Scams are unfortunately commonplace in the cryptocurrency world and can be attributed to the lack of regulation that has plagued the sector for the last nine years. This article will serve as a how-to approach for analyzing a coin while also implementing this approach on a specific coin, Skycoin. Skycoin is one of many currencies with little purpose with definite red flags that scream “SCAM!” to conscientious investors.
Why Are Scams Prevalent in Cryptocurrency?
Without looking at massive hacks, phishing schemes, or ICOs that run off with all their investors’ money before ever completing a product or token distribution, there are still a plethora of more well-hidden scams.
— Ameer Rosic (@AmeerRosic) January 29, 2018
The lack of regulation means that many of these strategies are relatively easy to pull off and end up as a get-rich-quick scheme. Further, tokens with little to no purpose are also not much better than the ICO dashing off with all your ether.
To top it all off, there has become two primary ways for anyone to create a new coin or token thus compounding significant problem in the cryptocurrency space.
Individuals, with relative ease, can release a token or coin on the Ethereum, Waves, Stellar, and NEO platforms. This is the first option.
The second involves forking an existing currency. It should be noted that both techniques are relatively easy processes to execute.
Thus another piece of information that the proactive investor must investigate is how startups are generating their token or coin. From here they can answer the following: What turns a coin from a viable currency to an actual scam? The simple answer is establishing Its utility and the platform supporting its use.
The following article will look at these two methods and their respective responses in detail.
Forking a Coin
The more difficult of the two processes is forking a coin. To keep the description short and sweet, there are two types of forks: a hard fork and a soft fork.
A hard fork occurs when a blockchain splits into two new chains (incompatible with each other). These hard forks often result in a software upgrade or an expansion of the rules governing the blockchain. To use an example, Bitcoin Cash (BCH) is a hard fork of Bitcoin (BTC)
A soft fork, on the other hand, occurs when there is a change of rules that generates valid that would not have been recognized as such previously. For an individual to create their coin, they would have to do a “user-activated soft fork.” This is what is occurring with Litecoin and Litecoin Cash in February.
A user-activated soft (USAF) fork is controversial as it explores how to perform blockchain upgrades that are not supported by the network’s original hashing power.
The founder of Litecoin Charlie Lee, for example, adamantly claims he is not in support of Litecoin Cash (LCH) and that it may be a scam.
Since on the topic of scams, any fork of Litecoin, calling itself Litecoin something or other, is a scam IMO. Litecoin Cash, Litecoin Plus, Litecoin *… all scams trying to confuse users into thinking they are Litecoin.
This also applies to all Bitcoin forks trying to confuse.
— Charlie Lee [LTC] (@SatoshiLite) January 30, 2018
The differences between a soft and hard fork enter into the technical side of the blockchain. The critical part to understand is some forks result in new coins, and other forks result solely in a change to the original structure of the coin’s blockchain.
To create a currency, one would have to do a USAF. Because it only takes a few pieces of mining hardware to support a newly forked blockchain, this process can be completed with a basic understanding of blockchain engineering.
Token Releasing Platforms
This is hands down the easiest way to create your coin. Each individual reading this article could go “print” their digital currency on one of many ICO platforms. An efficient marketing scheme generates the “value” attached to the newly printed cryptocurrency, despite the cryptocurrency’s genuine contributions to the market.
Once the individual has a newly printed digital cryptocurrency, their marketing campaign solidifies its value in the head of the investor and cryptocurrency community.
With some of the most significant market cap coins in the crypto space being tied directly to new coin distribution, it becomes increasingly clear out of the more than 1,600 coins many are unfortunately disingenuous get-rich-quick schemes.
The Beginning of a Scam: Skycoin
With minimal consumer protections and ICOs coming from across the world, investors need to proceed cautiously. This report will analyze Skycoin (SKY) to demonstrate how easy it is to stumble onto a scam coin.
Skycoin is only a quick google search away. The website and its homepage seem professional and somewhat standard at first glance. The legitimate cryptocurrencies all have very professional homepages that allow users to learn about the specific crypto, along with reading the white paper, see the team, and connect via social media.
The homepage explains that SKY is offering a downloadable wallet, a white paper, a blog (with recent updates), and a community section. At first glance, nothing illicit is made immediately apparent.
An immediate word to the wise: Do NOT download their wallet as the coin is almost guaranteed to be a scam, their wallet may have suspicious or malicious code.
Upon further reading, the real red flags are raised in the ICO’s white paper. This formal document does a fantastic job of mimicking an official research paper. It is filled with graphs and technical jargon that would turn off almost any reader.
This tactic results in most investors skimming or skipping it entirely. This is a major error when investing in a coin: Always read the white paper!
SKY White Papers Analysis
In the, “Designing the Algorithm,” section it becomes clear this may not be completely legitimate:
“Leader election is a natural adaptation in situations when group’s survival requires high intelligence, while the average intelligence of a group members is low. Hence the group, in order to survive, has to find a member who can make intelligent decisions for the group. Such behavior is modeled after sheeple, or after species that have predilection for being led, which does not seem to be congruent with cryptocurrency community.”
