A crypto scam is a fraudulent scheme that uses cryptocurrency to trick victims out of their money. Crypto scams are often very sophisticated and can be difficult to spot. However, some common red flags can help you identify a crypto scam.
It is important to protect yourself against the risks of crypto scams before you invest in cryptocurrency. By being aware of the red flags, you can help reduce your chances of becoming a victim of a crypto scam.
In this blog, we’ll be going in-depth into the 5 most popular types of crypto scams and how we can avoid them.
5 of the most malicious crypto scam types
Crypto scams come in many forms, but 5 of the most common include:
Ponzi schemes
A Ponzi scheme is a type of investment fraud where investors are promised high returns with little to no risk. However, the returns are actually paid out from the money of new investors, rather than from any legitimate business activity. This means that the scheme is only sustainable as long as new investors are coming in. Once the flow of new investors dries up, the scheme collapses and the investors lose their money.
Ponzi schemes are named after Charles Ponzi, who is believed to be the inventor of this type of fraud. In the 1920s, Ponzi promised investors a 50% return on their investment in just a few months. He claimed that he was making money by buying and selling international postal reply coupons, but in reality, he was simply paying out old investors with the money from new investors.
As dangerous as it is, you can still spot some red flags that can help you recognize the fraud in its early state:
- Promises of high returns. Ponzi schemes typically promise high returns, often in the form of weekly or monthly payouts. This is because they need to keep paying off early investors with the money from new investors.
- Lack of transparency. Ponzi schemes often lack transparency about their operations. They may not have a whitepaper or a website that provides detailed information about the project.
- Unregistered or unlicensed. Ponzi schemes are often unregistered or unlicensed. This means that they are not subject to the same regulations as legitimate investments.
- Unrealistic claims. Ponzi schemes often make unrealistic claims about their potential. They may claim to be the next big thing in cryptocurrency or to have a revolutionary new technology.
- Pressure to invest. Ponzi schemes often pressure investors to invest quickly. They may offer special incentives for early investors or claim that the opportunity is limited.
- No real product or service. Ponzi schemes often do not have a real product or service. They may claim to be developing a new cryptocurrency or platform, but they may not have any actual code or development.
- Untraceable founders. The founders of Ponzi schemes are often difficult to track down. They may use fake names or have no online presence.
Rug pull
Rug pull is a type of exit scam. An exit scam is a fraudulent scheme in which the creators of a cryptocurrency project abandon the project and take off with the investors’ money. Rug pulls are often well-orchestrated, with the developers creating a legitimate-looking website, social media presence, and white paper. They may even promote the project on cryptocurrency forums and social media.
Once they have attracted enough investors, the developers will pull the rug out from under them by either shutting down the project or simply disappearing with the investors’ money. This type of scam is often very difficult to track down, as the developers often use fake names and identities.
The term “rug pull” is specifically used to describe a type of exit scam in which the developers of a cryptocurrency project abandon the project after the price of the token has been artificially inflated. This is done by selling all of their tokens at once, which causes the price to crash and the investors to lose their money.
Rug pull scams are a common occurrence in the cryptocurrency space. In fact, a study by Chainalysis found that cryptocurrency scams in 2021 stole $7.8 billion, with rug pulls accounting for $2.8 billion.
Typical signs of a rug pull scam:
- A new project with no track record: Rug pull scammers often are new projects that have not yet been vetted by the community. These projects may have a slick website and social media presence, but they may lack any real substance.
- Anonymous developers: Scammers often use fake names and identities to hide their tracks. If the developers of a project are anonymous or use fake names, it is a red flag.
- Unrealistic returns: Scammers often promise high returns on investment to lure victims in. If a project promises to make you rich overnight, it is likely a scam.
- Heavy social media promotion: Rug pull scams are often promoted heavily on social media. This is because scammers want to create a sense of excitement and FOMO (fear of missing out) around the project.
- Lack of transparency: Scammers often avoid answering questions about the project or providing details about the team. If a project is not transparent, it is a red flag.
- Artificially inflated price: Scammers often inflate the price of their token artificially to make it seem more attractive to investors. If the price of a token seems too good to be true, it probably is.
- Low liquidity: Rug pull scams often have low liquidity, which means that it is difficult to sell the token. This makes it difficult for investors to get their money out of the project.
