Cryptocurrencies have proven to be a profitable investment instrument with several individuals, institutions and governments embracing the revolutionary financial innovation.
However, its popularity has not only attracted honest market participants but also cunning fraudsters seeking to exploit newbies and unsuspecting users.
This is evident in the numerous incidents of crypto scams, DeFi project hacks and exploits. Notably, crypto scams have become increasingly sophisticated and prevalent in recent years with investors losing over $103M and $54M to fraudsters in April and May 2023, respectively.
Following the rise of crypto scams and the significant threats posed to users and the industry, it is crucial to know the common techniques often employed by these scammers.
Therefore, this article outlines the common crypto scams, providing you with invaluable insights on how to protect your hard-earned assets and not fall victim to fraudsters.
Understanding Crypto Scams
Crypto scams refer to fraudulent activities or schemes within the crypto space that are designed to deceive unsuspecting users for financial gain. These scams come in various forms and often exploit the lack of crypto regulation and anonymity associated with crypto transactions.
Some common types of crypto scams include Ponzi schemes, phishing attacks, pump and dump schemes, fake initial coin offerings (ICOs), impersonation scams, and malware or ransomware attacks.
Regardless of the type, crypto scams can have serious consequences for victims including financial losses or loss of digital assets. To protect yourself from falling victim or losing your crypto assets, you must know and understand how these crypto scams work.
What Are The Most Popular Crypto Scams?
Below are some of the common crypto scams you should know and how to avoid them:
1. Ponzi Schemes
A Ponzi scheme is a fraudulent investment scheme where returns to earlier investors are paid with the capital of new investors, rather than from legitimate profits. This creates the illusion of a profitable enterprise, attracting more investors.
Because the scheme relies on a continuous influx of new funds to pay earlier investors, it eventually collapses when there are not enough new investments to cover the promised returns. Ponzi schemes are named after Charles Ponzi, who became infamous for such an initiative in the early 20th century. These schemes are illegal and result in financial losses for most participants.
Ponzi schemes, which have been a menace for centuries have found a new home in the crypto industry. As mentioned, this type of crypto scam promises unrealistically high returns, luring unsuspecting and greedy users to invest.
Initially, some investors receive returns, which are often paid using new investors’ funds. Oftentimes, these schemes collapse eventually, leaving most participants to swim in losses.
To avoid falling victim to Ponzi schemes, you have to be skeptical of investments promising guaranteed high returns. Second, always perform due diligence on investment opportunities, researching their team, history and track record. Most importantly, avoid investment opportunities that pressure you to recruit others.
2. Phishing Attacks
Phishing attacks are a form of crypto scam where malicious actors use deceptive tactics to trick individuals into revealing sensitive information. These attacks often occur through fraudulent emails, deceptive messages, malicious links or fake websites.
In other words, fraudsters impersonate reputable crypto companies to steal your sensitive information such as login details, personal data or private keys. Phishers often pose as trusted entities, creating emails or messages that look similar to official communications but contain malicious links.
They may create a false sense of urgency, such as warning of a security breach or requiring immediate action to lure people to click on these links. If you do and enter your credentials, your crypto assets could be stolen.
Staying ahead of this group of scammers requires that you always double-check website URLs, and ensure they are authentic and secure (https). Be cautious with unsolicited emails and messages and never share your private keys or login information.
3. Pump and Dump Schemes
A crypto “pump and dump” is a fraudulent and manipulative scheme where the price of a particular cryptocurrency is inflated inorganically through coordinated efforts like spreading misleading information or creating hype.
Once the price reaches a certain level, the orchestrators of the scheme sell off their holdings at a profit. This sudden selling pressure causes the cryptocurrency’s price to sink, resulting in significant losses for unsuspecting investors who bought in during the hype.
Pump and dump schemes are illegal and considered market manipulation. They are a huge risk in the volatile world of crypto trading. To avoid falling victim to pump-and-dump crypto scams, you should be wary of sudden, unexplained price spikes.
Also, do not invest in crypto assets because of price spikes alone; do your own research (DYOR) on the project, team, and other fundamental analysis. Also, beware of hype, investment groups and misleading social media influencers.