Here, the technical investigation ends and is diverted to a general documentation of human behavior in the middle of their white paper.
The next document that requires analysis is the “Sky: An Opinion Dynamics Framework and Model for Consensus over P2P Network.”
The authors are professors from Tsinghua University of which the current president of China attended. So, with a paper written by such respected authors, what is the issue? If an individual wrote a beautiful paper regarding a specific coin’s utility and P2P network it would be assumed they would be a part of the team, or at the very least, an advisor.
The authors of this well-written piece can be found nowhere on the website; they are not team members, founders, or advisors of any other notable projects. The citation on the paper demonstrates it is from an online archive, a repository of research papers.
SKY chose to access this public repository of papers and tailor it to fit their coin, and replacing the coin’s name across the top of the paper. This paper was not written for SKY by the authors cited; it was copied from an online database to be used for ICOs advantage.
Confusing paragraphs that have little to do with their associated bolded headings is an excellent indicator there may be underlying issues with the coin being analyzed. The above-quoted portion of the white paper is not related to algorithms and realistically has no business being where it was located.
Having a paper being authored by individuals that are not on your team nor your advisors is even more suspect. It is always surprising when a coin can host a beautiful website but still manages to completely butcher their white paper following thorough analysis.
Social Media Community
Accessing the social media community of a coin can also establish the legitimacy of a crypto startup. Cryptocurrencies are open source and require contributions of the developer community as well as another large social media presence to encourage new investors to use the coin.
Cryptocurrencies can be expected to have a Telegram account, Reddit activity, a Facebook profile, Discord channel, Medium articles, and Twitter presence to interact with their community. As Skycoin offers the majority of these mediums to transmit information, further analysis of the social media platforms is required.
Skycoin has multiple related posts on Reddit, and one of their top posts has 380 points with 95 percent of people having upvoted it. At first glance, once again it seems legitimate enough. “A newly decentralized internet is being built…” is the title of the article and it does not take more than reading the first few comments to identify more red flags.
Redditors love to absolutely shred and troll almost any post, especially a new coin. Questions such as, “Why does this coin need the blockchain?!” “Did you guys hit hard cap, why are you not advertising more?” should smatter the comment lists. Even the best posts still host both positive and negative comments.
However, Skycoin’s post has no negative comments, at all. They read like advertisements: “Take that Comcast,” “Takes less than 50 watts’ power too! Be hip, be green, mine SKY,” or “I’ve wanted this for two decades. So I get to run the internet AND get paid.”
Of course, positive comments for a great new product are to be expected. However, 100 percent positivity is never the case on Reddit. You could say “The Sky is Blue” and have someone arguing about how the Northern Lights creates multiple colors and downvote you. Thus, the absolute absence of any trolling on a site like Reddit should be a point of contention.
What is the Business Plan?
If the cryptocurrency’s social media is fraudulent and the white paper seems to have many issues, it can be said that there is an issue with the underlying cryptocurrency. However, assuming these had both seemed legitimate, an investor would still need to analyze the business plan.
Interrogation revolving around how founders of Skycoin make money is critical. We can determine the answer to this in two ways. First, owning a large percentage of SKY and as the price increases slowly sell their holdings. This method is the most preferred as it simply hinges on the manipulation of social media and the like.
Cryptocurrencies are fairly easy to manipulate especially if the coin is only on a few exchanges. Holders could open multiple accounts that do not require Know Your Customer (KYC) verification and would buy and sell between the accounts, creating an illusion of increased volume and price.
This attraction method is an easy way for founders to trap individuals by giving the appearance their coin has massive volume and a considerable price climb. Investors need to be aware that more often than not, founders are merely selling from their left hand to their right hand.
The second way SKY intends to make money is through selling mining hardware to support their blockchain. A Skycoin miner can be sent to you for the low price of $10,000 in Bitcoin. They, in turn, will provide you $9,400 of SKY and a $600 mining machine.
The prototype for the Skywire miner is done. Introducing the
"Dedicated hardware for the new internet". https://t.co/T8AKgLfZqK
— Skycoin (@Skycoinproject) August 3, 2017
If the miner had been one of the top miners on the market, one could expect to spend $5,000 plus for it. However, after a quick analysis of the hardware, SKY is selling Orange Pi’s that can be purchased for $25 online.
The chips and boards used in the machine are some of the lowest quality on the market, yet SKY is demanding $10,000 for their miner. Receiving $9,400 in monopoly money and a miner that is worth far less than $600, is the final nail in the coffin.
Skycoin provides the initial appearance of what may have been a successful project. However, further analysis yields that there are more red flags with which an investor should feel comfortable. The white paper has aspects written by authors that have no relation to the team and wording that makes little sense.
Their social media is filled with bogus responses to their published articles. The final straw is that their miner is almost useless and is priced at 2,000 percent what it should be. With red flags in the white paper, social media presence, and mining platform it becomes clear SKY may very likely be a scam.
Skycoin is a great example of why it is important to stay vigilant and always do your due diligence!
Source: BTC Manager
Featured image from Flickr