Pump-and-dump schemes
A pump-and-dump scheme is a type of investment fraud where a group of people artificially inflate the price of a cryptocurrency in order to sell it at a profit. The scheme works by the group first buying a large amount of the cryptocurrency, then promoting it heavily on social media and other channels. This creates a false sense of demand for the cryptocurrency, which drives up the price. Once the price has been inflated, the group sells its holdings, making a profit at the expense of other investors.
Pump-and-dump schemes are illegal in most jurisdictions. However, they continue to be popular in the cryptocurrency space because they can be very lucrative for scammers. In some cases, pump-and-dump schemes in crypto have resulted in billions of dollars in losses for investors.
Here are some of the key characteristics of a pump-and-dump scheme in crypto:
- Sudden and significant price spikes. A sudden and large increase in the price of a cryptocurrency is often a sign that a pump-and-dump scheme is underway. This is because the pumpers will buy up a large amount of the cryptocurrency and then start promoting it to others, causing the price to rise.
- High trading volume. Another sign of a pump-and-dump scheme is high trading volume. This is because the pumpers will need to sell their holdings at a profit, which will create a lot of trading activity.
- Hype and promotion. Pump-and-dump schemes are often accompanied by a lot of hype and promotion. This is because the pumpers need to convince others to buy the cryptocurrency, so they will spread positive news and rumors about it.
- Lack of fundamental value. Pump-and-dump schemes often target cryptocurrencies that have no real fundamental value. This means that the cryptocurrency does not have any underlying assets or businesses to support its price.
- Lack of transparency. Pump-and-dump schemes often involve a lack of transparency. This means that the pumpers will not disclose their identities or their intentions.
Phishing attacks
Cryptocurrency phishing attacks are a type of social engineering attack where the attacker sends a fraudulent message that appears to be from a legitimate cryptocurrency source, such as a crypto exchange or wallet provider. The goal of the message is to trick the recipient into clicking on a malicious link or providing sensitive information, such as their crypto wallet address or private keys.
Cryptocurrency phishing attacks are a common type of cybercrime, and they can be very effective. There are many different ways that cryptocurrency phishing attacks can be carried out. Here are some of the most common methods:
- Email phishing: Attackers send emails that appear to be from legitimate sources, such as cryptocurrency exchanges or wallet providers. The emails often contain links that take victims to fake websites that look like the real ones. Once victims enter their cryptocurrency wallet addresses or private keys on fake websites, the attackers can steal them.
- Text message phishing: Attackers send text messages that appear to be from legitimate sources, such as cryptocurrency exchanges or wallet providers. Text messages often contain links that work just like email phishing links.
- Social media phishing: Attackers create fake social media accounts that look like the real accounts of cryptocurrency exchanges or wallet providers. They then send messages to people who follow the real accounts, asking them to click on malicious links or provide sensitive information.
Here are some signs that may help you be aware of phishing attacks in crypto:
- Emails or messages from unknown senders. Be suspicious of emails or messages from unknown senders, or from senders who appear to be from legitimate companies or organizations.
- Malicious links or attachments. Don’t click on links or open attachments in emails or messages from unknown senders.
- Poor grammar or spelling. Phishing emails or messages often contain poor grammar or spelling errors.
- Urgent requests. Be wary of emails or messages with urgent requests for information.
- Requests for personal information. Never give out personal information, such as your cryptocurrency wallet addresses, private keys, or passwords, to anyone, even if they claim to be from a legitimate company or organization.
Fake ICOs
An initial coin offering (ICO) is a type of crowdfunding that uses cryptocurrency. It is a way for startups to raise money by selling tokens to the public. These tokens can be used to access the startup’s product or service, or they can be traded on cryptocurrency exchanges.
ICOs have become increasingly popular in recent years, with some raising hundreds of millions of dollars. However, there have also been several ICO scams, so investors should be careful before investing in any ICO.
In some cases, the creators of the ICO may actually create a product or service, but they may not be able to deliver on their promises. For example, they may not be able to build the product as they have promised, or they may not be able to attract enough users. In these cases, investors may still lose money, even if the project is not a complete scam.
Here are some red flags that may indicate that an ICO is a scam:
- Lack of transparency. Legitimate ICOs will provide detailed information about their team, project, and tokenomics. If you can’t find this information, or if it’s vague or misleading, it’s a red flag.
- Unrealistic promises. If an ICO is promising high returns with little or no risk, it’s probably a scam. Legitimate ICOs will be more realistic about their potential returns.
