You’d have to be living under a rock not to notice cryptocurrency’s recent rise in popularity.
Many curious and aspiring entrepreneurs have made fortunes in Bitcoin, Ethereum and other forms of digital currency – and many others have followed them, hoping to turn a quick profit.
In turn, fraudsters have swooped in to take advantage of novice investors in this new and largely unregulated market.
If you’re looking to get into crypto, make sure you know about the different scams out there and how to avoid them.
Cryptocurrency is a digital or virtual asset that uses unique encryption algorithms and blockchain technology to secure transactions. You can invest in cryptocurrencies like stocks or other market assets. But you can also use crypto as an alternate form of payment to buy everyday goods and services in many places.
Unlike the U.S. dollar or other traditional currencies, no central authority – like a bank, federal regulator, or law enforcement agency – regulates or protects the value of a cryptocurrency, records transactions, or issues new units.
While cryptocurrency can be profitable in some cases, this decentralized and unregulated system opens the door to opportunities for fraud and makes it difficult to recover from theft.
Common Cryptocurrency Scams to Watch Out For
While cryptocurrency is relatively new, scamming has been around forever. Con artists and thieves have found creative ways to use technology to defraud people and gain access to their digital wallets.
Here are some of the most popular scams being used in 2023.
Phishing scams are as old as the internet itself. Scammers “phish” by sending fake emails with links to fraudulent websites or apps that trick people into entering their personal information. These crypto phishing scams typically target personal information and crypto wallet private keys to gain access to funds within the wallet.
Phishing can also be connected to ransomware attacks. When someone opens a link in an email, their computer, company, or organization’s entire network is taken hostage. The ransomware will only give the user access back if they pay a sum of money in cryptocurrency.
“Get rich quick” investment schemes are another traditional scam that’s made its way into the crypto space. Scammers entice people to invest in a promising new product or service that doesn’t exist or inflate the potential of something currently being developed.
These types of bogus investment opportunities typically require large sums of cash up front, and the investors never see a return. Because the money is paid in cryptocurrency, it’s harder to track down the scammer and demand compensation.
Rug pull scams
Rug pull scams, also known as “pump and dump” schemes, involve a digital asset or project that’s heavily promoted and then suddenly disappears without a trace. Rug pull scams are commonly associated with new kinds of cryptocurrency or non-fungible tokens (NFTs), which are “supposedly” one-of-a-kind digital assets.
These scams rely on a sense of urgency, encouraging investors to get in on a limited or exclusive investment before it’s too late. Heightened interest in the NFT drives up the price until trading stops and the scammer disappears. Investors lose everything they’ve contributed and cannot sell the worthless assets.
Who doesn’t like free stuff? Giveaway scams typically ask people to send in a certain amount of cryptocurrency, and the illegitimate company offers to match or multiply it. This method sometimes requires people to submit cryptocurrency to verify that they’re “serious investors,” only to find that the giveaway is fraudulent and their verification payment is gone.
Like rug pull scams, these scams use clever messaging on social media to create a sense of urgency and entice people to act quickly before the deal ends.
Ponzi and pyramid schemes
The mission of ponzi and pyramid schemes is to constantly lure new people in, promising significant returns with little risk. Investors are promised a big payout when they recruit new investors, who are required to recruit even more. However, the scheme is just a recruitment cycle, with money flowing to the top of the pyramid and very little return on investment.
While these scams have existed for over 100 years, the lack of oversight and misinformation about cryptocurrencies provide a unique opportunity for scammers to take advantage of a new generation of targets.
Celebrity endorsement investment scams
Scammers sometimes create fake profiles of new products or investment opportunities with claims that celebrities and influencers back them. Or they might flaunt fake endorsements of their new cryptocurrency from successful business people like Mark Cuban or Elon Musk.
Either way, the scammer requires payments in cryptocurrency. And by the time the scam is exposed, the scammer and your money are gone.
With so many online social media platforms and ways to communicate, these impersonations can be hard to spot. Check marks on celebrity profiles to separate the real from the fake. And use trusted sources to confirm the authenticity of an endorsement before you give money or financial information.
Romance scams are one of the more elaborate and long-form cryptocurrency scam methods. The rise of dating apps, like Tinder and Hinge, has led to more virtual conversations with strangers without ever seeing them face-to-face.
Scammers create fake dating profiles, often pretending to be good-looking individuals, and gain victims’ trust over time. Then, dating scammers encourage victims to buy or give them money in some form of cryptocurrency.
After getting the money, the scammer and their dating profile disappear, leaving the victim with empty digital wallets and heartache.
Cryptocurrency Warning Signs
If something feels fishy, then it probably is. There are some tell-tale signs when it comes to spotting cryptocurrency scams. Here are some red flags to be on the lookout for:
- Only accepting cryptocurrency as a payment method
- Promising free money, significant gains, or double the investment
- Spelling errors in emails and social media posts
- Any type of signed contract requirements
- Manipulation tactics, such as extortion or blackmail
How to Protect Yourself Against Cryptocurrency Scams
There are proactive steps you can take to strengthen your defense against scammers. These simple steps can be the difference between holding onto your coins or losing all of your crypto in one day:
- Protecting your digital wallet with a private key
- Making sure your passwords are strong
- Keeping your crypto software up to date to avoid hackers
- Always using trusted Wi-Fi networks and/or VPNs when entering your private key
- Never clicking on a link from a random text, email or social media message
- Never paying a fee to get a job
If It’s Too Good to Be True…
The saying goes: “if something sounds too good to be true, then it probably is.” This is especially true in the cryptocurrency world. Hundreds of investors are duped each year, from fake websites to misleading social media messages, investing large sums of money for returns that never come to fruition.
Do your due diligence and verify an investment opportunity’s legitimacy before dumping cash. It could save you a lot of money and trouble in the long run.
U.S. Senate Committee on Homeland Security & Governmental Affairs. “Use of Cryptocurrency in Ransomware Attacks, Available Data, and National Security.” Retrieved September 2022 from https://www.hsgac.senate.gov/imo/media/doc/HSGAC%20Majority%20Cryptocurrency%20Ransomware%20Report_Executive%20Summary.pdf