How to Spot a Crypto Scam
The cryptocurrency industry has experienced tremendous growth in recent years, with crypto becoming an important part of many investment portfolios.
However, the increase in crypto adoption has also drawn unwanted attention from a malicious group of opportunists: scammers. From 2020 to 2021, losses from crypto-related scams rose 79%.Such scams have caused investors to lose not only nearly $15 billion dollars, but also shaken their trust in the industry. The truth is however, as this space remains largely unregulated it continues to be a space where scams might continue to happen. Therefore you might want to be as well informed as you can possibly be before meddling with cryptocurrencies.
This article explains the various types of crypto scams, so that you may recognize one quicker should you ever come across one.
What are Crypto Scams?
In the broadest sense of the word. Crypto scams usually revolve around attempts by individuals or organized groups to access users’ private information, such as a hidden key or security code, as well as deceiving people into sending crypto to a compromised digital wallet.
Crypto scams can be brought under into two main categories:
Aiming to acquire access to a targets physical hardware, digital wallet or authentication credentials, such as security codes, private keys, or seed phrases
Demanding cryptocurrency directly from a target through impersonation, fraudulent investment propositions, fake business opportunities or other malicious means.
Types of crypto Scams:
Pump and Dump
Pump and Dump scams involve a group of insiders using messaging apps or social media in order to plant rumors that a renowned mogul is supporting the digital currency in question, or fake news that mention a fundamental improvement on the project. The aim of this setup is to lure their audience into purchasing the crypto, drive up the price, and sell their stake thus causing the value of the currency to plummet.
When the public purchases all of the cryptocurrency, usually a new coin or one that has had very low trading volume, the insiders start selling, or “dumping” the crypto at high prices. This move sparks a steep sell-off and a profit at the expense of those who just bought the cryptocurrency at the time of the signal.
Phishing
Phishing is a common scam in cryptocurrency. In the world of cryptocurrency, phishing means deceiving victims in order to get them to reveal sensitive details like passwords and private wallet keys. Phishing scams often take place via email, with scammers posing as an authority and asking for users’ credentials, often by clicking on a malicious link. These scams are also widespread on various social media platforms.
Romance scams
The name might sound funny, but is a very serious and unfortunately emotional phenomenon for its victims. Romance scams, also known as pig butchering scams usually take place on online dating websites. The scammer sets an attractive profile picture to attract the “pig” (victim), and then “fattens” them up over a period of time through online messaging. As the victim grows closer to the perpetrator, they begin to trust the scammer more.
Eventually, the scammer informs the victim about huge gains that they’ve supposedly made in the cryptocurrency market, and advises the victim to follow along in some of their investments. Initially, these investments seem to pay off handsomely on paper, but the money’s gone as soon as it’s sent. The scammer uses phony sites, duping the victim into shelling out bigger sums of money to the perpetrator’s fake account.
When the victim tries to withdraw their money, their efforts are in vain. As the “pig” — who is now fattened for slaughter — they’re left empty-handed.
Ponzi Schemes
Ponzi schemes are named after the notorious 1920s swindler, Charles Ponzi. The basic idea of the scam hasn’t changed for over a century. Here’s how it works: A crooked broker proposes an attractive investment opportunity with guaranteed, lavish returns. Their pitch may involve a secretive strategy, or inside information about a cryptocurrency project. In the beginning, the idea looks legit. Your account balance keeps rising, and you might be able to withdraw some amount of cash. In reality, however, the crook pockets most of the money, issues phony paperwork to cover up their tracks, and uses cash from early investors to pay a little to the new ones. As more investors come on board, the scammer finds it increasingly hard to sustain the ruse. By the time the scheme collapses, your money is long gone.
Rug Pulls
A rug pull is a crypto scam wherein a cryptocurrency’s promoters pump up a new coin to boost its price, after which they disappear with the funds. The investors are then left with a valueless token that has zero fundamentals and no future.
A rug pull often doesn’t allow a non-insider owner to sell their token, as it’s coded in a manner that allows only insiders to exit.
Airdrops
Airdrop scams are prominent in decentralized finance (DeFi). They involve a phenomenon in crypto called a token airdrop. This means it drops tokens into your digital wallet as a reward for holding a specific crypto or carrying out specific actions on a crypto platform or software.
While legitimate airdropping of tokens is typically done to kickstart and grow a community, airdrop scams are also doing the rounds. The way that it works is that it starts with an airdrop, where coins are being dropped into your wallet that appears to have value. When you try to exchange or withdraw that airdropped token for a more well-known token, you give the protocol more permissions than you realize. This allows hackers to access all the assets in your wallet. Once that happens, your wallet is likely to be swept clean within minutes or even seconds. Not all airdrops are scams, but whenever you are required to do specific actions, make sure you always do your research!
Traditional Hacking and theft
The Unique Selling Point (USP) of blockchain technology is that a blockchain is extremely difficult to be altered once a block has been mined and added to the chain. The longer the chain becomes, the more history builds and more complex it becomes to alter any information. This is the reason why many have dubbed it as unhackable, and is widely considered the blockchain technology to be extremely secure.
Unfortunately, while this is mostly true, recent incidents have indicated that hackers can access and alter blockchain information in some situations.
When verifying a transaction, miners review transactions to ensure that they are legitimate. If one or more hackers gains control over at least half the mining process, the consequences could be severe. A malicious miner can create a duplicate version of the blockchain, which is called a fork, where some transactions are not reflected. Miners could then create a completely different collection of transactions on the fork, and make it seem like that’s the true version of the blockchain, despite its fraudulent nature. Hackers could also double spend cryptocurrency from the fork. Sometimes there may also be errors or security glitches during the creation of the blockchain. In such cases, hackers can identify and exploit. One way to reduce the risk of becoming victimized by this, is doing research and making sure the currency has a good team. Especially with new projects that have a short chain, low trading volume and have not released a working product yet.
Stay tuned for part 2!
Disclaimer:
The information provided above is not financial advice but for educational and entertainment purposes. Please do your own due diligence or consult a financial advisor before investing in any digital assets.
