophisticated, there are several key red flags that can help investors spot potential dangers before committing funds.
Unusually High Returns
One of the most common tactics used in honeypot scams is the promise of exceptionally high returns. If an opportunity seems too good to be true, such as guaranteed daily or weekly profits far beyond market norms, it’s a major warning sign.
Scammers often use this bait to lure investors in, capitalizing on the greed for fast profits.
Lack of Transparency
Legitimate crypto projects tend to provide detailed information about their team, technology, and tokenomics. In contrast, honeypot scams often lack transparency.
They may have no verifiable information about the developers, a vague whitepaper, or unclear explanations of how the system works. When a project refuses to disclose key information or provide proper documentation, it’s a major red flag.
Suspicious Token Behavior
Another telltale sign of a honeypot scam is unusual token behavior. Legitimate tokens typically follow predictable patterns based on the project’s goals, development, and market demand.
However, honeypot tokens often exhibit erratic behavior, such as sudden price spikes with no clear reasoning or tokens being temporarily locked in liquidity pools without any valid explanation. If a token seems to behave unusually or isn’t listed on reputable exchanges, it’s best to proceed with caution.
“If a crypto project promises guaranteed returns with little to no risk, it’s likely not a breakthrough, it’s a bait.”
Types of Honeypot Crypto Scams
Source: Freepik
Honeypot crypto scams come in various forms, each utilizing different strategies to deceive investors. Below are some of the most common types of these scams:
Ponzi Scheme Integration
Ponzi schemes are a well-known form of fraud, and they have been adapted into the world of cryptocurrency. In a Ponzi-style honeypot scam, early investors are paid returns from the investments of new participants, creating the illusion of profitability.
However, the scam is unsustainable, as the returns promised to investors cannot be paid without a continuous influx of new money. Once the flow of new investors slows down or the scammer decides to exit, the scheme collapses, leaving the majority of participants with nothing.
This type of scam often masquerades as a “high-yield” crypto investment program, drawing people in with the promise of quick profits.
Fake Airdrops
Airdrops are often used as promotional tools by legitimate cryptocurrency projects to distribute tokens for free or at a low cost to potential investors. However, honeypot scams also use fake airdrops to lure unsuspecting users.
These fraudulent airdrops typically require participants to send a small amount of cryptocurrency (such as ETH or BTC) to “claim” their airdropped tokens.
After the payment is made, the tokens are never sent, and the scammer disappears with the funds. The scam may appear credible due to the attractive nature of free tokens, but it is ultimately a tactic to steal funds from eager participants.
False ICO or Token Sale Scams
Initial Coin Offerings (ICOs) and token sales are common ways for cryptocurrency projects to raise funds. However, scammers use fake ICOs or token sales as a honeypot scheme to steal money from investors.
In these scams, the fraudsters set up a fake ICO or token sale for a project that doesn’t actually exist or is a copy of a legitimate one. Investors are encouraged to buy tokens in the presale, often at discounted rates.
Once the funds are collected, the scammers vanish, and the project is never launched. These scams often promise exclusive early access to the token, creating urgency to invest before the “sale ends.”
Fake Decentralized Finance (DeFi) Protocols
Decentralized Finance (DeFi) protocols have gained massive popularity due to their ability to provide decentralized, permissionless financial services. However, their rise has also led to a surge in fake DeFi projects designed to trap investors.
In a honeypot DeFi scam, fraudsters launch a project with features that sound appealing, such as high liquidity pools, staking rewards, or yield farming opportunities. Investors are encouraged to lock their funds into these protocols with the promise of high returns.
However, the scammers may control the smart contracts or liquidity pools, preventing investors from withdrawing their assets once they’ve deposited. These scams often exploit the complexity of DeFi and its associated risks, making it difficult for investors to realize they’ve been deceived until it’s too late.
“Honeypot scams often disguise themselves under the cloak of decentralization, exploiting the very trust that makes DeFi attractive.”
