The cryptocurrency world is still fairly young and unregulated. That and the fact that crypto is highly portable, liquid, and comes with irreversible transactions makes it an attractive asset to cybercriminals.
As a result, a broad array of scams has flooded the crypto and digital world. From the decades-old classic to crypto-specific frauds, cybercriminals are becoming more sophisticated in scamming investors. They do so through different fraud techniques and schemes that aim to drain their hard-earned money or access their crypto wallets.
To help you stay safe, this article shares some of the most common crypto scams and how you can avoid them.
The first thing you want to be careful with when entering the crypto world is who you trust with your portfolio.
The number of crypto exchange platforms or crypto brokers has been constantly growing since BTC, ETH, and other coins and crypto projects started to get traction.
Alongside the numerous trusted exchanges, including these sites, which have proved to be legit and gained reputable track records, there are crypto brokers which have been associated with incidents involving stolen funds and hacked systems which resulted in multimillion losses for investors.
In most cases, these brokers lack the regulatory oversight that most reputable crypto exchange platforms are subject to. Thus, you want to be careful in signing up and depositing your money into these exchanges. Research if the broker is actively overseen by top-tier jurisdictions such as the US, the UK, Australia, or Japan.
Also, don’t be tempted by their too-good-to-be-true offerings. These unregulated crypto exchanges and brokers often lure their clients with low prices, quick returns, and competitive trading products.
Once you make a deposit, it becomes difficult to withdraw your money. They may make up bogus reasons why you can’t withdraw your gain or funds or ask for high commissions. Worst case scenario—you won’t be able to contact them and lose all your money.
Social Media Giveaways
Who doesn’t like giveaways?
Nowadays, it’s amazing how everyone seems so generous on social platforms like Facebook and Twitter. If you check comments or replies on popular Facebook posts or tweets, especially crypto-related, you’ll probably see someone doing a giveaway of your favorite crypto.
They’ll ask you to send a crypto asset – for instance, 5,000 DOGE coins, and promise to send you twice that amount. Another point of something that seems too good to be true. It’s highly unlikely that someone hosting a legit giveaway will first ask you to send your own asset. Thus, you want to be wary of these kinds of posts and messages on social media.
Also, some fraudster further enhance their trick by impersonating reputable individuals within the financial and crypto space, a celebrity, or someone whose credibility might be sound enough to make people think that their offer is legit.
You’ll even see people and other users commenting positively on the said post. However, these are often the scammers themselves utilizing bots and fake accounts.
What’s worse is that some even go as far as hacking someone’s real social media profile. For instance, in 2020, the Twitter accounts of prominent US figures like Jeff Bezos, Elon Musk, Bill Gates, and even former US president Barack Obama were hacked and used to ask followers for a donation of crypto assets in exchange for higher payouts.
Bottom line: you should simply ignore these kinds of posts or messages. If you’re convinced that they are legit, check their profiles and you’ll immediately see the differences. And even if a prominent figure or crypto exchange does organize a giveaway, the legit ones will never ask you to send funds first.
DeFi Rug Pulls
This is the latest type of scam to hit the crypto industry. Short for decentralized finance, DeFi seeks to spread out finance by removing the concierges for financial transactions.
It has opened innovation in the crypto world. That said, the development of DeFi platforms also brings a new set of fraud and scams. Malicious actors have snagged several investor funds with such avenues. In particular, rug pull has become quite prevalent as DeFi protocols attracted crypto investors who want to magnify their profits by searching for yield-bearing crypto instruments.
This is how a rug pull happens:
Malicious actors list a new token on decentralized brokers then pair it with legit crypto. They’ll attract interest on social media to lure in investors. Once enough money is invested into their token, developers will scratch the project and run with your money.
The usual victims of this scam are early or newbie investors who think they’re getting early access to upcoming cryptos. To prevent this from occurring, you want to pay close attention to the third parties and websites involved. Don’t rely on other people’s comments on social media, regardless of how many positive reviews it has. If you can’t find reputable or verifiable reviews, then it’s highly likely to be a scam.
Ponzi And Pyramid Schemes
Ponzi and pyramid schemes are slightly different. However, they’re mostly similar, in terms of their goal—to recruit more members with the promise of huge returns and keep the model afloat.
Both Ponzi and pyramid schemes are commonly seen in businesses in the beauty and health industry but can also be found in the investment sector including crypto.
In fact, controversial projects like Bitconnec, OneCoin, and PlusToken are under fire for allegedly using pyramid schemes. Another example is Wotoken, a Chinese crypto Ponzi scheme that allegedly stole over $1 billion from investors in 2020.
But what exactly are these schemes? Let’s take a closer look:
A Ponzi scheme promises guaranteed profits for your investment. It’s often disguised as a portfolio management service. However, instead of managing your portfolio to gain profits, the returns you get are just other investors’ money.
