Common Cryptocurrency Scams and How to Avoid Them
8 min read
Cryptocurrency has revolutionized the financial world with its promise of decentralized finance and unprecedented opportunities for investment such as staking, Copy Trading, lending, etc. However, as the popularity of digital currencies has soared, so too have the number of scams targeting both novice and experienced investors. Understanding these scams and knowing how to protect yourself is crucial in navigating the crypto space safely. This article explores some of the most common cryptocurrency scams and provides practical advice on how to avoid falling victim to them.
1. Phishing Scams
Phishing scams are one of the oldest tricks in the book, but they remain highly effective, especially in the digital age. In the context of cryptocurrency, phishing typically involves scammers impersonating legitimate cryptocurrency exchanges, wallets, or other service providers to steal your private information and funds.
How Phishing Scams Work
Phishing scams usually begin with an unsolicited email or message that appears to be from a reputable source, such as your cryptocurrency exchange or wallet provider. The message might warn you of a security issue with your account, prompting you to click on a link to resolve the issue. Once you click the link, you are directed to a fake website that looks almost identical to the real one. Any information you enter on this fake site, such as your login credentials or private keys, is captured by the scammers.
Example
Imagine receiving an email that appears to be from Coinbase, a popular cryptocurrency exchange. The email warns you that there has been suspicious activity on your account and urges you to click a link to secure your account. The link directs you to a website that looks just like Coinbase, but any information you enter there is sent directly to the scammers.
How to Avoid Phishing Scams
Check the URL: Always verify the URL of the website you are visiting. Scammers often use URLs that look similar to the legitimate ones but may have slight differences.
Don’t Click on Unsolicited Links: Avoid clicking on links in unsolicited emails or messages. Instead, go directly to the official website by typing the URL into your browser.
Enable Two-Factor Authentication (2FA): Use two-factor authentication for an additional layer of security. Even if scammers obtain your login credentials, they would still need access to your second factor of authentication.
2. Ponzi and Pyramid Schemes
Ponzi and pyramid schemes are fraudulent investment scams that promise high returns with little or no risk. These schemes rely on the recruitment of new investors to pay returns to earlier investors, creating the illusion of a profitable business.
How Ponzi and Pyramid Schemes Work
In a Ponzi scheme, the scammer promises high returns to investors and uses the money from new investors to pay returns to earlier investors. This creates a cycle where the scam appears legitimate as long as new investors keep joining. However, when the flow of new investors stops, the scheme collapses, and the scammer disappears with the funds.
Pyramid schemes work similarly but require participants to recruit new members. Each new member pays an entry fee, which is distributed to the recruiters above them. As the scheme grows, it becomes unsustainable, and the majority of participants end up losing their money.
Example
Bitconnect was a notorious Ponzi scheme that promised high daily returns through a lending program. Investors were encouraged to lend their Bitcoin in exchange for Bitconnect tokens, which were supposed to generate returns through a trading bot. In reality, the returns were paid using funds from new investors, and when the scheme collapsed, many investors lost their money.
How to Avoid Ponzi and Pyramid Schemes
Be Wary of Guaranteed Returns: Be skeptical of any investment that promises guaranteed high returns with little or no risk.
Research the Company: Investigate the company and its business model. Check for transparency, regulatory compliance, and credible reviews.
Understand the Investment: Make sure you understand how the investment generates returns. If the process is unclear or relies heavily on recruiting new investors, it’s likely a scam.
3. Fake ICOs (Initial Coin Offerings)
Initial Coin Offerings (ICOs) are a popular way for cryptocurrency projects to raise funds. However, scammers often create fake ICOs to trick investors into sending them money.
How Fake ICOs Work
In a fake ICO, scammers create a convincing website and whitepaper to promote a new cryptocurrency project. They often promise groundbreaking technology and huge returns on investment. Investors are encouraged to send funds in exchange for tokens that are supposed to be issued when the ICO concludes. However, once the scammers have collected enough money, they disappear, leaving investors with worthless tokens.
Example
In 2017, a fake ICO for a project called Centra Tech raised over $25 million from investors. The project claimed to have partnerships with major credit card companies and promised a revolutionary crypto debit card. However, it was later revealed that the founders had fabricated the partnerships and the project was a scam.