Common Tactics Used in Honeypot Crypto Scams
Honeypot crypto scams utilize a range of tactics to manipulate and deceive potential investors, often relying on the trust in decentralized platforms, social media influence, and false validation to make their schemes appear legitimate. Here are some of the most common tactics used:
Exploiting Trust in Decentralized Platforms
Decentralized platforms, such as decentralized exchanges (DEXs), decentralized finance (DeFi) protocols, and smart contracts, are often seen as more secure and trustworthy due to their peer-to-peer nature and transparency.
Scammers exploit this trust by creating fraudulent projects that operate on these platforms. Since the crypto community values decentralization and often believes in the security and fairness of DEXs, these scams can appear legitimate, making investors more likely to participate.
Fraudsters often take advantage of the open-source nature of blockchain and the lack of regulation to create seemingly legitimate projects that have the appearance of genuine decentralized platforms.
Social Media and Influencer Manipulation
Social media and crypto influencers have significant power in shaping public opinion and generating hype around cryptocurrency projects. Honeypot scammers often collaborate with influencers or create fake accounts to spread positive news about their fraudulent project.
They may hype up a token, create excitement around a “must-have” investment opportunity, or falsely claim that the project has been vetted by experts.
The use of social media platforms like Twitter, Telegram, and Discord is especially common, as these channels allow for quick dissemination of information and can create a sense of community around a project. Scammers exploit these platforms to give their honeypot scam a veneer of credibility, making it more likely that unsuspecting investors will jump in.
Fake Audits and Reviews
One of the most convincing tactics used by honeypot scammers is presenting fake audits and reviews of their project. Audits from well-known firms like Certik or Trail of Bits are often used to validate a project’s legitimacy.
However, scammers will either create fake audit reports or bribe auditors to give their smart contracts a clean bill of health. They may also fabricate reviews or testimonials from “satisfied” users to convince potential investors that the project is trustworthy.
These fraudulent reports provide an illusion of legitimacy, which can lure in investors who might otherwise be cautious.
Using “Fake Liquidity Pools”
Liquidity pools are essential in DeFi projects, where they allow users to trade tokens without a centralized exchange. Scammers often create fake liquidity pools or manipulate existing ones to give the illusion of high liquidity and activity on a platform. They may incentivize users to add liquidity to their pools with the promise of rewards or yield farming opportunities.
However, once the funds are in the pool, the scammer controls the liquidity and prevents investors from withdrawing their assets. This tactic is particularly effective in DeFi-based honeypot scams, as liquidity pools are critical to the functionality of many projects, and the inability to withdraw funds can leave investors helpless.
“The real danger of honeypot scams lies in their sophistication, from fake audits to manipulated smart contracts, they’re engineered to appear legitimate.”
Real-World Examples of Honeypot Crypto Scams
Source: Freepik
The “Squid Game” Token Honeypot Scam
One of the most infamous examples of a honeypot scam is the “Squid Game” token. This token was created in October 2021 and gained attention due to its association with the popular Netflix show Squid Game. The token’s value skyrocketed as it was promoted through social media channels, with investors eager to cash in on the hype.
However, after the token price peaked, the creators of the project locked investors out from selling their tokens, making it impossible to cash out. The developers quickly withdrew all the funds from the liquidity pool, causing the token to crash and leading to a loss of over $3 million for investors.
The “PoodleCoin” Honeypot Scam
Another example of a honeypot scam involved a token called PoodleCoin. Promoted as a meme coin similar to Dogecoin, PoodleCoin gained traction on social media and Telegram groups.
However, it was revealed that the token had been designed with a trap built into the smart contract, preventing investors from selling the token once they purchased it. The scammers manipulated the code to allow buying but not selling, and ultimately, investors found themselves locked out of the project. This led to massive financial losses for unsuspecting buyers.
The “AnubisDAO” Honeypot Scam
AnubisDAO, launched in 2021, is a decentralized autonomous organization (DAO) that promised high returns on investments. The project claimed to be a decentralized and community-driven DeFi protocol.
