If you are reading this article, you are probably interested in or at least have heard of cryptocurrencies. You will decide to participate in cryptocurrencies based on their potential profits as well as their daily life applications. But you need to watch out for possible scams when trying to invest in cryptocurrency. These scams can result in loss of money or identity theft.
There are many different cryptocurrency scams that can make people fall victims every day. However, the good news is that if you take the necessary precautions, there is no reason for you to fall prey to scammers. In this article, we'll look at the downsides of crypto and explore some of the best ways to easily spot - and avoid - scams.
Most Popular Crypto Scams
Let's start by identifying the main scams.
Fake Cryptocurrency
One easily recognizable scam is fake cryptocurrency. These cryptocurrencies often position themselves as alternatives to larger 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 its parent company. Ethereum. They get you interested in it because a crypto like Ethereum is successful, but at the same time it may be a little late to invest in ETH for big profits.
Many people don't really know how cryptocurrencies work, but they are willing to invest due to "fear of missing out" (FOMO). Once the people behind this fake cryptocurrency feel they have taken enough funds, they can transfer all investments to a bank account and quickly shut down the fraudulent project, leaving behind “ investor” with an empty wallet. A related example is My Big Coin, a fake cryptocurrency that stole $6 million from investors who believed it was real cryptocurrency.
Counterfeit Exchange
Another common crypto scam is fake exchanges. Similar to fake cryptocurrencies, fake exchanges fake their reputation among the cryptocurrency communities by claiming that they are legitimate as well as offering options that appear to be better than those of other exchanges. legal. People try to buy cryptocurrency through these exchanges, but never actually get hold of the coins that don't exist. And fake exchanges steal their money.
Since cryptocurrency transactions are non-refundable, investors cannot get their money back. An illustrative example is a fake exchange called BitKRX that convinced many people that they were one of the largest cryptocurrency exchanges of the decade, stealing people's money on a large scale. This trading was suspended by the Korean government in 2017.
Pump-and-Dump
Pump-and-Dump models originate from the stock market. The main idea behind pump-and-dump is to inflate an asset that will increase in price in the future so that people participate in investing at low prices. This will automatically push product prices up as demand begins to exceed supply. Once the individual/group behind the pump-and-dump scheme earns enough money, they will “pump” the project.
So how does this relate to cryptocurrency? Inspired by major cryptocurrencies like Bitcoin(BTC), people hype and promote fake cryptocurrency schemes to attract investors. As a result, people start investing in that cryptocurrency with the belief that its price will increase, based on seemingly strong fundamentals. However, once they realize that the “innovation” plans are a scam, the cryptocurrency will be sold off, leading to massive financial losses for everyone involved - except the scammer. island behind the plan.
Visual representation of pump-and-dump. Source: The Wall Street Journal
Malware
Malware is one of the biggest vulnerabilities in the internet world. If a smart device accessing the internet is infected with malware, the data in that smart device can be manipulated or stolen by hackers. The same can happen with your crypto assets, especially if you are using an online wallet. A “hot” wallet or online wallet is a medium used to store cryptocurrency.
However, if your device is affected by malware and you use it to access your wallet, hackers can steal your private keys and transfer your assets to your address. of them. Even the simple act of typing a wallet's keyphrase into a device is considered dangerous. Malware can be downloaded unintentionally by clicking on ads or unsafe links on the internet. And since you can't tell which ads or links are unsafe, you should get in the habit of ignoring and deleting them.
Fake Applications
Whether you are working with a desktop or mobile app, fake cryptocurrency-related apps exist. Just like fake exchanges, fake crypto apps look legitimate to convince people to download them. These apps are often based on real apps and may be just one letter different in the name causing people to be fooled into thinking they are genuine apps. Once these apps are downloaded, they can inject malware onto the device or simply steal your data after you enter your personal information.
Ponzi Scheme
Ponzi schemes are among the oldest negatives in the world. The idea behind a Ponzi scheme is essentially that a fundraiser finds two investors and gets them to give him money so they can “double” their investment. To do so, the scammer finds four other 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 to pay back all four investors, the scammer scammed eight others, then sixteen others,...
The person behind the Ponzi scheme did not actually invest the money he took from investors, but rather stole it by using the money of subsequent investors to pay back previous investors, stay one step ahead of prying eyes. Perhaps the most famous recent example of this model is that of the recently deceased American financier, Bernie Madoff. In the same way, people can be scammed in cryptocurrency. For example, the BitClub Network is one of the largest Ponzi schemes in the crypto world, in which three people managed to run a scheme worth more than $700 million. Fortunately, those involved were discovered and arrested by the Authorities. However, participating investors never received a return on investment (ROI).
