Scammers are always looking for new ways to steal your money, and the massive growth of cryptocurrency in recent years has created plenty of opportunities for fraud. Cryptocurrency crime had a record-breaking year in 2021 – according to a report by blockchain data firm Chainalysis, fraudsters stole $14 billion of crypto that year. If you’re interested in crypto, it’s important to be aware of the risks. Read on to find out more about common crypto scams, how to spot them, and how to avoid them.
There are many types of crypto scams. Some of the most common include:
Scammers sometimes create fake cryptocurrency trading platforms or fake versions of official crypto wallets to trick unsuspecting victims. These fake websites usually have similar but slightly different domain names from the sites they attempt to mimic. They look very similar to legitimate sites, making it difficult to tell the difference. Fake crypto sites often operate in one of two ways:
Crypto phishing scams often target information relating to online wallets. Scammers target crypto wallet private keys, which are required to access funds within the wallet. Their method of working is similar to other phishing attempts and related to the fake websites described above. They send an email to lure recipients to a specially created website asking them to enter private key information. Once the hackers have acquired this information, they steal the cryptocurrency in those wallets.
Pump and dump schemes
This involves a particular coin or token being hyped by fraudsters through an email blast or social media such as Twitter, Facebook, or Telegram. Not wanting to miss out, traders rush to buy the coins, driving up the price. Having succeeded in inflating the price, the scammers then sell their holdings – which causes a crash as the asset's value sharply declines. This can happen within minutes.
Another common way scammers trick cryptocurrency investors is through fake apps available for download through Google Play and the Apple App Store. Although these fake apps are quickly found and removed, that doesn't mean the apps aren't impacting many bottom lines. Thousands of people have downloaded fake cryptocurrency apps.
Fake celebrity endorsements
Crypto scammers sometimes pose as or claim endorsements from celebrities, businesspeople, or influencers to capture the attention of potential targets. Sometimes, this involves selling phantom cryptocurrencies that don't exist to novice investors. These scams can be sophisticated, involving glossy websites and brochures that appear to show celebrity endorsements from household names such as Elon Musk.
This is where scammers promise to match or multiply the cryptocurrency sent to them in what is known as a giveaway scam. Clever messaging from what often looks like a valid social media account can create a sense of legitimacy and spark a sense of urgency. This supposed ‘once-in-a-lifetime’ opportunity can lead people to transfer funds quickly in the hope of an instant return.
Another method scammers use is blackmail. They send emails that claim to have a record of adult websites visited by the user and threaten to expose them unless they share private keys or send cryptocurrency to the scammer.
Cloud mining refers to companies that allow you to rent mining hardware they operate in exchange for a fixed fee and a share of the revenue you will supposedly make. In theory, this allows people to mine remotely without buying expensive mining hardware. However, many cloud mining companies are scams or, at best, ineffective – in that you end up losing money or earning less than was implied.
Fraudulent initial coin offerings (ICOs)
An initial coin offering or ICO is a way for start-up crypto companies to raise money from future users. Typically, customers are promised a discount on the new crypto coins in exchange for sending active cryptocurrencies like bitcoin or another popular cryptocurrency. Several ICOs have turned out to be fraudulent, with criminals going to elaborate lengths to deceive investors, such as renting fake offices and creating high-end marketing materials.
So, how to spot a crypto scam? Warning signs to look out for include:
Promises of guaranteed returns: No financial investment can guarantee future returns because investments can go down as well as up. Any crypto offering that promises you will definitely make money is a red flag.
A poor or non-existent whitepaper: Every cryptocurrency should have a whitepaper since this is one of the most critical aspects of an initial coin offering. The whitepaper should explain how the cryptocurrency has been designed and how it will work. If the whitepaper doesn’t make sense – or worse, doesn’t exist – then tread carefully.
Excessive marketing: All businesses promote themselves. But one way that crypto fraudsters attract people is by investing in heavy marketing – online advertising, paid influencers, offline promotion, and so on. This is designed to reach as many people as possible in the shortest time possible – to raise money fast. If you feel that the marketing for a crypto offering seems heavy-handed or makes extravagant claims without backing them up, pause and do further research.
Unnamed team members: With most investment businesses, it should be possible to find out who the key people behind it are. Usually, this means easy-to-find biographies of the people who run the investment plus an active presence on social media. If you can’t find out who is running a cryptocurrency, be cautious.
Free money: Whether in cash or cryptocurrency, any investment opportunity promising free money is likely to be fake.
Many crypto frauds are sophisticated and convincing. Here are some steps you can take to protect yourself:
Protect your wallet: To invest in cryptocurrency, you need a wallet with private keys. If a firm asks you to share your keys to participate in an investment opportunity, it’s highly likely to be a scam. Keep your wallet keys private.
Keep an eye on your wallet app: The first time you transfer money, send only a small amount to confirm the legitimacy of a crypto wallet app. If you’re updating your wallet app and you notice suspicious behavior, terminate the update, and uninstall the app.
Only invest in things you understand: If it’s not clear to you how a particular cryptocurrency works, then it’s best to pause and do further research before you decide whether to invest.
Take your time: Scammers often use high-pressure tactics to get you to invest your money quickly – for example, by promising bonuses or discounts if you participate straightaway. Take your time and carry out your own research before investing any money.
Be wary of social media adverts: Crypto scammers often use social media to promote their fraudulent schemes. They may use unauthorized images of celebrities or high-profile businesspeople to create a sense of legitimacy, or they may promise giveaways or free cash. Maintain a healthy skepticism when you see crypto opportunities promoted on social media and do your due diligence.
Ignore cold calls: If someone contacts you out of the blue to sell you a crypto investment opportunity, it’s probably a scam. Never disclose personal information or transfer money to someone who contacts you in this way.
Only download apps from official platforms: Although fake apps can end up in the Google Play Store or Apple App Store, it is safer to download apps from these platforms than elsewhere.
Do your research: The most popular cryptocurrencies are not scams. But if you haven’t heard of a particular cryptocurrency, research it – see if there is a whitepaper you can read, find out who runs it and how it operates, and look for genuine reviews and testimonials. Look for an up-to-date and credible fake cryptocurrency list to check for scams.
Is it too good to be true: Companies that promise guaranteed returns or to make you rich overnight are likely to be scams. If something seems too good to be true, tread carefully.
Finally, as with any investment opportunity, never invest money you can’t afford to lose. Even if you're not being scammed, cryptocurrency is volatile and speculative, so it's essential to understand the risks.
Falling victim to a cryptocurrency scam can be devastating, and it's essential to act quickly if you have made a payment or disclosed personal information.
Contact your bank immediately if you have:
Crypto fraudsters often sell the details they have captured to other criminals. So, it’s essential to change your usernames and passwords across the board, to prevent further damage. If you are the victim of a social media crypto scam, you can report it to the relevant social media platform. Depending on where you live, you can report frauds to the relevant body in your jurisdiction – for example, in the US, that would be the Federal Trade Commission. Other countries have their own equivalents.