The crypto field creates many wonderful opportunities, but it also seems to be a novel way of making big promises and taking money from unwary users. Cryptocurrency scammers took over $4 billion from unsuspecting people in 2019 alone. What are the telltale signs of crypto scams and how can you protect yourself?
Keep in mind that those who promote scams are marketing experts. They know exactly what will persuade ordinary people to part with their money. It is easy to get taken in by astonishing offers with huge and fast returns, skyrocketing prices of a new coin or token, and wonderful promises with no drawbacks. Thus, you need to protect yourself and your crypto investments as much as possible.
The Main Signs of Scams in Crypto
To be able to recognize potential scams and high-risk investments is instrumental to survive and thrive in the present-day crypto jungle. It’s not possible to cover all the sly approaches, as new and new ways to get money from people are constantly coming up. But even if you’re only privy to the most common scamming methods, it’s something that can give you some much-needed protection.
Ponzi and Pyramid Schemes
A Ponzi or pyramid scheme is a scam where earlier investors are paid with funds from more recent investors; the scheme runs only as long as new investors put in their money, and most people lose their funds in the scheme. Of course, people are made to believe that the profits are generated by the sales of a product.
This is no different in crypto. You must either get in very early or be at the top of the pyramid to make any profit, and you will also have to sign up many new ones under yourself to profit from them.
In crypto, there are promises of guaranteed appreciation of a new coin or of a guaranteed high daily interest. The term interest could be described as staking, mining or something else. With such a high interest, you can receive all of your capital back in just a few months, and the rest is all profit! Just think for a minute. For example, where on Earth can you get 2% daily? And why would anybody offer such a platform to investors to share the profit with them if they could keep it all to themselves?
Some ICO projects use referral incentives to attract new clients and save on advertising costs. The word of mouth from somebody you know (the company’s referral) can sometimes achieve more than advertising banners on the internet.
With honest projects, the referral programs are typically used at a certain stage, and the referrals get their commissions from one or two levels only. On top of that, the commissions are reasonable to keep the referrals motivated but not to debase the quality of the project.
On the other hand, referral schemes with many levels and huge commissions could be a clear sign of a scam.
Artificial Intelligence and Bots
If you want to trade cryptocurrency for profit, you need to buy low and sell high. Some platforms may claim that they use trading bots or artificial intelligence (AI) that executes crypto trades automatically for their platform and users. This, of course, is totally made up, with trading charts, if any, from Photoshop.
It is true that companies use trading bots. These trading bots are programmed by their users (traders) and some traders make money, but many do not. Are these bots really intelligent? Well, only to the abilities of the trader programming the bot. Since the field of cryptocurrencies only has a short history, the proper technical analysis doesn’t come into play for these bots, as they don’t have enough data to work with.
Some platforms advertise trading or AI bots with claims that their bots can outperform entire markets. If you hear promises of gains in the range of 0.5% up to 2% daily, you might have just come across an artificial intelligence scam. Ask yourself, why would they share these rich profits with you, rather than keeping everything for themselves?
The Pump and Dump
The pump and dump groups target certain coins. The goal of these groups is to get as many “normal” investors to buy the coin they intend to profit from. These groups will buy enormous quantities of a coin which drives the price of the coin up quickly. They typically choose a coin with a small market cap since it is easier to manipulate its price. The effect of their pump is that the price shoots up in a very short time.
This massive price hike will alert normal investors to the fact that “something is going on” with this coin and there is a high potential profit to be made. But you have to act fast to catch the price ride up, and there is seldom enough time to react.
Unfortunately, by the time you buy the coin, the pump and dump group will probably have achieved their target price. The group will then issue sell orders and dump that coin, perfectly timed with normal investors buying at the inflated price.
The group has now sold their coin completely, earning a massive profit from the pump and dump move. The normal investors will be left with a coin that has suddenly lost its value.
There is very little anyone can do at the moment. The decentralized nature of crypto makes cracking down on these pump and dump groups extremely difficult. To protect yourself, you need to conduct a very thorough fundamental analysis, learning as much as possible about the coin you want to buy. From this you might see that the price is unrealistic and just artificially inflated.
As a new crypto investor, you are also under threat from malware that can trace your online activity and steal data from you. The creators of malware might target your online cryptocurrency wallet login details. Once they get them, they can easily transfer your assets to their own wallet.
You can and you should protect yourself: It’s a good practice to use a long, varied, and safe login name and password and change these from time to time. Never store these in your browser or on your computer. Also, use two-factor authentication wherever possible. But in the first place, don’t use any online wallet where you don’t own your private keys. Why should you store your assets online when there are many high-quality free crypto wallets with your own private keys? Also, keep your system up to date, including your antivirus and firewall.