Visual representation of a Ponzi Scheme. Source: Business secrets
Exit Fraud
Most cryptocurrencies raise capital to develop their projects through initial coin offerings (ICOs). ICOs can be private or public, depending on the team behind the project. With ICO, the price of the token or coin is lower than its predicted price when it is officially released into the crypto market. Therefore, investors use this opportunity to buy a lot of coins through ICO, while also raising capital for the project.
However, there are cases where after these ICOs are held, the people behind the project can close the project and keep the money for themselves. This is called an exit scam. Because of the anonymous nature of cryptocurrencies, it can be difficult to trace the scammers behind ICOs. This makes exit scams one of the most dangerous online scams.
DeFi Scams
Decentralized Finance (DeFi) is one of the largest services offered by cryptocurrencies such as Ethereum, using smart contracts to make these services possible. One popular use of DeFi is yield farming. Similar to staking, yield farming allows you to lend out some of the coins you own to earn more coins through interest.
However, since anyone can launch their own DeFi project, DeFi scams can also be created. These utilities seem to offer you higher interest rates if you lend some money - but in reality, the person behind the project never pays you back. This can be done based on how smart contracts are formed for the project. Remember that this can also happen unintentionally if there are errors in the smart contract.
Spoofing Attack
Undoubtedly one of the most common internet scams is phishing attacks. Phishing means sending phishing emails to people with the intention of getting them to provide personal information such as phone numbers, Social Security Numbers and bank account numbers. Unfortunately, phishing attacks also happen in the cryptocurrency world. For example, people claiming to be from the wallet manufacturing company Ledger send you an email claiming that there are some problems with your assets and the only way to resolve the problems is to let these people know the phrase your keywords and password. Although the majority of people may not fall for these scams, some others still get scammed leading to significant financial losses for them.
How to Spot Crypto Scams
Let's look at some suspicious red flags that indicate a crypto scam is taking place.
Too Good To Be True?
If something sounds too good to be true, it probably is a scam. This often happens with pump-and-dump scams, but it is not limited to these cases. DeFi projects can give you much higher yield farming rates than regular projects. High rates are often a red flag - because the project could be a scam and the person behind the project is simply looking to convince you to invest more money. Another red flag is words like "guaranteed" because nothing is guaranteed when it comes to investments especially volatile investments like cryptocurrencies.
Legality of the Project
There are many aspects that show the legitimacy of a project. First are its founders. If the founders are clearly known, it is less likely that the project is fake. Of course, Bitcoin's Satoshi Nakamoto is an exception (in name only), but the majority of cryptocurrencies have a clearly known founder or parent company.
The second thing to keep in mind is whether the project has a legitimate, secure website and social media platform. If the answer is yes, you should check how they interact with their community and look for suspicious, unusual responses.
Finally, you should look for the main goal of the project. Typically, new blockchain-based projects seek to add new or better services to people. If the project has an authentic, achievable goal (i.e. not too good to be true), then it is less likely that the project is a scam.
Whitepaper
The whitepaper is one of the most important aspects of cryptocurrency. The whitepaper not only implies that the project is legitimate, it also allows people to directly understand how the project works. When checking the legitimacy of the whitepaper, also look at the project's key features - such as the estimated total supply, consensus mechanism, algorithm, or other components, to see if the project is realistic. whether it operates as proposed or not.
Note that the whitepaper does not necessarily prove that cryptocurrencies are legal. Scammers can construct a simple, professional-looking, and completely bogus whitepaper to take your money.
Do They Ask You to Deposit Money?
Asking a person to send money is one of the biggest red flags that a scam is taking place. Legitimate crypto-based projects never ask anyone for direct money. On the other hand, scammers have the skills to look for ways to directly threaten you with sending money or access to your wallet.
Is the Name Written Correctly?
When it comes to apps or exchanges masquerading as larger apps, you should always check the website's spelling (URL). For example: To many people, “ledger.com” with a lowercase “L” might look like “Iedger.com” with an uppercase “i” or the letter “O” might be typed as “0”. Always carefully check that the app or website is secure - the URL will start with “https://” - and that its name is the same as the original website to avoid falling victim to scammers. scam. Furthermore, check their social media accounts. If there is no account or only a brand new account on the social network, then most likely the project is a scam. Additionally, while you should never click on ads or links from unknown sources or download their attachments, simply click "reply" to a suspicious-looking email to see the email address. their address, this address is often easy to recognize as a fake address. Please delete the email immediately.
Conclude
In conclusion, there are many crypto scams online. They are becoming a bigger problem for investors looking to invest safely in cryptocurrencies. However, most of these scams can be detected if you are careful enough and learn to spot the red flags. Therefore, always remember that you may be vulnerable to crypto scams and need to take the appropriate measures outlined in this article to avoid falling prey to scammers.