This means that new cash added to the pool is from new entrants. The older investors are paid off with the money from new investors. This cycle goes on as more newcomers join. Thus, the scheme collapses if the organizer can’t find new investors and is unable to sustain payouts for existing investors.
For instance, an alleged crypto investor or manager promises 15% monthly returns by investing your money in crypto assets. So, if you give them USD$100, you can get $115 at the end of the month.
However, instead of investing your money on crypto assets, the scammer will simply entice yet another client to join their program and invest another USD$100, which they will use to pay you at the end of the month. They would rope in another client to pay the second one and the cycle continues.
Unlike Ponzi, pyramid schemes will require more effort from the members. From the top is the program organizer. They will recruit a specific number of individuals to work on the level below them. Then, each of those people will recruit their own number of individuals and so on.
You’ll end up with a large structure that grows exponentially as new levels are created, thus the name pyramid.
Although it may look like a legit, large business, pyramid schemes are easily distinguished in a way that they promise revenue for successful recruiting new members.
For instance, the program organizer has two recruits—A and B. When A and B enlisted new members to the program, the organizer promises to give them USD$50 each but also takes a 50% cut from it. So, if A recruited both C and D (at USD$50 each), he’ll be left with USD$50 since half of her revenue will be passed onto the organizer.
Both A and B can extend the same deal to their recruit but will need at least 2 recruits to reclaim their initial investment. If both C and D go on to recruit new members, then, the rewards will move upwards—A gets half of both C and D’s revenue, and the program organizer gets half of A’s half.
As the scheme grows, older members can earn a passive, increasing stream of profit. However, due to exponential growth, it is not a sustainable model for long.
The easiest way to not get caught up with this type of crypto scam is to not participate in any promotion or programs that appear to be a Ponzi or pyramid scheme. Also, make sure to gather all information regarding the program and company. Check if the investment is registered and verify with regulation institutions like SEC, IRS, and CFTC.
Pump And Dump Schemes
Pump and dump scams are not new. In fact, this type of fraud is said to go all the way back to the 18th century and continues to persist in the crypto world.
This type of scheme starts with an individual or an online group’s effort to inflate or “pump” the price of a crypto asset. They will convince investors, particularly the newbies, to buy a crypto asset. Oftentimes, scammers will use social media and online forum communities to spread misleading or false information or share convincing analysis that promises an impending surge to urge investors to buy and hold.
After pumping comes to the dump. As more investors become more convinced, buying and driving the price up, in the heat of the moment, the schemers sell off their holdings and make a quick fortune. Once people realize that the hype was fake, they’ll panic and also sell off their holdings to limit their losses. The huge sell-off causes the crypto’s price to plummet.
An example of a classic crypto pump-and-dump scheme happened in July 2021. Members of the FaZe clan which are pro gamers, along with other social influencers pushed the token “SaveTheChildren” to their followers. Once the price rose, they started selling off their tokens with some making about USD$30,000.
The most frustrating part of this is that pump-and-dump schemes are not exactly illegal. This is because crypto is highly unregulated and doesn’t have similar rules compared to stocks.
So, it’s best to learn how to avoid such a scheme. Spotting a pump-and-dump scheme essentially boils down to credibility. If you’re using social platforms such as Twitter and Reddit to track crypto movements, make sure to avoid anonymous accounts with minimal posting history or lookout for those with a track record of baseless pumping. Also, be wary of influencers who hardly mention crypto and suddenly start promoting a token. Lastly, don’t be influenced by the FOMO movement—always research and learn on your own and stick to your investment plan.
You probably know about phishing even if you don’t enter the crypto space. Phishing scams involve the scammer impersonating a company or person to extract personal data from you. Phishing scammers may also use psychological manipulation that tricks you into revealing your login credentials or bank information.
Phishing can take place across numerous mediums—from email and messaging apps to fake websites. In particular, messaging apps and email phishing scams are quite common in the crypto world.
Take note that there is not a single playbook that these scammers adhere to when trying to fish out your personal information. You may get a text message notifying you that there’s something wrong with your broker account or an email saying you won some coins. They often come with a link that will redirect you to a fake site and prompt you to log in. And if you do log in, the scammer will gain access to your crypto portfolio.
Some tips to avoid being scammed by phishers include:
- Always check the URL of the sites you’re visiting.
- Never give your password or OTPs. Legitimate crypto exchange will never ask these of you.
- Bookmark your frequently visited websites.
- When in doubt, ignore the message you received and contact the crypto exchange or business via their official channels.
- Same as passwords and OTPs, nobody needs to know about your seed phrase or private keys.
The mad rush into cryptos has evoked the familiar scenes of the Wild West. As the crypto world evolves and becomes more complex, so will the scamming agenda of malicious individuals and cybercriminals.
Although scary, it should not stop you from investing and cashing in large profits in the crypto world. Stay vigilant and understand the common ways cybercriminals and scammers try to trick you. By doing so, you hopefully will be able to actively spot a crypto-related fraudulent offering and prevent it from happening to you.