The crypto market is growing at a steady rate, resulting in impressive returns for investors and, consequently, a highly sought-after opportunity for those looking to make a quick buck.
Many analysts believe the increase in fraudulent activities is related to the asset’s ability to easily be sold, transported and irreversibility once used.
Taken together, these features make for an ideal setting for traditional scams and cryptocurrency-specific schemes to take root.
Therefore, before participating in the exciting world of digital assets, investors are cautioned to learn about the scams they are up against and consider what precautions are necessary.
In this article, we provide some definitions around “crypto scams” and look at some of the most common ploys investors are likely to come across today.
What is a Crypto Scam?
Cryptocurrency scams are classified as a type of investment fraud where criminals steal money from those hoping to invest in this new (and for many, poorly understood) asset class.
Due to the anonymity of both the internet and digital currencies, bad actors (also known as hackers or scammers) can make plausible claims to lure innocent parties into a carefully-crafted scheme.
A level of uncertainty is also added since cryptocurrencies aren’t regulated by the same authorities that monitor traditional assets, making it more difficult to recover money after it has been lost in a scam.
With the market being unknown to many and largely unregulated, it becomes difficult for many investors to decipher between a profitable opportunity and a phoney alternative.
Did You Know?
Chainalysis, a blockchain data platform, concluded that cryptocurrency-related crimes increased 79% in 2021, hitting a new all-time high compared to previous years. To put this percentage into perspective, these scams were said to amount to $14 billion in funds lost.
How do Crypto Scams Work?
Cryptocurrency scams can work in a few different ways, either with a hacker attempting to gain access to a target’s digital wallet or to encourage funds to be sent to their wallet directly.
In practice, scammers may try to pose as a trusted source to lure innocent cryptocurrency holders into giving them access to secure information.
Alternatively, some scammers will use forms of impersonation or a fraudulent investment opportunity to gain a hold of this same information.
5 Common Crypto Scams to Be Aware Of
Hackers are nothing short of creative in their techniques to steal funds from unsuspecting cryptocurrency users.
Therefore, although an investor cannot possibly learn the ins and outs of all of them, they can be made aware of the five most common scams present in the market.
1. Phishing Scams
Phishing scams are nearly as old as the internet itself; the term is often associated with standard acts of identity theft and other forms of corporate fraud.
The only difference is that within the cryptocurrency world, a scammer will attempt to target information regarding an investor’s online wallet, such as their private keys.
When you first purchase a cryptocurrency, you are issued a public key and a private key. The second of the two, the private key, is depicted as a string of letters and numbers which act as a password, enabling users to access and manage their crypto funds.
Note, if you are currently storing your cryptocurrencies in an online exchange wallet, there is a chance that your private key is being managed on your behalf.
To get this information, there are several mediums a scammer might employ.
For example, they might send a legitimate-looking email to notify you of something wrong with your exchange account, asking you to click on a link.
The link will then open a fake website, requiring users to put in their credentials so they can “fix” the problem.
As soon as a user inputs their information, the attacker will steal their credentials and, most likely, their assets in holding.
Other forms of phishing may occur on a social media platform or messaging service such as Telegram.
Another common scam users have noted occurs when a scammer joins Telegram groups where they wait for a member to report a problem.
The scammer will then reach out to the group member under the identity of a customer support member, asking for their personal information to help “resolve the problem.”
Although these are only two examples, a pattern can be seen in the way a bad actor presents themselves as a trusted authority to gain access to an investor’s private information.
2. Giveaway or Imposter Scams
In a giveaway scam, bad actors will take to social media platforms like Twitter or Facebook to make it appear as though their project is being sponsored by a celebrity or other influential cryptocurrency thought leaders.
On these platforms, the scammer will use well-crafted messaging on accounts that look legitimate to spark a sense of urgency with promises of multiplying any investments made in opportunities that can only be deemed as “once-in-a-lifetime.”
With hopes to earn these instant returns, investors often fall prey to this scam where they end up sending funds directly to a fraudulent party’s wallet.
3. Airdrop Scams
In the decentralized finance (DeFi) realm, investors may come across an airdrop.
The trend of airdropping first became popularized by new projects looking to start and grow a community.
As its name states, tokens are dropped directly into a user’s digital wallet, often as a reward for a certain action within a given platform or software.
The scam comes into play when the receiver goes on an exchange to swap the free coin they received via airdrop for a more known token.
Upon doing so, the investor unknowingly gives the protocol permission for the hacker to access the other assets stored in their wallets.
To avoid falling victim to this scam, investors are cautioned to avoid giving any unknown users permission to access their decentralized wallet.
4. Rug Pull Scams
Next on the list of cautionary tales is project rug pull.
Rug pulls occur when a cryptocurrency project attempts to magnify the price of a coin.
Once these prices rise, the developers pull the rug, take the earnings and disappear.
Consequently, investors are left with a currency of no value.
It is worth noting that this scam can be spotted in coins that appear to have little fundamentals and, therefore, little in the way of a future.
In many ways, this scam sounds as familiar as a pump-and-dump scheme; a key difference can often be spotted in the project’s design.
A pump-and-dump scheme occurs when thinly traded coins (or, in the traditional finance world, penny stocks) are hyped up with publicity to encourage the public to buy the asset. When the price rises, “insiders” dump the coins at inflated prices, sending the project plummeting for the rest of the world.
In a rug pull scam, non-insiders are often given tokens that have been coded so that they cannot be sold by the holder.
Therefore, even if an investor notices something isn’t adding up, they are unable to exit the market.
5. Pyramid or Ponzi Schemes
Although different, Pyramid and Ponzi schemes often fall under the same category due to their reliance on a mass-recruitment model.
Pyramid schemes are a business model already known across the world.
On social media, many have become used to members of these schemes appearing friendly, either willing to share their “tips” or helping people make money from their mobile devices.
Unfortunately, despite presenting a dream reality, these same people are often a part of a ruse to encourage people to invest in their scheme, each of which relies on a referral chain.
Each recruiter is then tasked with recruiting additional investors, hence the name “pyramid scheme.”
Scammers tell people to pay, often in crypto, for the right to recruit others into the program.
By doing so, they’ll be able to receive rewards paid in cryptocurrency.
Members of a pyramid scheme will often use lines like, “the more you pay, the more money you will earn,” thereby using funds they receive to pay back the same people.
In contrast, a Ponzi scheme will lure people in with an investment opportunity with guaranteed profits, often under the ruse of a portfolio management service.
While teams often defend these profits with a “magical formula,” it is worth noting that any returns are actually just another person’s “investment.
To distribute these funds, the scammer orchestrating the Ponzi scheme will take an investor’s money and add it to a pool.
As new investments are added to the pool, fraudulent parties then have what they need to redistribute “earnings” to the older investors who are awaiting their profits.
Unfortunately, this model stops working when no more cash from new investors is coming in, effectively collapsing the scheme.
Frequently Asked Questions
- Can Someone Steal Your Crypto?
- What Can You Do If Your Cryptocurrency Gets Scammed?