5 Mistakes That Can Lead to Crypto Scams: How to Avoid Them
Cryptocurrency scams have been on the rise, with fraudsters leveraging the decentralised and often misunderstood nature of digital currencies to exploit unsuspecting investors. If you hold Bitcoin, you could be a prime target.
We outline the top five crypto scams you need to be aware of and provide actionable steps to protect yourself from falling victim to these schemes.
1. Ponzi Schemes
How It Works:
Ponzi schemes in the crypto world operate much like traditional Ponzi schemes. Fraudsters promise high returns on investment with little to no risk. They use funds from new investors to pay returns to earlier investors, creating the illusion of a profitable business. Eventually, when new investments slow down or stop, the scheme collapses, and most investors lose their money.
Example:
One notable example is BitConnect, which promised substantial returns through its lending program. Investors were lured by the promise of high daily returns, which were supposedly generated through trading bots and volatility software. However, the entire operation was a classic Ponzi scheme.
How to Avoid:
Research: Always research the company and its founders. Check for regulatory registrations and licences.
Red Flags: Any scheme that promises you “yield” over and above the general price increase of your bitcoin should immediately set off alarms.
Due Diligence: Ensure you understand how the investment generates returns. If it's unclear or overly complex, it's best to stay away.
2. Fake ICOs (Initial Coin Offerings)
How It Works:
Fake ICOs involve creating a bogus cryptocurrency and promoting it as the next big thing. Scammers create persuasive marketing materials, fake websites, and even forge endorsements from well-known figures to lure investors. Once they collect enough funds, they disappear, leaving investors with worthless tokens.
Example:
In 2017, Centra Tech raised over $25 million through an ICO, claiming partnerships with Visa and Mastercard, which were later found to be false. The founders were eventually arrested, but not before scamming thousands of investors. ICO are much rarer these days and are subject to a lot more regulatory scrutiny, but you should nonetheless remain cautious.
How to Avoid:
Verification: Verify the legitimacy of the ICO through reputable sources and cross-check the information.
Transparency: Look for transparency in the team behind the ICO, their credentials, and their roadmap.
Community Feedback: Engage with the crypto community and seek feedback about the ICO on forums and social media.
3. Phishing Scams
How It Works:
Phishing scams involve fraudsters posing as legitimate entities, such as cryptocurrency exchanges, wallet providers, or even well-known individuals. They send emails or messages containing links to fake websites that look identical to the legitimate ones. Once users enter their credentials, the scammers gain access to their accounts and steal their funds.
Example:
A common phishing tactic involves sending an email that appears to be from a reputable exchange, asking users to verify their account or reset their password. The provided link directs them to a fake site where their credentials are harvested. Read about a recent case in Canada here.
How to Avoid:
URL Check: Always check the URL of the website you're visiting. Look for slight misspellings or unusual domain extensions.
Two-Factor Authentication: Enable two-factor authentication (2FA) on all your crypto accounts. Ideally using an authenticator app, NOT your phone number as this could be SIM swapped.
Direct Access: Avoid clicking on links in emails. Instead, navigate to the website directly through your browser.
4. Pump and Dump Schemes
How It Works:
Pump and dump schemes involve artificially inflating the price of a cryptocurrency through false or misleading statements, only to sell off the holdings once the price has been pumped up, leading to a crash. This leaves late investors with significant losses.
Example:
These schemes are often orchestrated in group chats or social media platforms where a coordinated effort is made to buy a specific cryptocurrency, hyping it up to attract outside investors. A recent pump and dump was Pepe coin, whose price rose 21,000% in just a few days.
How to Avoid:
Market Research: Be sceptical of sudden price spikes, unsolicited investment advice and aggressive marketing campaigns.
Credibility Check: Investigate the source of the information and the fundamentals of the cryptocurrency being promoted. Most non-bitcoin tokens are essentially worthless and are centrally controlled, so if it’s not bitcoin proceed with extreme caution.
Track Record: Avoid putting all your funds into a coin that has no reliable track record.
5. Malware and Ransomware Attacks
How It Works:
Cybercriminals use malware to gain access to your computer or smartphone to steal private keys or install ransomware to lock your files until a Bitcoin ransom is paid. These attacks are often spread through malicious downloads, infected email attachments, or compromised websites.
Example:
CryptoLocker, a notorious ransomware, encrypted victims' files and demanded payment in Bitcoin for the decryption key. Many victims paid the ransom, but not all received their files back.
How to Avoid:
Security Software: Install and regularly update reliable antivirus and anti-malware software.
Safe Practices: Avoid downloading software or files from unknown sources. Be cautious with email attachments and links.
Backups: Regularly backup important files to an external drive or secure cloud service.
By understanding these common crypto scams and implementing robust security practices, you can significantly reduce the risk of losing your Bitcoin investments. Stay informed, vigilant, and sceptical of too-good-to-be-true offers, and always perform thorough due diligence before making any investment decisions.
To learn more about safe custody:
https://content.thebitcoinadviser.com/accesstribe