How to Avoid Crypto Scams

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If you’re reading this, then you’re almost certainly interested in, or at least have heard of, cryptocurrencies. If you decide to become involved in cryptocurrencies, you’ll do so based on their potential profitability as well as their daily life applications. But you need to beware of the possibility of scams when you try to invest in cryptocurrencies. These scams may result in money or identity thefts. 

There are many different cryptocurrency scams that can victimize people on a daily basis. However, the good news is that if you take the necessary precautions, there’s no reason to fall prey to scammers. In this article, we’ll examine these crypto cons and explore some of the best ways to easily spot — and avoid — these scams. 

The Most Common Crypto Scams

Let’s begin by identifying the primary ones.

Fake Cryptocurrencies

One easily identifiable scam is fake cryptocurrencies. These cryptocurrencies usually identify themselves as alternative options to bigger cryptocurrencies. For example, a cryptocurrency may claim to be an upcoming fork of an established cryptocurrency, such as Ethereum (ETH), or simply a new cryptocurrency from the parent company of Ethereum. They lure you into getting interested in it, since a crypto such as Ethereum is successful, but at the same time, it might be a little late to invest in ETH for large profits. 

Many people are not really aware of how cryptocurrencies even work.But they’re willing to invest due to “fear of missing out” (FOMO). Once the people behind this bogus cryptocurrency feel like they have taken enough money, they can transfer all the investments into their own bank accounts and quickly shut down the fraudulent project, leaving the “investors” without their assets. A relevant example was My Big Coin, which was a fake cryptocurrency that saw $6 million stolen from investors who believed it was a real cryptocurrency.

Phony Exchanges

Another common crypto scam is bogus exchanges. Similar to fake cryptocurrencies, fake exchanges build a reputation among cryptocurrency communities by claiming that they’re legit, as well as offering seemingly better options than legitimate exchanges. People try to buy cryptocurrencies through these exchanges, but never actually get a hold of these nonexistent coins. Instead, the fake exchange steals their money. 

Since cryptocurrency transactions are nonrefundable, it becomes impossible for investors to get their money back. To illustrate, a bogus exchange named BitKRX convinced many people that they were one of the biggest cryptocurrency exchanges of the decade, resulting in the large-scale theft of people’s money. The exchange was stopped by government authorities in South Korea in 2017.

Pump-and-Dump

Pump-and-Dump schemes originate in the stock market. The main idea behind a pump-and-dump is that an asset is predicted to have a future increase in its price so that people will invest at the lower price. This automatically drives up the price of the product to increase as demand starts exceeding supply. Once the individual/group behind the pump-and-dump scheme makes enough money, they “dump” the project. 

So how does this relate to cryptocurrencies? Inspired by big cryptocurrencies such as Bitcoin (BTC), people hype up and promote fake plans about a cryptocurrency in order to get people to invest. As a result people begin investing in that cryptocurrency with the belief that its prices will surge, based on seemingly strong fundamentals. However, once they realize that the “innovative” plans were a hoax, the cryptocurrency is dumped, resulting in huge financial losses for everyone involved — except the con artist behind the scheme .

Visual representation of pump-and-dump. Source: The Wall Street Journal

Malware

A malware program is one of the biggest vulnerabilities in the internet world. If a smart device with access to the internet is infected with malware, the data in that smart device can be manipulated or stolen by the hackers who placed it there. The same can occur with your cryptocurrency assets, especially if you’re using an online wallet. “Hot” or online wallets are used for safely storing your cryptocurrencies. 

However, if a malware program harms your device and you use that device to access your wallet, hackers can steal your private keys and transfer your assets to their own address. Even the simple act of typing the seed phrase of your wallet in your device is considered to be dangerous. Malware can also be downloaded unintentionally by clicking on unsafe ads or links on the internet. And since you can’t tell which ads or links are unsafe, it’s recommended you get in the habit of ignoring and deleting them.

Fake Apps

Whether you’re working with a computer or a mobile application, fake apps related to cryptocurrencies exist. Just as with fake exchanges, fake crypto apps pretend to be legit in order to persuade people to download them. These apps are usually based on actual apps, and only a letter may differ in the name so that people get tricked into thinking that they’re genuine. Once these apps are downloaded, they can introduce malware to your device or simply steal your data once you enter your private information. 

Ponzi Schemes

Ponzi schemes are one of the oldest cons in the world. The idea behind a Ponzi scheme is essentially that a fundraiser finds two investors and lures them into giving him money so that they can “double” their investment. In order to do so, the con artist finds another four investors who in turn give the same amount of money, allowing the scammer to “make good” on his promise to the first two investors. And in order to return the money to all four investors, the con artist scams another eight people, and then another sixteen, and so on. 

The implication is that the person behind the Ponzi scheme does not actually invest the money he takes from investors, but rather steals it using the money of subsequent investors to pay back each round of investors, staying one step ahead of investigators. Probably the most famous recent example of this scheme is that of the recently deceased American financier, Bernie Madoff. In the same way, people can be scammed in cryptocurrencies. For example, BitClub Network was one of the biggest Ponzi schemes in the crypto world, in which three people managed to run a scheme worth more than $700 million. Thankfully, the men involved were caught and arrested by Government officials. However,he investors involved never got their return on investment (ROI)

Visual representation of Ponzi Schemes. Source: Business Know-How

Exit Scams

Most cryptocurrencies raise their funds for developing their projects through an initial coin offering (ICO). ICOs can be private or public, depending on the team behind the project. With ICOs, the price of tokens or coins is lower than its anticipated price once it is released into the crypto market. Hence, investors use this opportunity to buy a lot of coins through the ICO, while at the same time the funds for the project are raised. 