How to Avoid Fake ICOs
Verify the Legitimacy: Check the authenticity of the ICO. Look for detailed information about the team, project, and technology. Verify their claims through independent sources.
Check the Team’s Credentials: Investigate the backgrounds of the team members. Look for credible LinkedIn profiles and prior experience in the industry.
Seek Community Feedback: Join cryptocurrency forums and communities to get feedback from other investors. If the ICO is legitimate, there will likely be discussions about it.
4. Pump and Dump Schemes
Pump and dump schemes involve artificially inflating the price of a cryptocurrency through false or misleading statements, only to sell off the holdings at the peak, leaving other investors with losses.
How Pump and Dump Schemes Work
Scammers typically choose a low-volume cryptocurrency and start buying large amounts of it, causing the price to rise. They then spread false or exaggerated information about the cryptocurrency to attract more buyers. As more investors buy into the hype, the price continues to increase. Once the price reaches a peak, the scammers sell their holdings, causing the price to plummet and leaving other investors with significant losses.
Example
In January 2018, a pump and dump scheme targeted the cryptocurrency Tron (TRX). Scammers spread rumors that Tron was partnering with a major tech company, causing the price to surge. Once the price reached a high, the scammers sold their holdings, and the price crashed, resulting in losses for those who bought into the hype.
How to Avoid Pump and Dump Schemes
Avoid Hype-Driven Investments: Be cautious of cryptocurrencies that experience sudden, unexplained price increases. Do your own research before investing.
Research the Coin’s Fundamentals: Look into the cryptocurrency’s technology, use case, and development team. Make sure it has a solid foundation.
Be Skeptical of Rumors: Verify any information you hear from multiple reputable sources. Don’t make investment decisions based on rumors or unverified claims.
5. Fake Exchanges and Wallets
Scammers create fake cryptocurrency exchanges and wallets to steal funds from unsuspecting users. These fake platforms often look very convincing, making it difficult to distinguish them from legitimate ones.
How Fake Exchanges and Wallets Work
Fake exchanges typically lure users with attractive features such as low fees, high security, or exclusive token listings. Once users deposit their funds, the scammers either steal the money directly or manipulate the trading environment to siphon off funds.
Fake wallets, on the other hand, may appear in app stores or be promoted through phishing emails. These wallets steal users’ private keys, giving the scammers access to the funds stored in the real wallet.
Example
In 2017, a fake cryptocurrency exchange called BitKRX claimed to be affiliated with the Korean Exchange (KRX). The exchange attracted many users, but it was eventually revealed to be a scam, and users lost their funds.
How to Avoid Fake Exchanges and Wallets
Use Reputable Platforms: Stick to well-known and reputable exchanges and wallets. Check reviews and user feedback before using a new platform.
Verify Security Measures: Ensure the platform has strong security measures, such as two-factor authentication and secure socket layer (SSL) encryption.
Check for Regulatory Compliance: Verify if the platform is compliant with local regulations and has the necessary licenses to operate.
6. Malware
Malware can infect your device and steal sensitive information, including private keys to your cryptocurrency wallet. Malware can be distributed through phishing emails, malicious websites, or infected software downloads.
How Malware Works
Once installed on your device, malware can perform various malicious activities. Keyloggers can capture your keystrokes, including your passwords and private keys. Remote access Trojans (RATs) can give the attacker control of your device, allowing them to access your wallet and transfer your funds.
Example
In 2019, a malware strain called Clipper was discovered on the Google Play Store. It replaced cryptocurrency wallet addresses copied to the clipboard with addresses controlled by the attacker, causing users to send funds to the scammer’s wallet instead of the intended recipient.
How to Avoid Malware
Use Antivirus Software: Install reputable antivirus software and keep it updated to protect against malware.
Keep Software Updated: Regularly update your operating system and software to patch vulnerabilities that could be exploited by malware.
Avoid Suspicious Downloads: Be cautious when downloading files or apps from unknown sources. Stick to official app stores and trusted websites.
Conclusion
Cryptocurrency scams are becoming increasingly sophisticated, making it more important than ever to stay vigilant and informed. By understanding the common types of scams and following best practices for security, you can protect yourself and your investments