- Untraceable team. If you can’t find any information about the team behind an ICO, or if their identities are hidden, it’s a major red flag.
- Overly aggressive marketing. Scammers often use aggressive marketing tactics to pressure investors into buying into their ICOs. If you’re being bombarded with emails or social media messages about an ICO, it’s best to be wary.
- Technical problems. If the website for an ICO is poorly designed or has technical problems, it’s a sign that the project may not be legitimate.
- No regulatory approval. In many jurisdictions, ICOs are subject to regulatory oversight. If an ICO is not registered with any regulators, it’s a red flag.
Why crypto scams are the most dangerous.
What makes them so fatal?
Scams appear everywhere and in all fields, not only in crypto, however, these types of fraud often leave behind serious damages in the world of crypto. The reasons for that are:
- Irreversible transactions: Once you send cryptocurrency to someone, it is very difficult to get it back. This is because cryptocurrency transactions are recorded on a public blockchain, and once a transaction is confirmed, it cannot be reversed.
- Anonymous user: It is difficult to track down the people who are behind crypto scams. This is because cryptocurrency transactions are anonymous, and it is difficult to identify the people who are sending and receiving the cryptocurrency.
- Volatile prices: The price of cryptocurrency can fluctuate wildly. This means that transactions in cryptocurrency are often worth hundreds of thousands of dollars, so each of these scams often leaves losses of up to millions of dollars.
- The market is still young: Cryptocurrency is still a fairly new technology, and there is a lot of uncertainty about it. This means that newcomers are the delicious prey of scammers.
Why are they so manipulative?
Despite the many warnings and articles about crypto scams, even experienced investors can still fall victim to them. Here are some reasons why:
- Scams are becoming more sophisticated: Scammers are constantly evolving their techniques to make their schemes more believable. They often create legitimate-looking websites, social media accounts, and white papers to make their scams seem more credible.
- Scams are well-promoted: Scammers often use famous influencers to promote their schemes. This can be very effective, as people are more likely to trust the recommendations of someone they admire.
- Greed is a powerful motivator: Scammers often prey on people’s greed by promising high profits. This can be very tempting, especially in a bull market.
- The change of heart: In some cases, the developers may start out with good intentions, but then they change their minds and decide to take the money and run. This can be very difficult for victims to predict or prevent.
How to Protect Yourself Against Crypto Scams
Cryptocurrency is a new and innovative technology, but it has also attracted its fair share of scammers.
There are a number of things that you can do to protect yourself against crypto scams:
- Be skeptical of promises of high profits: If something seems too good to be true, it probably is. Scammers often promise high returns on investment to lure victims in.
- Don’t trust influencers: Just because someone is famous doesn’t mean they’re trustworthy. Some influencers have been paid to promote crypto scams.
- Do your research carefully: Before you invest in any cryptocurrency, make sure you understand what it is and how it works. You should also research the company or organization that is offering the investment.
- Don’t share your private keys: Your private keys are the keys to your cryptocurrency wallet. If you share them with someone, they will be able to access your funds.
- Use a reputable crypto exchange: When you’re buying or selling cryptocurrency, use a reputable exchange. These exchanges have security measures in place to protect your funds.
- Beware of suspicious links: If you receive a link in an email or text message, be careful before you click on it. Scammers often use links to redirect you to fake websites that look like legitimate crypto websites.
- Keep your software up to date: Make sure you keep your cryptocurrency software up to date. This will help to protect you from security vulnerabilities.
Here are some additional tips that might come in handy:
- Use a strong password for your cryptocurrency wallet.
- Enable two-factor authentication (2FA) for your cryptocurrency wallet.
- Store your cryptocurrency in a cold wallet. A cold wallet is a physical device that stores your cryptocurrency offline.
- Be careful what information you share online. Scammers can use your personal information to target you with scams.
Conclusion
Crypto scams can be considered one of the most dangerous forms of fraud with losses that can reach billions of dollars. In this blog post, we learned about the 5 most common types of crypto scams, why crypto scams are so dangerous, and how to protect yourself from these crypto scams.
We hope that through this article, you were able to distinguish some of the most common crypto scams and their signs so that you can protect yourself and the people you care about. beware of these billion-dollar frauds.
In addition, we also have other articles that provide interesting knowledge and information about the cryptocurrency world such as the 5 most popular token standards, opBNB, and which stablecoins are for you.