However, within hours of launching, the creators drained the liquidity pool, stealing over $60 million in funds. Despite an early surge in hype and social media promotions, the scam became apparent when investors could no longer access their funds, and the project website disappeared.
The AnubisDAO scam is an example of a honeypot scam that targeted both individual investors and DeFi enthusiasts, exploiting the trust that many have in decentralized finance.
“Pizza Token” Honeypot Scam
The Pizza Token scam, while less high-profile than others, still illustrates the common tactics of honeypot scams. In this case, the creators behind Pizza Token launched a campaign promoting a new, “innovative” food-themed token with the promise of significant rewards for holders.
They set up a liquidity pool, but once investors began purchasing the token, they quickly found they were unable to sell it. The smart contract had been coded with a restriction that blocked users from selling their holdings, trapping them in the scam.
How to Avoid Falling for a Honeypot Crypto Scam
Protecting yourself from a honeypot crypto scam requires vigilance, research, and caution. Follow these strategies to minimize the risks of falling victim to deceptive schemes.
Conducting Proper Research
Proper research is the first line of defense against honeypot scams. Scammers often rely on investor ignorance and the rush for quick profits to execute their schemes. Taking time to thoroughly investigate a project can help you spot red flags early.
Checking Token Contract Codes
A smart way to avoid honeypot scams is to review the token’s smart contract code. Many reputable projects publish their contract code publicly on platforms like Etherscan or BscScan.
Inspecting the contract helps you look for common red flags such as functions that limit the ability to sell tokens or withdraw funds. Tools like “contract scanners” or auditors can also help you analyze whether the contract is safe or has been manipulated. If the code isn’t available or difficult to verify, that’s a major warning sign.
Verifying the Team Behind the Project
The credibility of a crypto project often hinges on the team behind it. Always check for information about the project’s creators. A reputable team typically has verifiable backgrounds in the crypto or tech industry, and many projects will list their team members on their website or in their whitepaper.
If the team is anonymous or there is no contact information provided, it’s a strong indicator that the project may be a scam. Be wary of projects that claim to have a “secretive” team or those that avoid questions about their founders.
Avoiding Offers That Sound Too Good to Be True
As the saying goes, “If it sounds too good to be true, it probably is.” Honeypot scammers often entice investors with unrealistic promises of high returns or guaranteed profits.
If a project is guaranteeing returns that far exceed the norm, such as daily profits or a “get rich quick” scheme, it’s likely a scam. Always be cautious about offers that sound too extravagant and conduct additional research before investing.
Using Trusted Platforms and Wallets
Using well-known and trusted platforms for buying, selling, or trading crypto can help reduce the risk of encountering a honeypot scam. Reputable exchanges like UEEx, Binance, Coinbase, or Kraken have built-in security measures to protect users from fraudulent activities.
Similarly, using secure, hardware wallets like Ledger or Trezor to store your funds provides an added layer of protection, reducing the chances of being manipulated by scams on digital wallets.
Engaging with Established Community Reviews
One of the most effective ways to gauge the legitimacy of a project is to engage with the wider crypto community. Established online forums such as Reddit, Bitcointalk, and Telegram are home to active discussions about new and emerging cryptocurrency projects.
Communities will often share their experiences with a particular project, offering insights into whether it is legitimate or a scam. A lack of any online presence, especially on reputable forums, or unusually glowing reviews that seem scripted can be a sign of a scam.
Recognizing Red Flags Early
Honeypot scams often exhibit several key red flags that, if recognized early, can save you from losing your investment. Some of these red flags include:
- Unverified or Anonymous Team Members: Lack of transparency about the project’s creators and their qualifications.
- Aggressive Marketing: Overhyped promotions, heavy use of social media, and influencer endorsements without clear, verifiable information.
- Locked Liquidity: If liquidity pools or tokens are “locked” and can’t be accessed, it’s a warning sign that the project might be a scam.
- Unusual Token Behavior: Sudden price spikes, erratic behavior, or claims of guaranteed returns that don’t align with market realities.
