What is a honeypot in crypto

Honeypots represent decoy systems in cybersecurity which security professionals deploy to attract malicious activity for analysis and threat detection. The systems present false weaknesses which hackers mistake for entry points to obtain information about their methods.

The crypto space features a different type of honeypot which represents a criminal deception system that scammers use to steal money from crypto investors. What is a honeypot in crypto? Crypto honeypots differ from standard cybersecurity honeypots because they operate as deceptive schemes to trick users into losing their funds through inaccessible contracts.

Honeypot scams disguise themselves as tokens or smart contracts and investment opportunities which seem legitimate to users. The scammers use attractive promises of high returns and innovative technology and exclusive opportunities to trick investors. These projects present themselves as normal operations since users maintain standard access to buy tokens and stake funds while interacting with the platform. The smart contract code contains secret limitations which block users from moving or selling their assets.

Scammers exploit investors' FOMO (Fear of Missing Out) and their desire for quick, high returns to carry out fraudulent activities. Victims come across what seem to be attractive tokens or promising projects, only to later realize that they cannot move their assets. The DeFi (decentralized finance) ecosystem is particularly vulnerable to honeypot scams, as it frequently launches new, unregulated tokens and projects.

The main difference between cybersecurity honeypots and crypto honeypots emerges from their fundamental objectives. The primary function of cybersecurity honeypots is to defend systems through researcher analysis of attacks which enables better protection strategies. What does honeypot mean in crypto? Crypto honeypots function exclusively as deceptive traps which manipulate investors to send money that remains permanently inaccessible.

Investors who operate in the crypto space need to learn to identify these risks to make safe decisions. Learning about honeypot operations and detection methods will protect investors from financial loss and support their investment safety. Research all projects extensively before investing and examine smart contracts for warning signs while avoiding suspiciously perfect investment opportunities.

How honeypot scams work

Honeypot scams in crypto are carefully designed traps that trick investors into depositing their funds while making it impossible to withdraw them. Understanding how these scams operate can help users recognize and avoid them before falling victim.

Step 1: Creation of a fake project or token

The scam begins with fraudsters developing a fake cryptocurrency project or a deceptive token that appears legitimate. These projects often claim to offer revolutionary technology, high-yield staking, or exclusive early investment opportunities.

To gain credibility, scammers may:

• List the token on decentralized exchanges (DEXs) like Uniswap or PancakeSwap.

• Create a professional-looking website and whitepaper to appear authentic.

• Launch social media campaigns and fake endorsements to generate hype.

• Promise unrealistic rewards to attract quick investments.

At first glance, everything about the project seems normal, and investors can easily buy the token without issues. However, the real trap lies hidden in the smart contract’s code, which is designed to prevent users from selling or withdrawing their assets later on.

Step 2: Attraction of investors with promising returns

Once the fake project or token is created, scammers focus on building hype and attracting investors. They use aggressive marketing tactics, including:

• Social media promotions on platforms like Twitter, Telegram, and Discord.

• Influencer endorsements (sometimes paid, fake or unknowingly promoted) to create a sense of legitimacy.

• Artificially inflated token prices through wash trading or bots to show rapid growth.

• Promised high returns or "guaranteed" profits to lure in unsuspecting investors.

By making the project look like a lucrative opportunity, scammers encourage people to invest as quickly as possible, often using FOMO tactics.

Step 3: Restrictions on selling or withdrawing funds

The real trap of a honeypot scam lies in the smart contract's hidden restrictions. While investors can easily buy the token, they later discover that:

• They are unable to sell the token due to coded restrictions.

• High transaction fees or minimum balance rules prevent withdrawals.

• Only the scammer's wallet has permission to sell or move funds freely.

These restrictions aren't visible at first glance, making it difficult for users to detect the scam until it's too late.

Step 4: The final rug pull or exit scam

After enough money is invested, the scammers execute the final step—vanishing with the funds. This can happen in different ways:

• Removing liquidity from the trading pool, making the token worthless.

• Disabling all transactions, preventing further activity.

• Shutting down websites, social media, and communication channels to erase their presence.

