What is a Honeypot?
In cryptocurrency, a honeypot is a type of scam where you can buy a token, but you cannot sell it. In other words, the money you invest is essentially stolen, leaving you with a bag of coins you cannot trade.
Honeypot scams usually work the following way. A scammer creates a token presale and promotes it on various channels. However, a piece of code is written into the contract which only allows certain wallets to sell the coin (usually the scammer’s wallets).
When the coin is launched, unsuspecting investors buy it, causing the price to increase or ‘pump.’ The pump is greatly exaggerated, since there is no selling activity. The scammer then sells when he wants, cashing out the stolen funds.
How Does a Honeypot Scam Work?
Honeypot scams most likely got their name from someone getting their hand stuck in a jar or pot of honey. The honey represents something sweet and enticing, like a pumping coin. However, once your hand is inside the jar, it gets stuck.
One of the characteristics that make honeypots so successful, is the fact that they prey on greed and FOMO. Since it is written in the contact that no one (excepts a few wallets) can sell, the price of the coin skyrockets. This type of scam can go on for days or weeks. As the price continues to increase, investors are encouraged to hold, since they believe they have found a gem of a coin. Once the scammers are satisfied, they cash out and leave.
Honeypots are, unfortunately, difficult to spot before launch. However, there are a few tools that you can use to audit smart contracts to determine if a project is a potential honeypot. Token Sniffer, for example, will analyze the contract to determine if the token is sellable.
Another way to determine if a project may be a honeypot is to be patient and have a look at the price chart on launch. If you notice that the price of the token continues to rise constantly without any selling activity, this is a red flag.
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