If you’re new to investing in crypto, it’s tempting to assume that safely investing in cryptocurrency is a reasonably simple task. After all, the crypto landscape was developed with privacy, anonymity and security in mind. Despite this, though, cryptocurrency trading isn’t immune to scamming or hacking, and it’s vital to take steps to protect yourself from these activities.
In 2021, crypto-related crime skyrocketed, reaching an all-time high of $14 billion over the course of the year. That’s nearly double the $7.8 billion that occurred in 2020. Now, many experts worry that 2022 will be far worse — and potentially outpace 2021 dramatically. In fact, the North American Securities Administrators Association (NASAA) believes the digital asset and cryptocurrency landscape represent a top investor threat when it comes to potential scams.
If you’re a cryptocurrency investor, knowing how to spot and avoid crypto scams is essential. Get started by taking a look at cryptocurrency scams and learning some tips you can use to avoid falling for them.
What Are Cryptocurrency Scams, and Why Are They on the Rise?
Cryptocurrency scams are criminal activities that have the end goal of acquiring crypto funds from owners under false pretenses. They typically fall into one of three broad categories.
First, there are efforts to acquire digital wallet authentication credentials in order to hack into users’ wallets and transfer crypto out of them. There are also attempts to get users to send a scammer cryptocurrency directly. Finally, there are crypto projects that masquerade as legitimate but aren’t. These are little more than attempts to either acquire money from a target user or inflate the value of an illegitimate coin high enough that the scammer can cash out while it’s on top before it inevitably collapses.
The main reason cryptocurrency scams are rising is that the landscape is prime for these illicit activities. There’s little regulation, and most crypto transactions are irreversible once they’ve been completed, so it’s difficult to get your crypto back once a scammer has taken it. Plus, crypto-related activities aren’t managed by a typical financial middleman, such as a bank or payment processor, so there’s much less oversight. In addition, the same coins are used across the globe. Since that makes international transactions simpler, it also makes cryptocurrency an attractive target for overseas scammers.
Common Cryptocurrency Scams
A handful of cryptocurrency scams are popular with scammers. While they all typically fall into one of the three categories above, they each have unique features that distinguish them.
Pump and Dump
With a pump and dump, scammers send out a deluge of false information about a coin they hold, aiming to increase interest and boost prices through rising purchases. Once the coin reaches a high enough value, the scammer sells its holdings. Meanwhile, users who bought in are typically stuck with crypto that loses value because it wasn’t actually as strong as the (false) information made it seem.
Also known as Ponzi schemes, rug pulls involve scammers tricking investors into supporting a non-existent or illegitimate project, company, or another potential investment. The scammer takes in the money investors pay towards the project — without any intention of following through on any promises they initially made. The investors are unknowingly backing something that’ll never come to fruition, making the investment a complete loss for them while the scammer makes off with their investments.
A type of “romance scam,” pig butchering lures in targets with promises of love, intimacy and riches. Usually, this type of scammer connects with marks on dating apps and starts building their soon-to-be victims’ interest and confidence over time.
Then, the scammer claims they have knowledge about a potential investment and instructs the target to send money to earn substantial profits in the future. However, there’s no legitimate investment. Instead, the scammers simply make off with the money.
Account hijacking involves taking over a legitimate account and using it to push a scam. The 2020 Twitter hack is a prime example of this activity; a scammer took over celebrity accounts to post messages relating to a Bitcoin scam. In some cases, scammers create fake accounts designed to resemble legitimate ones instead.
Fake Exchanges and Apps
Other popular sources of scams are fake crypto exchanges and apps. In some cases, these are designed to look like the originals. They trick users into utilizing the scammer’s service, which is secretly set up to create opportunities for theft. In similar practices, scammers pretend to offer a new service or rising one. Then, they charge fees or request private information during signup — details they can use to steal cryptocurrency from owners.
Phishing involves pretending to be a trusted organization or known individual in an attempt to acquire personal information from a target. For instance, a scammer may create emails masquerading as messages from a legitimate crypto exchange in hopes of securing a person’s login credentials.
5 Tips for Spotting Cryptocurrency Scams
Crypto scams are out there, and they’re often hidden well. Being aware of them — and putting the following tips into practice — can help you avoid falling for these scams.
1. Use Multi-Factor Authentication
Multi-factor authentication reduces the likelihood that a scammer can gain access to your online account even if they get ahold of your initial login credentials. Multi-factor authentication programs use a passcode delivered through a text message to prove your login attempt is legitimate, so they require more than just your account password. Unless the scammer compromises both parts of the authentication process, they can’t gain entry.
2. Avoid Upfront Investment or Fee Requests
Requests for an upfront investment in a cryptocurrency project or a statement that there’s a fee to join a new exchange are signs of potential scams. Most legitimate operations don’t require cash or crypto upfront.
3. Don’t Trust Online Pushes
Even if it involves a trusted online social media account, be wary of any uncharacteristic cryptocurrency-related claims or investment pushes. Scammers often bank on the fact that people react differently if information comes from an account they trust, so they may hack legitimate accounts to accomplish their goals.
4. Don’t Share Private Keys
Private keys function similar to PINs for debit cards or passwords for accounts. Without your private key, you can’t gain access to your crypto wallet. Since that’s the case, it’s vital to never share private keys with anyone, as doing so puts your wallet – and any assets within – at risk.
5. Never Click on a Link Without Doing Due Diligence
Links are inherently risky online. If you see any URLs – including those that seem to come from legitimate sources – never click without a bit of due diligence. Look at the URL to see if letters or numbers are swapped or altered. If the message appears to come from a platform or site you use, skip the link and go directly to the site using your typical approach instead.