Reddit's Crypto Communities Are Driving the Hype Behind MemeCoins, Is This a Danger For New Investors?

After the r/SatoshiStreetBets and Elon Musk Tweet-fuelled rise of Dogecoin in early 2021, many online cryptocurrency communities began hungrily pushing their own tokens. From ‘groundbreaking tokenomics’ to charity coins, every MemeCoin imaginable began capturing fledgling investors with promises of massive gains, BitCoin potential, and being the next to "go to the moon". Luckily some did, but many - including the likes of ZepellinDao and Aussie Safe Shepherd - did not. Now, and although the crypto market has recently started to climb from the post-frenzy slump, the majority of new investors who invested in these MemeCoins when the market was high - some risking their entire life savings - are still at a loss. 

For every comment that criticizes any of these tokens, there's an onslaught of responses including, "this is the way", "to the moon" and "diamond hands only". Although the sustained optimism many investors have that their specific token is the next to take off is admirable, to an outsider it can be interpreted in a multitude of ways; among those, cultish and exciting.

For new investors hoping to capitalize on what experts claim could be another period of growth in cryptocurrency, this is where the danger comes in. Many aren’t well-versed around conducting adequate due diligence, either in verifying the creators of a project and establishing credibility, or understanding the red flags to watch out for. Because of this, entering an echo chamber of support and validation - any dedicated Reddit forum for a token - assuages fears and builds excitement, causing many to throw their hard-earned capital behind tokens they know little about. 

This places these investors at risk of not only investing in tokens that may fail or are rugpulls, but also places them in a high category of risk for scammers. This is because many of these new investors are convinced they can get rich quick, so long as they can identify the next up-and-comer. Unfortunately, scammers are all too understanding of this, and carefully lay their traps within these same forums to great success. According to the Federal Trade Commission, more than 7000 crypto investors have reported losses of over $80 million through these scammers since October 2020, more than 12 times the amount reported the year prior. 

So how can fledgling investors better protect themselves? While there are no guarantees and a potential for risk in any investment scenario, there are a number of due diligence actions that can be taken and scams to look out for. Below is an overview of common scams both in Reddit Forums and the real world, as well as ways to avoid them.

Social Engineering 

What it is: Social engineering is essentially phishing repackaged for the crypto-age. Scammers post links, usually veiled as a telegraph link, link to claim a prize or free cryptocurrency, or other helpful crypto-related information, which aim to glean personal information, capture a wallet’s seed phrase, or trick investors into sending cryptocurrency. While this is common on forums like Reddit, these scammers also use email, other social media channels - like Twitter or Facebook - and chat groups to run their schemes. 

How to avoid it: Don’t trust or click on links for free crypto giveaways, don’t share personal information including email address or phone number, and don’t share your seed phrase. 

Fake Coins

What it is: Scammers create tokens with similar names and ticker codes to other popular coins. Investors who are excitedly rushing to make a purchase accidentally buy the fake token instead of the real one. 

How to avoid it: Take your time in making a cryptocurrency purchase. Triple-check the coin’s website for buying instructions, to verify the chain it is built on, as well as the exchanges it is available for purchase through. Before clicking the ‘buy’ button, triple-check the name and ticker symbol again. 

Pump and Dump Group

What it is: A group or forum sends an invite for a token presale, claiming they will pump a token to dump on the general public for a profit. The organizers, however, have already taken their profits from early investors and dump the floundering coin on the group instead of the public upon release. 

How to avoid it: Don’t accept random invitations to pump and dump groups or private token sales, reputable developers will generally have open, public calls for early investors through their channels and websites.

Gas Trap

What it is: A commenter posts the seed to a wallet full of ERC20 tokens and claims that for anyone interested in these tokens, they only need to transfer Ethereum to that wallet to pay for gas. Upon transfer, a bot takes the ETH immediately and the investor loses their Ethereum. 

How to avoid it: In the crypto world, no one realistically gives away tokens or coins for free. Unless you’ve specifically entered a competition hosted by a reputable organization or exchange, it’s likely a scam. 

Fake Exchanges, Apps, and Browser Extensions

What it is: Scammers in forums will post links under the guise of being helpful, but instead of linking to real apps, exchanges, or browser extensions, they send links to convincing imitations. Once an investor has entered their login details, the scammer not only has access to their wallet or log-in details for their exchange, but also to more personal information which can be used in further scams. 

How to avoid it: Don’t click random links from internet strangers, even if they are being helpful. Instead, google the name of the service you want and before entering any details, triple check the web addresses and ensure you’re accessing the official website. Additionally, avoid clicking any ‘ad’ versions of exchanges, apps, or browser extensions within Google, as scammers also pay for their fake websites to be featured as ads on certain searches.  

With so many overnight success stories and what appears to be a long road of growth ahead, the cryptocurrency market - as well as the hype generated by online communities - can lure many unaware investors with promises of great success. Although the tactics used by scammers are increasingly becoming more sophisticated, the best way to stay safe remains the same as in any other investment setting. This means conducting adequate due diligence around prospective cryptocurrencies and remaining vigilant to scams. It’s only through doing this that fledgling investors can enter the crypto market with greater awareness and a reduced risk of becoming a victim.