The popularity of cryptocurrency has coincided with a rise in financial scams. Despite the nascent asset class offering many benefits and opportunities for individuals and businesses alike, the surge in investor interest in cryptocurrencies and the astronomical returns it offers have created a highly sought-after option for scammers to take advantage of their users.
From exit scams like rug pulls, impersonations, and giveaway scams to phishing attacks, and Ponzi schemes, there are many methods used to lure in victims. Recognizing these common cryptocurrency scams while being forewarned will help users stay safe in the cryptosphere.
A report released by the U.S. Federal Trade Commission claims that between January 2021 and June 2022, over 46,000 consumers lost more than $1 billion to cryptocurrency scams. According to many analysts, the three leading causes of the rise in fraudulent activities within the ecosystem are:
- The absence of a centralized authority,
- Irreversible transactions and,
- The pseudonymity associated with cryptocurrencies.
The cryptocurrency industry is still in its infancy since the inception of Bitcoin a little over a decade ago. However, the ecosystem has since exploded, with more than 22,000 cryptocurrencies. Not only is DeFi growing and expanding, but NFTs and decentralized marketplaces have also entered the picture, giving unscrupulous scammers more options.
Cryptocurrency scams can operate in a few different ways. Typically, scammers convince users to send money directly to their wallet or by a hacker trying to access a victim’s digital wallet. These swindlers use astoundingly inventive methods to defraud their unsuspecting victims of their funds. Therefore, it is crucial to maintain the highest level of caution as users navigate the cryptocurrency world. Awareness of the most common cryptocurrency scams is the first step.
Common cryptocurrency scams
1. Phishing attacks
While phishing attacks are one of the most common vectors for an attack in the crypto industry, it is also one of the oldest identity and financial theft methods the internet has seen. Phishing is a method of social engineering in which a perpetrator poses as a reputable entity to mislead a user into opening a malicious link in an email or instant message that leads to a fake website. Once the users enter their login credentials or other sensitive information, the attackers can obtain this information.
Within the cryptocurrency realm, phishing scams specifically target private keys (the keys needed to access cryptocurrency) and other sensitive information related to users’ online wallets. Additionally, scammers use various techniques to direct their victims to fake websites. For example, attackers may use emails that appear legitimate, alerting users to account issues but contain a malicious link, or pose as customer service representatives to solve problems to obtain victims’ personal information. Cybercriminals are also using fake browser extensions of popular crypto wallets to deceive users of their funds.
2. Exit Scams
An exit scam is a deceptive practice wherein the developers or promoters of new cryptocurrency projects defraud investors by promising them enormous profits but then keeping the money or abandoning the projects, leaving retail investors empty-handed. Some of the space’s most high-profile exit schemes include Bitconnect, OneCoin, and LoopX. A common type of exit scam includes rug pulls or pump-and-dump schemes.
The term rug pull comes from the expression “pulling the rug out from under” or withdrawing support unexpectedly. Rug pulls involve promotors of a project generating false hype for a project’s utility to attract funding and artificially inflating the price of a coin or NFT project, only to disappear with investor funds, leaving investors with bags of worthless tokens. Although many pump-and-dump schemes have existed in the traditional financial sector for decades, these fraudulent practices have become particularly prevalent in the cryptocurrency space.
Therefore, it makes sense for investors looking to place their funds in speculative small-cap altcoins to conduct the appropriate background research on the project, including looking into the project’s roadmap, tokenomics, the team behind it, and their track records.
3. Ponzi Schemes
A Ponzi scheme is a well-known get-rich-quick scam that pays out rewards to initial investors using money from more recent ones. The promise of enormous returns with little volatility or risk is the primary allure of a Ponzi scheme. The funds are never invested as promised; instead, they are used to pay early investors their “guaranteed high returns” until the supply of new investors runs out, and the scheme collapses. Since there are no legitimate investments, the model is a cyclical money-making scam constantly targeting new investors.
Ponzi masterminds are particularly attracted to the crypto space due to novice investors entering the ecosystem and the regulatory grey area. The absence of traditional regulatory materials like earnings reports, third-party research reports, and audited documents serve as a haven for Ponzi schemers.
Additionally, because of the industry’s rapid growth, average investors are flocking to the sector without a firm grasp of the technology. Unfortunately, this has allowed scammers to present themselves as experts who can take care of that learning curve.
4. Social Media Impersonation and fake giveaways
Another popular cryptocurrency scam sweeping Twitter and other social media platforms like Discord, Telegram, YouTube, and Instagram is the rise of fake accounts posing as well-known influencers or public figures in the cryptocurrency industry.
The modus operandi of these scams involves attackers creating fake profiles nearly identical to the ones they are pretending to be to advertise giveaways that promise to double a user’s money if they deposit cryptocurrency assets into a specific wallet address. This, of course, isn’t the case and the user’s funds are irretrievable once sent.
As the crypto industry grows in scale and complexity, malicious actors are incentivized to siphon funds from unsuspecting cryptocurrency users. Therefore the acronym DYOR (Do Your Own Research) is pertinent to this thriving industry. In addition to recognizing the common scams that plague the ecosystem. Fortunately, there are red flags and preventative measures that users need to be aware of to avoid the most pervasive deceit tactics. This includes promises of guaranteed returns, a poor or non-existent project whitepaper, excessive marketing with free giveaways, unnamed founding team members, avoiding google or social media ads, and ignoring cold emails.
Users can avoid becoming victims of such scams by taking note of these warning signs, taking proactive steps to learn about the ecosystem, and using the best practices for securely storing cryptocurrency assets.