However, once these ICOs have been held, the people behind the project can shut down the project and keep the money for themselves. This is known as an exit scam. Since the main idea of cryptocurrencies is anonymity, it can be hard to trace the scammers behind the ICO. This makes exit scams one of the most dangerous online.

DeFi Scams

Decentralized Finance (DeFi) is one of the biggest services provided by cryptocurrencies such as Ethereum, which uses smart contracts to make these services possible. A common use of DeFi is yield farming. Similar to staking, yield farming, enables you to lend some of the coins you own so that you earn more coins through interest rates. 

However, since anyone can launch their own DeFi project, DeFi scams can also be created. These come-ons seem to offer you higher interest rates if you lend some money — but actually, the person behind the project never returns your coins at all. This is possible because of the way that the smart contracts for the project are formulated. Do keep in mind that this can also occur unintentionally if there are flaws in a smart contract.

Phishing

Without a doubt, one of the most prevalent internet scams is phishing. Phishing means sending fraudulent emails to people for the purpose of inducing them to give out personal information such as telephone, Social Security and bank accounts numbers. Unfortunately, phishing occurs in the world of cryptocurrencies as well. For instance, people claiming to be from the company which manufactures Ledger wallets send you an email claiming that there are some issues with your assets, and the only way to resolve these issues is by telling these folks your seed phrase and password. While the majority of people might not fall for these scams, some people still do, resulting in significant financial losses for them.

How to Spot Crypto Scams

Let’s look at some red flags that indicate a crypto scam is taking place.

Too Good to Be True?

If something sounds too good to be true, then it probably is. This is usually the case with pump-and-dump scams, but it’s not limited to these. DeFi projects can offer you yield farming rates much higher than usual ones. High rates are usually red flags — because the project can be a scam and the person behind the project is simply looking to convince you to invest more money. Another red flag is a word like “guaranteed” since nothing is guaranteed when it comes to investments, especially volatile investments such as cryptocurrencies. 

Project Legitimacy

There are a lot of aspects that lend a project legitimacy. The first one is its founders. If the founders are known, it’s less likely that the project is bogus. Of course, Bitcoin’s Satoshi Nakamoto is an exception (in name only), but the majority of cryptocurrencies have a known founder or parent company.

The second thing to keep in mind is whether or not the project has a legit, secured website and social media platform. If the answer is yes, you should check to see how they engage with their community, and look for suspicious, unusual responses.

Lastly, you should look for the main goal of the project. Usually, new blockchain-based projects seek to add new or better services for people. If the project has a real, authentic goal that is achievable (i.e., not too good to be true), it’s less likely the project is a scam.

White Paper

A white paper is one of the most important aspects of a cryptocurrency. Not only does a white paper suggest that the project is legitimate, it also allows people to understand firsthand how the project works. When checking on the legitimacy of the white paper, also look at the main features of the project — such as the estimated total supply, consensus mechanisms, algorithms or other components, to see if the project can really function as proposed.

Note that a white paper does not necessarily prove that a cryptocurrency is legit. Scammers can construct a simple, professional-looking and completely bogus white paper simply in order to take your money.

Are They Asking You to Send Money?

It should go without saying that asking a person for money is one of the biggest red flags which suggests a scam is at play. Legit crypto-based projects never ask anyone for money directly. Scammers, on the other hand, are skilled at findingways to directly intimidate you into giving them money or access to your wallet.

Is the Name Correctly Written?

When it comes to fake apps or exchanges that pretend to be other, bigger apps, you should always check the way the website (URL) is written. For instance, “ledger.com” with a lower-case “L” can look the same as “Iedger.com” with an upper-case “i” to many people, or the letter “O” can be typed where a “0” should be. Always carefully check if the app or website is secured — the URL will begin with “https://” — and if the name is the same as the original website in order not to become a victim of scams. Furthermore, check their social media accounts. If there are no accounts, or only brand-new accounts on social media networks, there’s a good chance that the project is a scam. In addition, while you should never click on ads or links from unknown sources or download their attachments, simply clicking on “reply” to a suspicious-looking email will allow you to see their email address, which is often readily recognizable as a fake one. Delete the email immediately.

The Bottom Line

To conclude, there are a lot of online crypto scams. They’re becoming a bigger problem for investors who want to safely invest in cryptocurrencies. However, most of these scams can be spotted if you are careful enough and learn to spot the red flags that raise suspicion. As such, always keep in mind that you can be vulnerable to crypto scams, and take the appropriate measures laid out in this article to avoid falling prey to them.

Disclaimer

This article is intended for and only to be used for reference purposes only. No such information provided through Bybit constitutes advice or a recommendation that any investment or trading strategy is suitable for any specific person. These forecasts are based on industry trends, circumstances involving clients, and other factors, and they involve risks, variables, and uncertainties. There is no guarantee presented or implied as to the accuracy of specific forecasts, projections, or predictive statements contained herein. Users of this article agree that Bybit does not take responsibility for any of your investment decisions. Please seek professional advice before trading.

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