Once the exit scam is complete, investors are left with worthless tokens and no way to recover their funds. The scammers, meanwhile, move their stolen crypto to different wallets, often laundering it through mixers to hide their tracks.

Understanding these tactics is crucial in avoiding honeypot scams and protecting investments in the crypto space.

Types of crypto honeypots

Crypto honeypots come in different forms, each designed to trap unsuspecting investors and prevent them from withdrawing their funds. Here are the most common types:

1. Smart contract-based honeypots

These scams rely on malicious smart contracts that appear legitimate but contain hidden restrictions. While investors can buy tokens freely, the contract prevents them from selling or imposes exorbitant fees on withdrawals.

• How it works: The scammer programs the contract with restrictions, such as whitelisting only their own wallet to sell tokens.

• Signs of a scam: Lack of transparency in the smart contract code, unusually high transaction fees, or functions that prevent selling.

• Example: A token may show price growth, but when investors try to sell, they discover that only the developer's wallet has the ability to withdraw funds.

2. Liquidity honeypots

Liquidity honeypots trick investors by creating fake liquidity pools that seem functional at first. In decentralized exchanges (DEXs), liquidity pools are essential for token swaps, but in this scam, the liquidity is either fake or locked in a way that prevents investors from withdrawing their funds.

• How it works: Scammers launch a new token and pair it with another cryptocurrency (e.g., ETH or USDT) to create a trading pair. They manipulate the contract so that while buying is allowed, selling is either restricted or impossible.

• Signs of a scam: Liquidity that isn't locked for a reasonable period, low liquidity despite high trading volume, or smart contract functions that prevent withdrawals.

• Example: An investor buys a token on a decentralized exchange, but when they try to swap it back for ETH or USDT, the transaction fails due to hidden restrictions in the smart contract.

3. Fake exchange honeypots

These scams involve fraudulent cryptocurrency exchanges that mimic legitimate trading platforms, tricking users into depositing funds. Unlike real exchanges, these platforms never allow withdrawals—once funds are deposited, they are lost.

• How it works: Scammers create a professional-looking website or app that resembles well-known crypto exchanges. They promise low fees, high returns, or exclusive trading opportunities to lure users into depositing their assets. Once enough funds are collected, the exchange either shuts down or prevents users from withdrawing their money.

• Signs of a scam: Poor website security, lack of regulation, unrealistic profit guarantees, and no real customer support.

• Example: A trader deposits Bitcoin into a newly launched exchange that claims to offer "zero trading fees", only to realize later that the withdrawal function is disabled or non-existent.

Each of these honeypots exploits investor trust in different ways, making it essential to research projects, read smart contract audits, and verify liquidity security before investing in any crypto asset.

Well-known examples of honeypot scams

Honeypot scams have cost investors millions of dollars, often disguising themselves as promising crypto projects. Below are some notable cases where unsuspecting investors lost their funds and the lessons learned from these scams.

1. The Squid Game token scam (2021)

Inspired by the popular Netflix series Squid Game, scammers launched a Squid Game (SQUID) token, promising a play-to-earn gaming experience. The token’s price skyrocketed from a few cents to over $2,800 in days. However, the smart contract was designed to prevent holders from selling their tokens. After attracting significant investments, the developers executed a rug pull, disappearing with an estimated $3.3 million in stolen funds.

Just because a project is linked to a popular trend doesn't mean it's legitimate. Always verify whether tokens can be sold by analyzing the smart contract.

2. The Thodex exchange exit scam (2021)

Thodex, a Turkish crypto exchange, lured investors with high returns and promotional giveaways. Users deposited millions of dollars, believing the exchange was trustworthy. However, the platform suddenly went offline, and its CEO disappeared. Around $2 billion in user funds vanished, making it one of the largest exchange-related honeypot scams.

Be cautious of exchanges with unrealistic offers and always use regulated, well-known platforms with a strong reputation.

3. The Snibbb token scam (2023)

Snibbb was a meme coin that gained popularity in a short time. Investors were able to buy the token, but the smart contract blocked them from selling. The developers hyped the project on social media and attracted significant investment before draining the liquidity pool. Investors lost millions as they were left holding worthless, unsellable tokens.

