Common cryptocurrency scams and how to avoid them

December 23, 2021

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Sometime in 2014, Ruja Ignatova launched a crypto project known as OneCoin. Between 2014 and 2016, the project attracted investment worth over 4 billion dollars. Little did the investors know that they were pouring their money into a Ponzi scheme that masqueraded as cryptocurrency. The so-called coin had no value or utility as no one could exchange it for anything. So, the entire project eventually collapsed as with most Ponzi schemes, leaving Ruja richer and the investors licking their wounds.

Stories like the above are not very uncommon in the cryptocurrency space. While this one has been described by many as the biggest cryptocurrency scam, there have been a lot of other scams in the crypto space in the last couple of years. These scams take different forms and approaches. Let’s explore each of them.

Contents

Common cryptocurrency scams

Cryptocurrency is a very promising investment. People make 10x of their investment, sometimes, in a few days. This explains why it’s such an easy way to scam unsuspecting individuals.

Here are some of the common crypto scams out there and how you can avoid them

Phishing

As the list’s first scam, you may already be familiar with it as it’s also popular amongst customers of large local banks.

This type of scam is known as phishing and takes place when you receive an unsolicited email that looks as if it came from your bank or cryptocurrency exchange. A link in this email takes you to a website that appears almost identical to the one you usually use, but is a scam site.

The scammers will have all the information they need to log in to your real account and steal your funds once you submit your account details on this unofficial page.

How to avoid phishing scams

Be sure you are visiting the genuine website by double-checking URLs
Don’t click on links you receive via email that seem suspicious
Keep your private key private at all times

Pumps and dumps

The cryptocurrency landscape is often seen as a speculator’s paradise that’s ripe for market manipulation, which has given rise to what is known as ‘pump and dump’ schemes. It involves large groups of buyers buying vast amounts of an altcoin with a small market cap to drive its price up (which attracts new buyers fueled by FOMO – fear of missing out) before selling to take advantage of the substantial price rise, leaving new buyers in massive loss.

Although this type of behaviour is illegal in traditional markets, it is pretty prevalent in the largely unregulated world of cryptocurrencies. Many online forums and groups specialise in this exact scam, so you must stay savvy and know how to avoid them.

How to avoid pump and dump scams

Traders should be cautious of low market cap cryptos that suddenly experience a sharp price rise despite low trading volume.
Pay attention to online hype surrounding particular coins that may be ‘fake news.’
Before purchasing any cryptocurrency, thoroughly research its credentials
Read also: What is this NFT everybody is talking about?

Rug pulls and exit scams

Rug pulls are exit scams in which a smart contract’s developer steals its funds after a substantial number of users deposit money into it. Rug pulls have become increasingly popular in DeFi, allowing users to receive interest by depositing funds into specialised smart contracts – a process known as ‘yield farming.

Using either the contract’s keys or a backdoor in the code, the developer will then steal funds once a large enough sum of money has been deposited into the contract.

How to avoid rug pulls and exit scams

Avoid DeFi projects where only one individual holds the private keys.
Watch out for pseudonymous developers or teams with no track record.
It is best to select DeFi projects that have been subjected to an audit by a third party to minimise the risk of backdoor attacks – although even these can be spoofed.
Don’t chase gains by jumping into a project before it has the chance to prove itself.
There are no foolproof methods for DeFi, which is a high-risk industry.

Mining scams

You can mine cryptocurrencies such as Bitcoin without purchasing expensive hardware, using cloud mining. Cloud mining is a legitimate method for coins that lets users rent server space at a set price. Also, it’s possible to invest in Bitcoin mining companies and share in their profits.

It’s important to note that there are also several cryptocurrency mining scams. While some promise astronomical (and implausible) returns without disclosing hidden fees, others are fronts for Ponzi schemes designed to defraud you of your money.

Additionally, even if cloud mining is not an outright scam, it will always be a poor investment compared to simply buying cryptocurrency and leasing any other form of cryptocurrencies mining equipment. Because of Bitcoin mining economics, no matter how much Bitcoin prices rise or fall, you’ll always be better off just purchasing the equivalent amount of bitcoin instead of investing it in a mining scheme.

How to avoid cryptocurrency mining scams

In any case, stay away from cloud mining and renting a miner.

Pyramid or Ponzi schemes

Ponzi schemes are simple but alarmingly effective scams that lure new investors by promising them unusually high returns. In essence, a promoter encourages people to invest in their scheme. Initial investors believe they receive returns, but they are receiving payouts from funds deposited by newer investors. Once investors are satisfied that the scheme is legit, they pump more money into it and recommend it to others.

Eventually, the scheme collapses either because the promoter runs off with the money or it’s too hard to find new investors. The types of pyramid schemes described here are not new and can be easily identified, but the fact remains that some crypto buyers have been scammed in high-profile cases.

