Cryptocurrency has become increasingly popular in recent years, with more and more people investing in various digital currencies such as Bitcoin, EtherealY Litecoin. However, with this increased popularity comes an increase in the number of scams and fraudulent activities involving cryptocurrencies.
These activities are possible mainly due to a lack of research and sometimes also a lack of fundamental knowledge about space. Many people blindly jump on the bandwagon due to the โhypeโ that is being created around certain projects. So it's important learn web3 and blockchain fundamentals before getting started.
With that said, let's move on. Here are the 7 most common cryptocurrency scams and how to avoid them.
1. Ponzi schemes
Ponzi schemes are fraudulent investment schemes in which returns are paid to existing investors from funds contributed by new investors, rather than profits made by the operator. These schemes often promise high returns and use tactics like social media and celebrity endorsements to attract new investors.
How to avoid becoming a victim of a Ponzi scheme: Be sure to thoroughly research any investment opportunity, and beware of promises of high returns with little or no risk.
Example of a Ponzi scheme in the cryptocurrency space: The PlusToken scam, which was uncovered in 2019, promised high returns to investors who deposited their cryptocurrency into the PlusToken wallet. But in reality, traders were using funds from new investors to pay returns to existing ones. The scheme is believed to have defrauded investors of more than $2 billion worth of various cryptocurrencies.
2. Phishing scams
Phishing scams involve the use of fake emails or websites that look like legitimate ones to trick people into providing personal information, such as login credentials or credit card numbers. These scams often target cryptocurrency exchanges and wallet providers, and can result in the loss of funds or the theft of personal information.
How to avoid falling victim to a phishing scam: Make sure to only use official websites and always check the authenticity of emails or messages that ask for personal information.
Example of a phishing scam in the cryptocurrency space: The popular cryptocurrency exchange Binance experienced a phishing attack in which hackers used fake websites and emails to trick users into providing their login credentials and 2FA codes. This allowed hackers to gain access to user accounts and steal funds.
3. Pumping and discharge schemes
Pump and dump schemes involve artificially inflating the price of a certain cryptocurrency through false and misleading statements, in order to sell it at a higher price. These schemes often take place on online forums and social media platforms, and can lead to significant losses for those who buy the inflated price.
How to avoid being a victim of a pump and dump scheme: Thoroughly research any cryptocurrency and beware of sudden or unexplained price increases.
Example of a pump and dump scheme in the cryptocurrency space: In 2021, the SEC (US Securities and Exchange Commission) charged a group of individuals with participating in a pump and dump scheme involving a little-known cryptocurrency called "MarijuanaCoin." They used social media and online forums to artificially inflate the price of the coin before selling it at a profit, leaving investors with significant losses.
4. Cloud mining scams
Cloud mining scams involve selling mining smart contracts for a cryptocurrency, which promises a certain level of return on investment. However, these scams often involve little or no actual mining and can lead to significant losses for those who invest in them.
How to avoid falling victim to a cloud mining scam: Always research any mining opportunity thoroughly, snoop around and ask questions. This can help you invest only in reputable companies.
Example of a cloud mining scam: A company called "HashInvest" promised to mine cryptocurrency on behalf of investors, but it turned out to be a scam. The company accepted investments from thousands of people, promising to return their investments with profit. But the company never actually mined any cryptocurrency, and the team behind it disappeared with the funds.
5. ICO scams
Initial Coin Offerings (ICOs) are a form of crowdfunding for cryptocurrency projects, where investors can buy tokens in exchange for a future product or service. However, many ICOs are scams that involve little or no actual development and can lead to significant losses for those who invest in them.
How to avoid being a victim of an ICO scam: Thoroughly vet any ICO and only invest in reputable projects with a clear and realistic roadmap.
Example of a cryptocurrency ICO scam: The SEC (US Securities and Exchange Commission) charged a company called โVaultbankโ with conducting a fraudulent Initial Coin Offering (ICO) that raised $15 million from investors. The company promised to use the funds to develop a "state-of-the-art financial platform," but instead misused the funds for personal expenses and to pay returns to previous investors.
6. Crypto Wallet Scams
Crypto wallets are digital wallets used to store, send, and receive cryptocurrency. Scammers often create fake wallet apps or websites that mimic legitimate ones to trick people into entering their private keys or seed phrases. These keys or phrases are used to access and control a user's cryptocurrency, so if a scammer gets hold of them, they can steal the user's funds.
How to avoid getting caught up in a crypto wallet scam: Remember to only download apps from official sources, beware of unsolicited messages and offers, use a hardware wallet, and enable two-factor authentication.
Be especially careful with "free" wallets. They are never free and end up costing you a lot.
An example of a cryptocurrency wallet scam: In September 2021, a fake mobile wallet app for Ledger, a well-known hardware wallet provider, was found on the Google Play Store.
The app was created by a third-party developer and was designed to look like the official Ledger Live app. The app was downloaded by thousands of people before it was removed. The app not only spoofed users' private keys, but also contained malware that could steal the user's personal information and credentials from the infected device.
7. Get out of scams
Exit scams involve the disappearance of a cryptocurrency project or company with investor funds. This happens when the company or project suddenly closes and the team behind it vanishes, with the money invested by its investors. This can happen with smaller projects that were not well known and not properly audited, or with projects that were simply a scam from the start.
How to avoid being a victim of an exit scam: Invest in well-known projects that have been audited by reputable firms, and only invest what you can afford to lose. Don't trust word of mouth or social media reviews; It could very well turn into a Bernie Madoff situation, and that was ugly.
An example of exit scams: A company called "Harvest Finance" that operated a decentralized finance The (DeFi) platform was suddenly shut down in 2020 and the team behind it disappeared with the funds of thousands of investors. The platform had gained popularity among investors, but it was later revealed that traders had exploited a vulnerability in the code to drain funds from the platform's liquidity pools and disappear with the money. The incident led to a loss of around $24 million for investors who had invested in the platform.
Conclution
While cryptocurrency can be a great investment opportunity, it's important to be aware of potential scams and fraudulent activity that can occur in this space.
Taking the time to thoroughly research any investment opportunity, beware of promises of high returns with little or no risk, and investing only in reputable companies and projects can help protect yourself from falling victim to a cryptocurrency scam.
In addition, it is important to stay informed about the latest developments in the cryptocurrency industry and be aware of red flags, such as sudden or unexplained price increases or unregistered companies, which may indicate a scam.
It is also essential to remember that no investment is without risk and it is always important to be cautious and aware of potential risks before making any investment.
Remember that if something seems too good to be true, it probably is.
By keeping these tips in mind, you can help protect yourself and your funds as you participate in the exciting world of cryptocurrency.