- Vague Roadmap and Whitepaper: A poorly written whitepaper or roadmap lacking detailed plans for development and project goals.
“Before you invest in any token, remember: transparency, verifiable audits, and the ability to withdraw your funds are non-negotiable.”
Protecting Your Investments
Source: Freepik
Protecting your cryptocurrency investments is crucial, especially when the risk of scams like honeypots is ever-present. Taking proactive steps to secure your assets helps to mitigate risks and reduce the chances of falling victim to fraud.
Using Hardware Wallets
A hardware wallet is one of the most secure ways to store your cryptocurrency. These physical devices, such as Ledger or Trezor, keep your private keys offline, making them resistant to online hacks and phishing attacks.
Unlike software wallets, which are connected to the internet, hardware wallets provide an extra layer of protection by storing your crypto on a device that only you have access to.
Multi-Factor Authentication
Enabling multi-factor authentication (MFA) adds another layer of security to your accounts. This requires more than just your password, typically, a second form of verification, such as a code sent to your phone or an authentication app, is required. This greatly reduces the likelihood that a hacker could access your account, even if they manage to obtain your password.
Avoiding Public Wi-Fi Networks
Public Wi-Fi networks are notoriously insecure and are often targeted by hackers to intercept sensitive information. When accessing your cryptocurrency accounts or making transactions, avoid using public Wi-Fi. Instead, use a VPN (Virtual Private Network) or wait until you are on a trusted, secure connection.
Diversifying Investments
Diversification is a critical strategy for minimizing risk in any investment portfolio, including cryptocurrency. Spreading your investments across multiple assets, you reduce the impact of a single asset’s failure on your overall portfolio.
In the context of honeypot crypto scams, this means not only diversifying between different tokens but also allocating investments between different platforms and blockchains. This way, even if one platform experiences a breach or becomes a honeypot scam, your entire portfolio isn’t wiped out.
Regular Monitoring of Crypto Assets
Cryptocurrency markets are highly volatile, and it’s essential to stay vigilant about the status of your investments. Regularly checking your portfolio and keeping track of market trends can help you spot any unusual activity or signs of a potential scam.
Set up alerts for price changes, liquidity movements, and any updates from the platforms or projects you’re invested in. Staying informed helps you to act quickly if something seems off, such as a sudden inability to withdraw funds or drastic price fluctuations.
Conclusion
Honeypot crypto scams represent a significant threat to the growing cryptocurrency ecosystem, leveraging deceptive tactics to manipulate unsuspecting investors. These scams are sophisticated, often masking themselves as legitimate opportunities with promises of high returns and secure investments.
However, by taking proactive measures to safeguard your investments, you can protect yourself from falling victim to such frauds.
Ultimately, investing in cryptocurrency requires caution, research, and vigilance. So utilize a trusted platform like UEEx to secure your investment.
FAQs
What is a honeypot crypto scam?
A honeypot scam specifically involves a cryptocurrency project that allows you to buy tokens but prevents you from selling them, trapping investors in the process.
How can I identify a honeypot scam before investing?
Look for red flags such as limited or locked liquidity, anonymous teams, unrealistic promises, or smart contracts that restrict token sales.
Are there any legitimate honeypot crypto projects?
No, honeypots are inherently fraudulent schemes and are not legitimate projects.
Can I recover my lost funds if I fall victim to a honeypot scam?
Recovering funds can be very difficult, but reporting the scam to authorities may help, and in some cases, legal action might be possible.
Are honeypot scams illegal?
Yes, honeypot scams are illegal as they involve deceptive practices and fraud.
How can I report a honeypot crypto scam?
You can report a honeypot scam to authorities like the SEC, CFTC, or use platforms like the FBI’s Internet Crime Complaint Center (IC3).
What are the best practices for securing my cryptocurrency assets?
Use hardware wallets, enable multi-factor authentication, avoid public Wi-Fi, and conduct thorough research before investing.
