Cryptocurrency has become increasingly popular over the past few years, with more and more people investing in various digital currencies such as Bitcoin, Ethereum, and Litecoin. However, with this increased popularity, comes an increase in the number of scams and fraudulent activities related to cryptocurrency.
These activities are mostly possible because of the lack of research and also sometimes lack of fundamental knowledge around the space. Several people blindly hop on the bandwagon due to the “hype” being created around certain projects. So it’s important to learn web3 and blockchain fundamentals before you start.
Having mentioned that, let’s move on. Here are the 7 most common cryptocurrency scams and how to avoid them.
1. Ponzi schemes
Ponzi schemes are fraudulent investment schemes where returns are paid to existing investors from funds contributed by new investors, rather than from profit earned by the operator. These schemes often promise high returns and use tactics such as social media and celebrity endorsements to lure in new investors.
How to avoid falling victim to a Ponzi scheme: be sure to research any investment opportunity thoroughly and be wary of promises of high returns with little or no risk.
Example of a Ponzi scheme in the cryptocurrency space: The PlusToken scam, which was uncovered in 2019, promised high returns to investors who deposited their cryptocurrency into the PlusToken wallet. But in reality, the operators were using funds from new investors to pay returns to existing ones. The scheme is believed to have defrauded investors of over $2 billion in various cryptocurrencies.
2. Phishing scams
Phishing scams involve the use of fake emails or websites that mimic legitimate ones in order to trick people into providing personal information, such as login credentials or credit card numbers. These scams often target cryptocurrency exchanges and wallet providers, and can lead to the loss of funds or the theft of personal information.
How to avoid falling victim to a phishing scam: Be sure to only use official websites and always verify the authenticity of emails or messages that ask for personal information.
Example of a phishing scam in the cryptocurrency space: The popular cryptocurrency exchange Binance experienced a phishing attack in which hackers used fake websites and emails to trick users into providing their login credentials and 2FA codes. This allowed the hackers to gain access to user accounts and steal funds.
3. Pump and dump schemes
Pump and dump schemes involve artificially inflating the price of a certain cryptocurrency through false and misleading statements, in order to sell it at a higher price. These schemes often take place on online forums and social media platforms, and can lead to significant losses for those who buy into the inflated price.
How to avoid falling victim to a pump and dump scheme: Research any cryptocurrency thoroughly and be wary of sudden or unexplained price increases.
Example of a pump and dump scheme in the cryptocurrency space: In 2021, the SEC (U.S. Securities and Exchange Commission) charged a group of individuals with participating in a pump and dump scheme involving a little-known cryptocurrency called “MarijuanaCoin”. They used social media and online forums to artificially inflate the price of the coin before selling it at a profit, leaving investors with significant losses.
4. Cloud mining scams
Cloud mining scams involve the sale of mining smart contracts for a cryptocurrency, which promise a certain level of return on investment. However, these scams often involve little or no real mining, and can lead to significant losses for those who invest in them.
How to avoid falling victim to a cloud mining scam: Always research any mining opportunity thoroughly, snoop around and ask questions. This may help you only invest in reputable companies.
Example of a cloud mining scam: A company called “HashInvest” promised to mine cryptocurrency on behalf of investors, but turned out to be a scam. The company took investments from thousands of people, promising to return their investments with profit. But the company never actually mined any cryptocurrency, and the team behind it disappeared with the funds.
5. ICO scams
Initial coin offerings (ICOs) are a form of crowdfunding for cryptocurrency projects, where investors can buy tokens in exchange for a future product or service. However, many ICOs are scams that involve little or no real development and can lead to significant losses for those who invest in them.
How to avoid falling victim to an ICO scam: Vet any ICO thoroughly and only invest in reputable projects with a clear and realistic roadmap.
Example of a cryptocurrency ICO scam: A company called “Vaultbank” was charged by the SEC (U.S. Securities and Exchange Commission) for conducting a fraudulent initial coin offering (ICO) that raised $15 million from investors. The company had promised to use the funds to develop a “next-generation financial platform” but instead misused the funds for personal expenses and to pay returns to earlier investors.
6. Crypto wallet scams
Crypto wallets are digital wallets that are used to store, send, and receive cryptocurrencies. Scammers will often create fake wallet apps or websites that mimic legitimate ones in order to trick people into entering their private keys or seed phrases. These keys or phrases are used to access and control a user’s cryptocurrency, so if a scammer gets their hands on them, they can steal the user’s funds.
How to avoid getting caught up in a crypto wallet scam: Remember to only download apps from official sources, be wary of unsolicited messages and offers, use a hardware wallet and enable Two-Factor Authentication.
Be especially cautious of “free” wallets. They’re never free and end up costing you a lot.
An example of a cryptocurrency wallet scam: In September 2021, a fake mobile wallet app for Ledger, a well-known hardware wallet provider, was found on Google Play Store.
The app was created by a third-party developer and it was designed to look like the official Ledger Live app. The app was downloaded by thousands of people before it was taken down. The app was not only phishing the users’ private keys but it also had malware that could steal user’s personal information and credentials from the infected device.
7. Exit scams
Exit scams involve a cryptocurrency project or company disappearing with investors’ funds. This happens when the company or project suddenly closes and the team behind it vanishes, with the money invested by their investors. This can happen to smaller projects that were not well known and not properly audited, or to projects that were simply a scam from the start.
How to avoid falling victim to an exit scam: Invest in well-known projects that have been audited by reputable firms and only invest what you can afford to lose. Don’t trust word-of-mouth or social media reviews – it could very well become a Bernie Madoff situation, and that was an ugly one.
An example of exit scams: A company called “Harvest Finance” which operated a decentralized finance (DeFi) platform suddenly shut down in 2020 and the team behind it disappeared with the funds of thousands of investors. The platform had been gaining popularity among investors, but it was later revealed that the operators had exploited a vulnerability in the code to drain the funds from the platform’s liquidity pools and disappear with the money. The incident caused a loss of around $24 million for the investors who had invested in the platform.
While cryptocurrency can be a great investment opportunity, it’s important to be aware of the potential scams and fraudulent activities that can occur in this space.
Take the time to research any investment opportunity thoroughly, be wary of promises of high returns with little or no risk, and only invest in reputable companies and projects, you can help to protect yourself from falling victim to a cryptocurrency scam.
Additionally, it is important to stay informed about the latest developments in the cryptocurrency industry and to be aware of red flags, such as sudden or unexplained price increases or unregistered companies, that may indicate a scam.
It is also essential to remember that no investment is without risk and it is always important to be cautious and aware of the potential risks before making any investments.
Remember that if something seems too good to be true, it probably is.
By keeping these tips in mind, you can help to protect yourself and your funds while participating in the exciting world of cryptocurrency.