Cobinhood Declares Bankruptcy. Analysts Suspect Exit Scam

Cobinhood Declares Bankruptcy. Analysts Suspect Exit Scam

Abishek Dharshan
05/27/19 11:22 AM 2019-05-27 11:22:52
Cryptocurrency exchanges going bust is not a new thing, especially after the shutdowns witnessed during the crypto winter. But a recent bankruptcy filing by Cobinhood has raised some eyebrows and that

Cryptocurrency exchanges going bust is not a new thing, especially after the shutdowns witnessed during the crypto winter. But a recent bankruptcy filing by Cobinhood has raised some eyebrows and that too for the wrong reasons. The bankruptcy filing came as a surprise for many. It was no secret that the company was in financial trouble, but the company maintained that it was going through restructuring. There was the talk of laying off staff and other financial tightening measures, but there was no mention of bankruptcy. This is especially worrisome given the fact that the exchange just raised $3.5million successfully through the completion of the Dexon ICO last month, many in the industry are suspecting an exit scam.

Possible exit scam

These type of scams have been going on for some time and is nothing new. In fact, there have been significant incidents involving exit scams as far back as November 2017. An exit scam is a fraudulent practice by unethical cryptocurrency promoters who vanish with investors’ money during or after an ICO. The first of such an event, a startup called Confido disappeared within a day after collecting $175,000. The funds were raised through its Initial Coin Offering (ICO). When the news of the Confido exit scam broke out, the market cap of the cryptocurrency fell to $70,000 from $6 million within a week. The scam usually involves a company raising capital through an ICO and then just leaving without a trace, and the anonymous nature of crypto and lack of regulations means that it is hard to prosecute the people behind such scams. It is also impossible, in most cases, to recover any funds that were lost.

Cobinhood scandal

The events that happened at Cobinhood had all the hallmarks of an exit scam. They raised funds through an ICO and then announced the shutdown. The Dexon ICO happened last month and had successfully raised over $3.5 million. The tokens were supposed to be unlocked on May 20th. This is where things start to get a little murky, since even as May 20th approached, investors still didn’t have any access to the token. At the same time, trading charts showed a massive dump of the token, which resulted in the price falling by 85 percentage. All this happened within a couple of hours, which severely affected the Cobinhood native coin (which also saw a dip of 50 percentage points). Afterward, Dexon coin recovered some lost ground climbing back to 40 percent of its original value. In an announcement made by the company’s founder Wei-Ning Huang through the Dexon telegram group, he said that none of the foundation-owned tokens were dumped.

Watch out for red flags

It’s hard to spot a scam ICO as it is quite easy to make it look legitimate, and this is one of the reasons why many people fall for such traps. There are five things to watch out for. The first is credibility and in today’s digital world, it’s hard to measure credibility. Likes, tweets, and followers can be bought, creating fake online credibility. Thus, before putting one’s hard earned cash into an ICO, take time to research and validate the credibility of the founders.

The second thing to look out for is ROI (Return On Investment), especially for Extravagant Return Projections. 1% daily returns will transform an initial investment of $1,000 into a return of more than $50 million within three years, which implies that it simply is not a legitimate investment.

The third thing to watch out for is documentation, primarily white papers. Some of the white papers are so weak in substance that a single read would reveal that the project has very little chance of ever being successful. The fourth and one of the most important things to look for in an ICO is the business model. If it is a concept-only, non-existent product, then it probably won’t work. It is true that some new-age technology may need to be designed entirely from scratch, but promoters who want to raise millions of dollars should prove their project is worth investing in. Finally, big promotions may be another sign of an exit scam.

It is high time investors take care of their own money. It is precisely due to the fact that investors keep falling for such scams that it has started to become fairly frequent. Among other crypto exchanges that have stopped operating and where the community suspected exit scams are QuadrigaCX and – the most recent one – New-Zealand-based Cryptopia. Cobinhood still has not given the public an exact date of when it will cease operations. At the time of writing, the site of the exchange is still functional with trades being conducted in the standard mode.

Abishek Dharshan
Abhishek leads Community & Growth Product Management at Zerion - a DeFi Asset Management Company. Currently, he’s living in the hub of all great tech startups, San Francisco, with frequent trips to here and there around the world. Abhishek’s entrepreneurial drive and insatiable curiosity led him to scale and invest in companies and user-driven organizations at the bleeding edge of capital markets; web 3.0, and AI. His expertise on all things DeFi is aimed at pushing decentralization into the mainstream. His true power is his knowledge to help startups and companies to scale their operations for a DeFi future. You can connect with Abhishek on Linkedin.

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