If you ask a Bitcoin maximalist about scams, he or she will frown and point to Bitcoin Cash (which shall be referred to as "Bcash"). If you go to the average ICO investor with the same question, you will discover that they're really upset about Bitconnect X, Prodeum, and all the exit schemes that have been pulled over the last few years. Likewise, if you ask Monero supporters about scam projects, they will gladly bring into discussion Electroneum, Verge, DASH, and every other coin whose privacy feature is optional. If you hope to reach a conclusion to this lengthy inquiry by asking a conservative banker, you will definitely hear that Bitcoin and the entire cryptocurrency market is nothing but a scam.
In different contexts, anything from on-chain scaling via big blocks to unrealistic ICOs can be described as scams. Even the Magical Crypto Friends like to joke around and point out that every coin involved in their monthly podcast is a scam (including Litecoin and Monero). So the fundamental question is: Where do we draw the line and how can we avoid the general overuse of the term?
If we use the word "scam" so loosely, we might as well deconstruct and expose everything from banks to governments. Focusing on flaws and risks is definitely beneficial when doing certain types of analysis, but it doesn't necessarily mean that we should stop being part of this society just because of the W's and T's in our SWOT analysis. We shouldn't stop using fiat money just because inflation devalues it, we shouldn't avoid voting just because the government is corrupt, and we shouldn't stop being responsible members of our communities just because one can inevitably identify breaking points.
Under the same considerations, since cryptocurrencies are regarded as the future of money and hold a unique kind of value, we shouldn't stay away from the entire industry just because some project (or all of them) gets called a scam. Therefore, we can agree from the very beginning that the "everything is a scam" argument is flawed and shouldn't be taken into consideration for its dangerously counterproductive implications. At the same time, we should look for the valid meanings of the word "scam" in the cryptocurrency space and do our best to make sure that this type of classification doesn't hurt the development of the industry. Instead, calling out scams should be regarded as constructive criticism which prepares us for the big moment when mainstream adoption finally happens.
The Case of Scammy ICOs
There are two cases when ICOs can be classified as scams, and they find themselves at opposite extremes of the spectrum. First of all, we have the projects that are never meant to deliver because the founders are greedy, ill-intentioned, and deceitful.
There are plenty of ICOs that take advantage of the legally-unregulated framework and function as schemes that are only meant to enrich their founders. We still find ourselves in the Wild West, and there is very little anyone can do in order to stop this phenomenon. It's up to investors to be careful and avoid putting their coins into the hands of malicious people, so research and due diligence are mandatory requirements. An article on this topic has previously been published and you can read it here.
I recently realized there are not as many crypto scams as I thought, just a ton of projects that honestly think they can achieve overly ambitious goals.— Eric Turner (@ericturnr) May 21, 2018
In some ways I guess that is good for innovation.
The second category of scams is more special because it covers failures that aren't necessarily driven by greed or bad intentions. It's about these people who start ICOs, deliver all the information, provide a detailed roadmap, but fail to live up to the expectations. They don't know much about management or business to begin with, and find themselves in a situation where they can't handle all the responsibilities. Lots of brilliant people in the blockchain space have groundbreaking ideas to revolutionize certain sectors, but without proper help to cover all the issues involved, they won't be able to turn their concept into a product that delivers.
Being overly ambitious can be a big issue, especially when you're dealing with large amounts of money from investors who believe in your vision. You take funds from people who trust in your vision and skills, but end up becoming a scammer in everyone's eyes (and having your reputation destroyed) just because you didn't know where to stop when making promises. That's why it's a better idea to start with something small and feasible, and then progressively move on to other features. Maybe it's hard to remain competitive in a market where everyone promises to do a little bit of everything, but excellence always shines on and prevails over mediocrity on the surface.
The Case of Ponzi Schemes
There is no better way of beginning this discussion than quoting Carlos Matos - "BITCONNEEEEEEEEEEEEEECT!". Ponzi schemes have truly reached a more advanced level with cryptocurrencies: the benevolent and generous founder is no longer a charismatic philanthropist, but some kind of advanced and occult artificial intelligence which runs a trading mechanism which produces profit. It's made not to sound like a Ponzi, but in the words of our beloved Carlos, "THAT'S A SCAM!".
I've been asked what I think about BitConnect. From the surface, seems like a classic ponzi scheme. I wouldn't invest in it and wouldn't recommend anyone else to.— Charlie Lee [LTC⚡] (@SatoshiLite) November 30, 2017
I follow this rule of thumb:
"If it looks like a 🦆, walks like a 🦆, and quacks like a 🦆, then it's a ponzi." 😂
In the crypto space, everything which promises guaranteed returns should be taken with a grain of salt as there is no way the system of profits can inflate so much without collapsing, and the last person to invest is the biggest loser. Bitcoin itself has been called a Ponzi or pyramid scheme for years, but in the lack of a central authority to make any profits and wihout any promises of great returns, even bankers have come to the conclusion that it's digital money that can't be censored.
But if the line between a cryptocurrency and a Ponzi is so thin, then where do we draw the line? Even in the case of more centralized coins, you can argue that the system can get "hacked" to double spend at any time, as the founders pull a good old exit scheme. This is why coin ownership matters just as much as the concentration of validating nodes and mining operations: the fewer whales a coin has, the more likely it is to exist on the long term and function according to the convened principles. It's a special type of factionalization which creates lots of small stakeholders whose best interest is to maintain decentralization and respect the rules of the protocol.
The Scammy Conclusion
Everything from mainstream media to the social contract can be declared a blatant scam if we take into account those who don't get the same benefits as the most privileged of individuals. In the crypto space, everything that isn't decentralized, isn't planning to deliver according to the roadmap, lives by virtue of hype and isn't properly managed can be called a scam.
In the most specific and rightful terms, only Ponzi schemes and exit schemes deserve the label. Everything else has all the virtues to get integrated into the mainstream financial system, as we can't really tell the difference. Those who bought IBM stocks at $1 and became millionaires aren't any different from the early Bitcoin adopters. The best of cryptocurrencies benefit from all the qualities one expects from a branch of the free (regulated) market. That's why we should know the difference and stop calling everything in the space a scam without proper arguments.