Every type of investment has the potential to attract scammers, and cryptocurrencies are no exception.
The rise of digital currencies has made them valuable and sought after by investors and criminals. Once a cryptocurrency transaction is made, it is very difficult to reverse. The unregulated nature of these highly liquid and highly portable assets makes them an easy target for fraud.
The following are the 7 most common cryptocurrency frauds, with 2 bonus frauds and protection tips at the end of the article.
1. Giveaways on social media
This type of social media fraud requires you to send them funds in a cryptocurrency, and they promise to send back an incredible return. Giveaways like this are common on Twitter and Facebook. They are often disguised as accounts that you know and trust, and often look identical to them. These scams frequently impersonate well-known cryptocurrency figures or companies, using similar usernames and profile pictures.
Fraudsters use fake accounts or deploy bots to respond with replies about how much money others have made and how grateful they are. These types of profiles should always be ignored because they are never legitimate. Even if a legitimate site ever hosts a giveaway, it would never request you send funds first. A common red flag is the promise of multiplying your investment (e.g., “Send 1 BTC, get 2 BTC back”).
2. Collapsing Ponzi schemes
Ponzi schemes somehow never cease to do the rounds, and recent years were no exception. These are usually marketed as portfolio management services with guaranteed profits. Unfortunately, the returns generated are money that comes from other investors. New entrants are the only ones bringing money into the pool, and that money covers the promised “returns”. Once newcomers dwindle and cash stops coming in, the money runs out and the scheme implodes.
PlusToken is one example of a Ponzi scheme involving cryptocurrencies. Its instigators were sentenced to 11 years in prison for defrauding Chinese investors of over $2.25 billion in cryptocurrencies. Another notable example is the BitConnect scheme, which collapsed in 2018 after reaching a peak market capitalization of over $2.6 billion.
3. Pyramid Schemes
These are almost like Ponzi schemes, but require people to recruit members to grow the scheme. As new members are recruited, part of their contributions goes to their recruiters. Money from new recruitments trickles upwards, and older members make the most money, but the model soon loses momentum and collapses.
While similar to multi-level marketing (MLM), crypto pyramid schemes typically lack any actual product or service, focusing solely on recruitment rewards. They often disguise themselves as “educational platforms” or “mining pools” to appear legitimate.
4. Phishing scams
Much like phishers target customers of financial institutions, the same tactics are used to approach you for your cryptos. The phishers pretend they are from your wallet or crypto exchange provider and prompt you to follow a link through an email. Everything on the email looks identical, but you are diverted to their scam site where you unknowingly enter your details, giving them the information they need. These attacks have become increasingly sophisticated, with scammers creating perfect replicas of popular cryptocurrency platforms and even using Google Ads to promote their fraudulent websites.
Protect yourself by always checking the URLs, never click on suspicious links from emails, and never enter your private key. Always type the exchange or wallet website directly into your browser, and verify that the URL uses HTTPS and displays the correct security certificate.
5. Fake cryptocurrency apps
These apps are used to entice people to part with their cash. They use promotional offers, bonuses, and various forms of pressure to get you to invest. Once your cash is invested, they either charge ridiculous fees for transactions, you can’t withdraw your funds, or you find the money has just disappeared.
Before installing any cryptocurrency wallet or trading app, verify its legitimacy by checking official websites, reading user reviews, and confirming the developer’s identity. Even apps listed on official app stores can be fraudulent, as scammers have successfully bypassed store security measures.
6. Cryptocurrency mining scams
Not all mining schemes are scams, but these are known to be bad investments. Some have even been used as fronts for Ponzi schemes. Experts caution against cloud mining and rent-a-miner schemes, as they often promise unrealistic returns and may be fronts for theft. These operations frequently misrepresent their mining capabilities or don’t actually own any mining hardware. Rather invest directly in a cryptocurrency.
7. Fake initial coin offerings (ICOs)
The huge demand for cryptocurrencies also includes buyers with limited knowledge. These people are easy for scammers to target, especially with offerings for a cryptocurrency that doesn’t exist. Also, the success of some cryptocurrencies is not mirrored in others, and some investors buy into cryptos that are unsuccessful.
Before investing in any ICO, conduct thorough due diligence. These usually have a white paper, introduce the team behind the project, and offer a purpose for their currency. They also publish the tech and specifics of their offering. Look for verification of team members’ identities on professional networks, check the project’s GitHub repository for actual development activity, and be wary of projects that promise guaranteed returns or make unrealistic claims about their technology.
Bonus Frauds…
8. Romance Scams
Cryptocurrency romance scams, also known as “pig butchering” scams, have become increasingly prevalent. Scammers build trust through dating apps or social media, then convince victims to invest in fraudulent cryptocurrency platforms. They often show fake profits to encourage larger investments before disappearing with the funds.
9. Pump and Dump Schemes
These schemes involve artificially inflating the price of lesser-known cryptocurrencies through coordinated buying and misleading promotional campaigns. Once the price rises significantly, the scammers sell their holdings, causing the price to crash and leaving other investors with worthless tokens. These are particularly common with new tokens on decentralized exchanges.
Protection Tips:
- Always enable two-factor authentication (2FA) on your cryptocurrency accounts
- Store significant amounts in cold wallets rather than hot wallets
- Be extremely wary of unsolicited investment advice or opportunities
- Remember that legitimate crypto projects never require you to send coins to receive more in return
- Research thoroughly before investing in any new cryptocurrency or platform
