Cryptocurrencies are a new trend in the finance world, so it's no wonder that people are still confused about how they work and how they're used. With so many options out there, it can be hard to keep track of what's real and what isn't.
Cryptocurrency, or crypto, is a type of money that is kept in a digital wallet and may be converted into actual cash by the owner by transferring it to a financial institution. Cryptocurrency is different from fiat currency. Since it runs outside of financial institutions and uses blockchain for verification, it is more prone to various scams.
Despite cryptocurrencies being a more recent trend, fraudsters are still stealing via traditional means. Here we will review the most popular types of scams and how to avoid them.
1. Crypto Investment Schemes
Investing in cryptocurrencies can be a great way to grow your money, but it's important to do your research and make sure you're working with a legitimate company.
Crypto investment schemes are everywhere, and they're preying on people who want to make quick money. The scammers approach participants under the pretense of being seasoned "investment managers." As part of this scam, the so-called investment managers make extravagant claims about their previous success of investing in cryptocurrencies and assure their victims that their investments will be profitable. When the gullible investor is on the hook, the “investment manager”then demands a payment up front to begin. The fraudsters simply steal the advance payments. In order to access someone's cryptocurrency, they may also ask for personal identity information under the pretense that they need it to transfer or deposit money.
The scammers may even use fake accounts of celebrities’ social media or testimonials on fake global media sites in order to make it seem as though a celebrity is endorsing a significant financial benefit from an investment. But don't fall for it! Such endorsements can be a well-hidden scam..
How to avoid crypto investment schemes? Always double-check the credibility of the information and its source. If you intend to use the services of an investment advisor, ask for trusted recommendations from your network.
2. Rug Pull Scams
If you're planning on investing in a new business, NFT, or coin, you might be at risk of falling for a rug pull scam.
If you haven't heard of this term before, it's just like it sounds: a fraudster will "pull the rug" out from under the new business or project. They'll pump up its value by promoting it as an investment opportunity to attract investors, but then they'll just disappear with the raised money. It's not uncommon for these con artists to ban people from selling their assets immediately after buying it, leaving them with a worthless investment.
A common variation of this scam is known as Squidcoin. To earn cryptocurrency, investors had to play online games and later earn more tokens in order to trade for other cryptocurrencies. Shortly the value of Squidcoin increased from one cent to almost $90 per token. Trading eventually ceased altogether, and the funds vanished. Even though users tried to sell their tokens, they were unable to do so, as the trading had stopped. Token value eventually fell to zero. Over $3 million was obtained from these investors by the con artists behind this scheme.
Rug pull scams are also prevalent for unique digital assets called non fungible tokens (NFTs).
How to avoid rug pull scams? Pay serious attention to the reliability of the crypto project and its team. Look for project reviews and testimonials in trusted sites or communities.
3. Romance Scams
Cryptocurrency scams are not new to dating apps. These frauds involve romantic relationships that are established over time, usually through long distance and only online communication. At some point, one party starts to persuade the other to buy cryptocurrency for them, and does that regularly for some time.
Once the dating scammer has enough of your money, he or she vanishes. These frauds are additionally known as "pig slaughtering frauds".
How to avoid romance scams? The following is a list of warning signs that you may be being scammed:
- If a potential partner asks for money from you on the first date (or even before), here's a red flag: ask yourself if you really know this person well enough to trust them with your finances? If not, run far away!- Be wary of any online relationship that seems overly fast and too good to be true; if someone claims love at first sight or says they've fallen in love with you after just one week of talking via text/email/chat, it's definitely a scammer or con artist trying to get your cash!
- Never send money electronically unless you are 100% sure who the other party is and why they need it. And even then, be cautious.
4. Phishing Scams
Phishing scams are still very popular. The scammer will send you an email with a link, which takes you to a fake website that asks for your personal information. This could be your private key for your digital wallet or any other sensitive information.
Digital wallets only have one permanent private key, unlike passwords, which can be changed regularly. Private key is unique to the wallet. A new wallet must be created in order to change this key.
How to avoid phishing scams? Never enter secure information from an email link. No matter how trustworthy the website or link looks to be, always go directly to the page by typing in the address manually rather than clicking on the link provided in an email or message from a stranger or someone you don't know well.
5. Man-in-the-Middle Attack
A man-in-the-middle attack is when someone intercepts communication between two parties by pretending to be one of those parties. It's called a man-in-the-middle attack because the hacker usually sits between two networks, pretending to be both at once.
When you're logging in to your crypto wallet from a public place, you're opening yourself up to the possibility of being hacked.Also, when you use a trusted network, like a WiFi signal from your home or workplace, hackers can intercept the data transmitted by that network and steal your private information.
Hackers can use this method to gain access to your private information whenever you login from an untrusted network like an airport or coffee shop. By impersonating trusted networks nearby and stealing their identities, they can trick you into giving up information that could be used to steal your cryptocurrency.
How to avoid man-in-the-middle attacks? The best way to defend against these attacks is with a virtual private network (VPN). The VPN will encrypt all of your data before it leaves your device, making it impossible for hackers to access any personal information or stolen cryptocurrency.
6. Social Media and Giveaway Scams
The scammer here is trying to convince a cryptocurrency investor that they are hosting a legit giveaway.
To entice consumers, some of these scams also use phony celebrity accounts to promote the offer. However, when a user clicks on the promotion, they are transferred to a phony website that requests verification. To verify the wallet address and receive the promised crypto later, the investor has to transfer a certain amount of crypto to the giveaway organisers. Making a payment as part of the verification process should demonstrate the legitimacy of the account.
The victim runs the risk of losing this payment or, even worse, clicking on a malicious link that results in the theft of their personal data and cryptocurrency.
How to avoid giveaway scams? Never trust the giveaways whose hosts are asking to send funds in order to verify your wallet address.
7. Ponzi Schemes
You've probably heard of Ponzi schemes, but what exactly is a Ponzi scheme?
A Ponzi scheme can be defined as a fraudulent investment operation that pays returns to its investors from new capital paid by new investors, rather than from profit earned by the individual or organization running the operation. In other words, it's a money-making scheme that goes in circles.
The promise of enormous riches with little risk is the core allure of a Ponzi scheme. However, there are always dangers associated with these investments, and no profits can be guaranteed.
How to avoid Ponzi schemes? If you notice any of the "benefits" listed below, avoid such projects at all costs:
- 100% guaranteed high returns: any investment that offers "guaranteed" high returns needs to be thoroughly investigated.
- Contrary information: red flags include justifications involving errors, missing papers, and covert tactics.
- Regular high returns: be wary of investments that produce large returns despite market fluctuations.
- Investments without registration: the majority of investment fraud cases involve unregistered investments.
- Unauthorized sellers: unregistered companies and/or unlicensed persons are frequently used in Ponzi schemes.
8. Fake Cryptocurrency Exchanges
Scammers might entice investors with claims of a fantastic cryptocurrency exchange or even extra bitcoin for the registration or “successful trading”. However, there isn't really an exchange, and the investor doesn't realize it's a scam until they've already lost their money.
Since cryptocurrency operates outside of financial institutions, recovering from theft is more difficult.
How to avoid fake cryptocurrency exchanges? You can always check the trading data on various aggregators. Also, stick to trusted platforms such as Bitlocus!
It’s surprisingly easy to get trapped by scammers, and even experienced investors may fall for fake investment opportunities. In order to secure your funds, always remember to double-check the information and its source, also avoid sending any amounts of crypto to people that you have met only recently.