How to avoid Ponzi/pyramid schemes

Look out for cryptocurrency projects that encourage you to recruit new investors to enjoy bigger profits
Never trust a scheme that promises returns that sound too good to be true.

Fraudulent ICOs

Consumers are being lured into the world of cryptocurrency as its price has grown exponentially since its inception. The bottom line is that if ‘the next Bitcoin’ ever emerges, early adopters could make a fortune.

For those interested in getting in on the ground floor, their best bet is to buy coins or tokens at an ICO. The demand for new digital currencies is enormous – in the first half of 2018, ICOs raised approximately US$11.69 billion – and with many new buyers having no clue about how the crypto industry works, this is the perfect breeding ground for scammers.

ICOs offer the possibility of getting rich quickly, but be aware that for every success story, there are countless failures, even if the project is legitimate.

How to avoid fraudulent ICOs

Before investing in an ICO, do your research thoroughly. Check out the project team, its whitepaper, the currency’s purpose, the tech behind it, and the token sale details.

Impersonation giveaway scams

The celebrity impersonation giveaway scam is common to many large sites and social media platforms. As part of this scam, scammers will impersonate celebrities or other notable people to announce they will give away a lot of cryptocurrency for free in exchange for some cryptocurrency.

Often, scammers promise to return twice what you sent. Although this scam is popular on Twitter, it has also been reported on YouTube, in which scammers impersonate celebrities in video or live streams.

In this scam, victims are rushed into bad decisions by making them think they are missing out. Giveaway scams typically specify a total amount of cryptocurrency, such as ‘5,000 ETH giveaway’, and then use bots and fake accounts to make it appear as though people are receiving the funds.

As soon as victims see all the seemingly free money being given away, they rush to send money to scammers before they have a chance to think.

Many fake giveaway bots have the blue ‘verified’ checkmark on Twitter, but this means nothing. These are obtained by taking control of verified accounts and renaming them. Also, scams will often have thousands of likes, views, retweets or other types of social proof. These are just bots, and they mean nothing.

How to avoid impersonation giveaway scams

Assume all offers of free cryptocurrency posted by celebrities are scams
Check the username of the suspected scam account against the username of the celebrity’s real account
Use a blockchain explorer to verify the provided cryptocurrency address. It is possible to find out how much money is entering the wallet and whether or not it actually sends any money.
Read also: Cryptocurrency and its future in Nigeria

Bitcoin blackmail scams

Similar to how scammers will often pretend to represent a tax office to coerce victims into giving up money, they may also pretend to be hackers with evidence to implicate their potential victims.

An unsolicited email sent by a hacker that claims to have accessed your PC is a common variation of this scam. They may claim that they have found some incriminating evidence, or that they have taken over your webcam to record you doing something embarrassing, which you would prefer not to be public with. Blackmailers often use these emails to threaten you with sending incriminating evidence to all of your email or social media contacts unless you send them Bitcoin. The emails are typically accompanied by instructions on obtaining Bitcoin and where to send it.

The whole thing is a lie, of course. Blackmailers have no evidence, so nothing will happen no matter what you do. The scam is purely a numbers game in which the perpetrators hope to scare enough people into sending them Bitcoin by sending out enough emails.

How to avoid Bitcoin blackmail scams

Check online to see if others have received the same email
Don’t fall for the scam
To prevent scams such as this, use VPNs to browse more privately

Fake exchanges and wallets

Fake Bitcoin exchanges operate similarly to phishing scams. They may look and act like a reputable exchange, but they’re mere fronts designed to separate consumers from their money.

Users may be enticed by promotional offers that seem too good to be true. There are also those who pressure their users into opening accounts and making deposits, and may even offer ‘bonuses’ to those who deposit larger amounts. However, once these platforms have your money, they may charge outrageous fees, make it difficult for you to withdraw funds, or simply steal your money completely.

Other scammers have created sophisticated fake wallet applications that can be used to steal account details once the apps are downloaded onto a user’s smartphone. Several of these apps have made it into official, legitimate app stores like Google Play, so it is always a good idea to do your research before you download anything.

How to avoid fake exchange and fake wallet scams

Keep your money on well-known and popular exchanges
Before creating an account, research the exchange or wallet thoroughly – who is behind the exchange or wallet? Where is it registered? Does it have reliable reviews?
Don’t let anyone pressure you into putting money or providing personal information
Ensure you are downloading applications and software only from reliable wallet providers and exchanges – don’t just pick a wallet randomly from the app store.

In conclusion

There are scammers everywhere there is money. And with the amount of money daily exchanging hands in the cryptocurrency world, it comes as no surprise that all these forms of scams exist there.

Hopefully, this guide helps stay clear of these crypto scams, especially if you’re new in crypto investment. Don’t forget to always DYOR (do your own research) before investing in any crypto, irrespective of what anyone has told you about it.

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