Investors are known to put in enormous amounts of money into ICOs (Initial Coin Offering). Many new crypto-companies enter this market with their projects, asking users to support their ideas. To do that, the investor just needs to buy the new coin or token issued by means of the ICO. However, this concept has also attracted all kinds of scammers.
One way to get money from the average unsuspecting investor is to create a fake ICO. The story behind the ICO is just made up to sound interesting and appealing enough for people to put in their money. The goal is not to bring in a new quality coin or token to the market, but just to get money from investors. Another way is to create a website that resembles an ICO where users are asked to send their cryptocurrency into a compromised wallet.
The best way to protect yourself and ward off any unpleasant surprises is to research the project before making a final decision: review the team, study the whitepaper, analyze the offer and the company.
Fake Exchanges and Wallets
A banner might pop up with an enticing offer saying something like, “Get Bitcoin for 5% less. Limited offer!” If you click on it, the link will take you to a website with a fake crypto exchange.
What are some red flags to look for? Check the website address. If it begins with HTTP (instead of HTTPS), it is not a secured website; no real exchange would use it. Fake sites also try to sell Bitcoins through PayPal payments. They have web forms ready for that, but after you send your money, you never get your Bitcoins.
Another scheme is to ask users to deposit larger amounts and motivate them with “discounts” or “bonuses” to do so. Once your money is on such a platform, they might simply steal it, or they might charge exorbitant fees and make it difficult for you to withdraw your funds.
Other fraudsters create fake wallet apps that, once downloaded to your phone, can steal critical details from your account. Do your research before deciding for any app like this, since some of these apps made it even to Google Play store.
To protect yourself, research any wallet or exchange before creating an account, and use only proven exchanges. Also, think twice before providing any personal data and before making any deposits.
Many people realize that they could have made a huge profit if they had bought Bitcoin at the start, for example, back in 2010 when its price was around $0.01 only. Some scammers try to take advantage of such investors by coming up with their own coin, promising similar gains but in a much shorter time. They might use terms such as “better Bitcoin” or “Bitcoin for everybody,” etc.
An example of such a project is OneCoin that started in 2014 and acquired billions of USD from credulous investors. The claim was that OneCoin is a legitimate cryptocurrency with fast and enormous growth-potential. The project had no blockchain and was abusing the multi-level marketing business model, as there was no product, and commissions from the money of the new investors went up to the wallets of those who started promoting this “coin” early on, with most money ending up in the pocket of the creators of this scheme. Similar fake projects followed, and some fresh ones with different or altered features might come again.
Cloud Mining Schemes
With cloud mining, you can rent mining capacity remotely from mining companies that will share their revenue with you for a certain fee. This way, you can profit from mining without investing into any mining hardware. You don’t have to spend to set everything up, do maintenance, etc. But the honest cloud mining companies are the exception rather than the rule.
Most of these mining offers are ineffective: In the end, you will earn less than if you would have just bought Bitcoins. Many cloud mining offers are just outright scams: They distribute the “mining” profit for the first couple months and then they stop, keeping your fee for the mining. Many of these schemes don’t do any mining at all, owning no mining rigs and equipment; everything they post are just made-up pictures and stories to attract the dupable investors. Thus, before investing into cloud mining, find out if this company owns and runs an actual mining farm with real mining rigs.
Crypto Backed by Gold
Since gold has been traditionally associated with stability and security, some crypto projects claim that their coins or tokens are backed by gold. As of June 2020, about 77 blockchain projects claimed to be backed by this precious metal, while as many as 30 previous gold-backed crypto projects have already failed.
It is helpful to know that many of these gold-backed crypto projects are actually run by gold mining companies. You can receive an equity share of the company while they try to mine for physical gold. However, nobody can guarantee that any gold will be actually found. Thus, the same people can come up with similar ICOs indefinitely, fooling people out of their money.
With other projects claiming to be backed by gold, you could ask questions such as: Where exactly is that physical gold? How is it stored? How is it secured? How will it be transported in case it is needed?
And it’s good to add that the US dollar is not backed by gold since 1971. At this time, there is no national currency backed by gold. On top of that, many experts on crypto see no need for any cryptocurrency to be backed by gold. Gold is a centralized asset that has to be deposited in a certain location or several locations, whereas Bitcoin was designed as a decentralized means of payment.
Too Good to Be True?
As you can see above, the scammers use many ways to fool gullible people out of their money and cryptocurrencies, and the list is by no means exhaustive. With all the rapid developments and technological advancements, new methods to dupe people will be appearing. How can you protect yourself? It is important to take your time to see all the strengths, weaknesses, opportunities, and threats of the offer. If it looks too risky, it might be safer to avoid it. When in doubt, leave it out. If it sounds too good to be true, it probably is.