top of page
  • Writer's pictureDenis Mesek

Frauds and Scams in Cryptocurrency and How to Avoid them


 

By November of 2021, the value of cryptocurrency had soared to $3 trillion.


About 2.8% of the global population uses at least one form of cryptocurrency to transact. Experts in Decentralized Finance (DeFi) are strongly predicting that up to 30% of traditional banking infrastructure will be rendered absolute by the end of 2022.


The broad cryptocurrency adoption has made it a lucrative target to fraudsters and scammers with itchy fingers ready to rob you of your hard-earned cash. 2021 saw scammers making away with about $14 billion in crypto, almost doubling the $7.8 billion seen in 2020.


The nature of crypto in itself is an attraction to high-tech scammers. It has now fallen upon crypto investors and enthusiasts to learn how to protect themselves from the fraudsters.


Scams and frauds in crypto range from elaborate rug-pulls performed by high-tech developers who lure investors onto their platforms only to make away with their money to your long-lost elementary school classmate sending you an out-of-the-blue text with a website link promising you millions of profits from a zero investment.


It’s a dumbfounding reality that for all the high-tech gloss and glamour of cryptocurrency, the majority of the scams are nothing but modern versions of the old classic scams. Some of the classic frauds include:


Romance scams


Scammers use dating sites and social media sites to solicit their victims to invest and trade in cryptocurrency. In the first seven months of 2021, the FBI branch, Internet Crime Complaints Center (IC3), recorded over 1,800 reports relating to crypto-focused romance scams. These frauds saw losses in excess of $133million.


Celebrity endorsements


Scammers can market themselves online as billionaire crypto investors and promise you significant returns on your investments on specific crypto projects. It all turns out to be hot air and the money you sent them gone. Famously, the SEC launched an investigation and fined DJ Khaled and Floyd Mayweather for non-disclosure of earnings from promoting investments in an ICO.


Bogus websites


These websites can come to you like a flashy advert on your browser or links sent to you from a family or long-lost acquaintance. They in most cases contain crypto jargon. These sites may link up to your crypto wallet and siphon every crypto coin you have.


Cryptocurrency is a highly speculative environment. It is highly decentralized, making it hard for regulators to do meaningful checks and monitoring. For these reasons, some elaborate scams have cropped up. As an investor, you need to watch out for these scams.



 


MARKET MANIPULATION


This is the artificial and deliberate interference with asset prices to tilt the scales to favor fraudsters for quick returns. Activities that fall under this illicit practice include:


Spoofing


This involves creating fake orders to an asset hence misleading investors that a given crypto asset is in demand. Fraudsters go to the extent of employing bots and dummy accounts to drive such demands.


Front-running


In crypto, validators or miners could make certain future transactions based on insights of pending transactions. They leverage this inside knowledge to make profitable trades just before significant price swings.


Churning


This occurs when a crypto asset manager makes excessive trades using a client’s account to get more commission. Such kinds of fraud can lead to the client incurring unnecessary tax liabilities.


Pump and Dump Scams


This occurs when crypto-asset holders inflate the price of their assets and then sell their stake for profits. This mainly happens in minimally traded coins. Schemers would convince investors to buy these coins through social media, discord channels, and community forums. When the momentum swells and the price is high enough, the scammers quickly cash out with huge fortunes.


Rug Pulls


Perhaps the most infamous. Rug pull happens when fraudulent cryptocurrency developers leave their projects, making away with the funds raised by the investors. The fraudsters could list a new project on a decentralized platform and even launch on a legitimate blockchain.


The bad actors would then drum up support to the projects and get early investors who believe in getting their hands on new crypto projects. Once enough money has been invested, the developers then rug pull the whole project and make away with the initial investments.


Traditional Hacking and Theft


To transact on cryptocurrency, you need a crypto wallet. This is a digital account holding your crypto assets. The wallets have a key or an address that enables you to receive, deposit, or send payments. Just like an online banking platform, crypto wallets have passwords. Anybody who has access to your password would have control of all the funds in your crypto wallet.



 


How to Avoid Cryptocurrency Frauds and Scams?


These are some precautions you could take not to fall victim to cryptocurrency scams and frauds.


It is safer to trade on established and reputable exchange platforms as a beginner on cryptocurrency. As an investor, it is best practice to investigate thoroughly coin offerings, brokers, and crypto projects. Legitimate projects mostly have clear roadmaps and a whitepaper detailing their concept and values. You should hold on and restrain from jumping onto every new project on the blockchain.


To avoid falling victim to pump and dump scams, track unusual crypto trends through Reddit and Twitter. Look out for accounts with no history, suddenly vouching for a little-known coin. They are most likely fraudsters.


Watch out for crypto phishing emails that could pose as legitimate crypto wallet providers. The out of the blue text messages from past acquaintances offering opportunities to get rich quickly must also be treated with caution. Illegitimate email addresses most of the time have generic domains and misspelled characters. Watch out for these.


Traditionally IPOs are typically from well-established and recognized companies; the same regulatory measures don’t apply to those offering ICOs. You could spot potential rug pulls by examining a project’s whitepaper. From there, you could spot certain levels of unpreparedness, unstructured goals, and unclear market strategy. These are the red flags to watch out for potential rug pulls.


Cryptocurrency trading is a catch-22 situation. Whereas decentralization allows for community-agreed decisions leading to vast opportunities, this lack of an oversight authority has opened the door to scammers to commit frauds and rob unsuspecting investors of their money.


Crypto investors could reduce the chances of succumbing to these scams by being wary of every investment opportunity that come their way. Experts advise you to do proper research of your own (or DYOR as you would often hear in the crypto communities) before making any investment decision on cryptocurrency.


Do not have the time to do your own research? We will do it for you, visit our services page or book a free consultation to find out our services related to cryptocurrencies.






Recent Posts

See All

コメント


bottom of page