Always check if a smart contract has been audited and whether it includes any restrictions on selling.

Key takeaways from these scams

1. If it looks too good to be true, it probably is. Unrealistic promises of high returns are a major red flag.

2. Analyze the smart contract. If a project doesn't provide a verified contract audit, be wary.

3. Beware of hype-driven projects. Scammers use social media and celebrity endorsements to create FOMO.

4. Use reputable exchanges. Avoid platforms that are new, unregulated, or have withdrawal restrictions.

How to identify and avoid honeypots

Honeypot scams are designed to deceive investors, but with careful analysis, you can spot red flags before falling victim. Here are key steps to identify and avoid these traps:

1. Analyze smart contracts

• Use blockchain explorers like Etherscan or BscScan to review the smart contract code.

• Look for hidden functions that restrict selling or withdrawing funds.

• Check if the contract allows the developers to modify trading rules after launch.

2. Check liquidity & trading restrictions

• Ensure the token's liquidity is locked using platforms like Unicrypt or Team Finance.

• Avoid tokens with high sell taxes or complex transaction conditions that prevent users from selling.

• Verify trading volume and token distribution—if a single entity holds most of the supply, it's a red flag.

3. Verify project transparency

• Research the team's background—anonymous developers increase risk.

• Assess the roadmap and whitepaper for unrealistic claims or missing technical details.

• Look for third-party audits from trusted firms like CertiK or SlowMist.

4. Community and developer activity

• Join the project's Telegram, Discord, or Twitter to check for real community engagement.

• Be wary of overhyped promotions and giveaways designed to lure investors.

• Check developer activity on GitHub—legitimate projects have consistent updates.

By following these steps, investors can reduce the risk of falling for honeypot scams and make more informed decisions.

What to do if you encounter a honeypot

If you come across a honeypot scam, taking immediate action can help prevent further losses and warn other investors. Here's what to do:

Steps to take if your funds are lost

• Stop further transactions — avoid interacting with the scam project further to prevent additional losses.

• Check for refund possibilities — some victims organize recovery efforts or class-action lawsuits against scammers.

• Use blockchain forensics — services like Chainalysis, CipherTrace, or Elliptic can track stolen funds, though recovery chances vary.

• Warn others — post your experience on platforms like Reddit (r/cryptocurrencyscams), Twitter, and crypto forums to help prevent others from falling victim.

How to report a honeypot scam:

• Use blockchain explorers — report suspicious smart contracts on Etherscan, BscScan, or other blockchain explorers.

• Notify crypto scam databases — submit the scam to platforms like Scam Alert by CoinGecko, Token Sniffer, or RugDoc to warn others.

• Contact crypto exchanges — if the scam token was listed on an exchange, report the fraudulent activity to the platform's support team.

• File a complaint with authorities — depending on your region, report the scam to organizations like the U.S. SEC, Europol, or FCA (UK).

Platforms and organizations that track crypto scams

• Token Sniffer — analyzes smart contracts and flags high-risk tokens.

• RugDoc — assesses DeFi projects for potential scams.

• Scam Alert by CoinGecko — community-driven database for reporting fraud.

• Crypto Scam Tracker (FTC) — tracks and reports cryptocurrency-related fraud cases

Conclusion

What is a honeypot in crypto? Honeypot scams in the crypto space are a growing threat, targeting unsuspecting investors with promises of high returns while secretly restricting withdrawals. By understanding how these scams operate—from the creation of fake projects to the final rug pull—you can recognize the warning signs and avoid falling victim.

To protect yourself, always analyze smart contracts, verify liquidity and trading conditions, and assess project transparency. Engaging with active and reputable crypto communities can also help spot potential scams before they cause damage.

If you ever encounter a honeypot scheme, report it immediately to blockchain explorers, scam databases, and authorities to prevent others from being defrauded. While crypto offers exciting investment opportunities, due diligence and skepticism remain your best defenses against fraudulent schemes.