By Samuel Becker (5 minute read)
Where there’s money, there are scammers—it’s a relationship as old as time itself. So it is no surprise that enterprising fraudsters started running cryptocurrency and Bitcoin scams almost as soon as the technology was born.
While Bitcoin scams and fraud may be relatively new, many of the more common rackets involving cryptos use age-old tricks to achieve their goals. Almost all types of fraud—be they Bitcoin scams or phishing attempts—are rooted in a schemer’s ability to gain a victim’s trust. It’s all about gaining someone’s confidence; that’s why they call them “con artists,” after all.
With that in mind, here are some of the more common Bitcoin and cryptocurrency scams. This list should give people a good idea of what to watch out for so that they can protect their assets, even before they start investing in crypto.
Common Bitcoin Scams to Avoid
1. Fake Cryptocurrency Exchanges
One way to attract potential crypto investors who are eager to get in on the action? Create a cryptocurrency exchange—even if it isn’t real. Yes, fake crypto exchanges exist, and in some cases, have been used to scam investors out of their money.
For fraudsters, it can be as easy as luring crypto investors with the promise of free bitcoin (or something similar) to get them to sign up for the exchange. Then, after making an initial deposit, victims may find that none of it was real, and they’ve been bilked out of their deposit.
As for how to avoid these fake exchanges? Sticking to the known, established crypto exchanges is a start. Think twice before creating an account with a new or unfamiliar exchange, and be sure to do some research to make sure it’s above board before making any moves. Refer to industry sites and newsletters, message boards and forums, and other reputable sources of information to find out more about an exchange’s credentials and reputation. And it never hurts to remember the advice our parents and grandparents have drilled into us from a young age: If it sounds too good to be true, it just might be.
2. ICO and Fake Cryptos
If you’re familiar with buying IPOs, then ICOs should ring a bell. ICO stands for “initial coin offering,” and is more or less the same thing as an IPO. It’s when a new coin or crypto makes its market debut.
That’s sure to attract some attention, right? That’s what fraudsters think, too. And it’s why ICOs, or ICOs promoting fake cryptos, are ripe for scams.
An ICO scam might work like this: A fake ICO can be teased, asking investors to pony up some cash to get in early. Money is exchanged, and then the ICO never occurs, and investors never get their money back.
These types of scams are common. So much so that the U.S. Securities and Exchange Commission (SEC) even published a website that simulates them, only to lead you to educational tools when you try to invest, instead of stealing your money.
As with any investment, it is a wise idea to do your research before putting money behind a crypto ICO. Try to find out as much as you can about the company in question—from sources other than itself or the tease that first grabbed your interest. And take advantage of tools like the ones provided by the SEC, to help educate yourself.
3. Social Engineering Scams
Many of the same tactics used to con people out of their cash or personal information are used in the crypto sphere, too. That includes things like hacking, social media scams, phishing attempts, and more.
For instance, crypto investors may get an email asking them to update their password or personal information on a crypto exchange—a phishing attempt, which is meant to trick users into providing their credentials. With that information, a fraudster could, potentially, gain access to an investor’s holdings and liquidate them. Always check the sender address on emails like this—one riddled with typos or oddball fonts is likely to be a fake. If possible, compare it to previous emails from the exchange that you know to be legitimate. Rather than clicking on any links from the email in question, go directly to your crypto exchange. There, you will be able to see if your password or personal email needs updating.
It’s important to be careful on social media, too. Imposter social media accounts may contact you and ask for investments or deposits, only to take your money and run. A good rule of thumb? Go with your gut, and don’t trust social media accounts—it’s all too easy for bots or others to create fakes.
4. Ponzi Schemes
Ponzi schemes are very similar to pyramid schemes. In essence, it’s a game of hot potato, with older investors being paid with the proceeds and investments from newer ones. It’s a common scheme in financial circles that has found its way to the crypto world.
The government has gone after Ponzi schemers in the crypto community, and that includes those that use bitcoin to lure in fresh investors. In fact, government regulators say that they root out and prosecute many Ponzi scheme cases every year, which includes those involving cryptocurrencies.
One typical red flag indicating a Ponzi scheme (or nearly any type of fraud): the promise of investing your money at no risk to you with the guarantee of huge profits. The truth is, with investing there is always a risk and there is no guarantee of returns.
5. Pump-and-Dump Bitcoin Scamsp
For investors who are even somewhat familiar with the stock market, “pump-and-dump” should be a familiar term—especially after the Gamestop headlines of early 2021.
A pump-and-dump scheme involves a number of traders or investors buying up an asset (say, Bitcoin for example, or a penny stock) which causes its value to increase. Then, with values high, they sell it all off—or “dump” it. Investors who bought in during the initial run-up are often caught underwater as a result.
Naturally, this same play can be run with cryptocurrencies. Government regulators, such as the U.S. Commodity Futures Trading Commission (CFTC), have warned that pump-and-dump schemes can be particularly effective in the crypto sphere, and warn investors to do their homework before making any investment decisions.
The crypto world can be risky if you don’t know what to watch out for. In that sense, investing in cryptocurrency isn’t much different from investing in other assets. Where there’s wealth or value of some kind, there will inevitably be scammers, fraudsters, and con men (or women) who will try to find a way to get their hands on it.
By taking a few protective measures, people will be better able to keep their holdings safe. That includes researching a company before investing in it, and using some common sense—a good rule of thumb is that if something sounds too good to be true, it usually is.
It never hurts to be wary of anyone who contacts you asking for a deposit, to make a payment, or to otherwise send them money. If a crypto exchange or ICO is offering you a guarantee of some type, that’s another red flag. And if someone or a company is offering you something for free, tread very carefully. Businesses don’t often make money by giving things away.
Keeping your wits about you and avoiding anything that may seem sketchy should keep the majority of crypto investors out of harm’s way when it comes to scams—whether you’re new to the market, or a seasoned veteran.
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