4. Fake Initial Coin Offerings (ICOs)
An Initial Coin Offering (ICO) refers to the issuance or sale of new digital tokens by upcoming crypto projects or startups to the public to raise capital. Investors often purchase these tokens with the expectation that their value will increase as the project develops.
While ICOs are legitimate methods for raising funds in the crypto industry, fraudsters have seen the scheme as an opportunity to defraud users. Accordingly, scam artists now create fake ICOs to solicit investments and then vanish with the funds, leaving investors with worthless crypto tokens.
Therefore, it is pertinent to double-check ICOs before making investments. This can be done by researching the team behind an ICO and their credentials. Also, you can verify the authenticity of an ICO by reviewing the project’s whitepaper and accessing their social media channels.
5. Impersonation Crypto Scams
In this type of crypto scam, fraudsters impersonate influential personalities, founders, companies, celebrities, or crypto influencers to dupe unsuspecting users. Typically, they use the names and faces of these popular figures or entities to promote malicious investment opportunities or fake airdrop campaigns.
To avoid falling victim to impersonation crypto scams, it is advisable to always verify the legitimacy of any suspicious crypto airdrop or investment opportunity before engaging. Do not jump on any opportunity simply because it carries the face or name of a renowned personality or project in the crypto industry. Make it a habit to always check their official social media accounts for confirmation.
Moreover, do not send your cryptocurrency to anyone promising to multiply it and be cautious with unsolicited investment opportunities.
6. Malware and Ransomware Attacks
Malware —short for malicious software— crypto scams involve the distribution of software designed to compromise the security of a user’s computer or cryptocurrency wallet. This malicious software can include keyloggers, spyware, or trojans that aim to steal sensitive information like private keys or login credentials.
Once these details are obtained, the attacker can access the victim’s cryptocurrency holdings and transfer them to their accounts. It bears mentioning that this crypto scam approach is similar to cryptojacking.
Likewise, ransomware is another form of crypto scam where malicious software encrypts a user’s data or access to their device, and a ransom is demanded in crypto assets such as Shiba Inu (SHIB), Cardano (ADA) or XRP.
Said differently, the victim is required to pay the ransom to receive the decryption key. If paid, there’s no guarantee that the attacker will provide the code, and this can result in financial loss and data compromise for the victim.
Overall, malware and ransomware attacks can compromise your computer or crypto wallet security, steal private keys, or encrypt data, leading to the loss of your crypto assets.
To avoid malware and ransomware crypto scams, ensure to keep your computer’s operating system and antivirus software up to date. Second, avoid clicking on suspicious links or downloading unknown files. Third, back up your data regularly.
7. Rug Pulls
A rug pull is a colloquial term used in the cryptocurrency community to describe a fraudulent practice where the developer(s) of a crypto project, after gaining trust and financial support from investors, suddenly and deliberately drain the project’s token liquidity and exits the project, leaving investors with substantial losses.
It’s essentially an exit crypto scam where the scammers disappear with the invested funds after that a project’s tokens are first offered to the public.
Therefore, it is important to carry out thorough research or due diligence before investing in new crypto projects, especially. Notably, crypto investors lost $54M to rug pulls in May 2023 according to a CoinDesk report.
8. Flash Loans
A flash loan is a type of loan in the decentralized finance ecosystem that allows users to borrow crypto assets without collateral. In other words, flash loans are uncollateralized loans, enabling borrowers to access significant funds within a single transaction, provided they repay the loan within the same block.
In some cases, crypto scammers exploit these loans to manipulate the prices of a particular token and drain treasury funds. According to blockchain security firm CertiK, investors lost $19.8M to flash loan crypto scams in April 2023.
Unfortunately, crypto scams will never cease as they’ll always be bad actors in the industry. While adequate crypto regulations may help curb these challenging incidents, users should always be on their guard. Ensure to always do your own research to avoid falling victim to Ponzi schemes, phishing attacks, rug pulls, pump and dump schemes and impersonation scams amongst others. Most importantly, avoid greed because when something sounds too good to be true, it probably is.