Common cryptocurrency scams and how to avoid them

Scammers are always looking for new ways to steal your money, and the massive growth of cryptocurrency in recent years has created plenty of opportunities for fraud. Cryptocurrency crime had a record-breaking year in 2021 – according to a report by blockchain data firm Chainalysis, fraudsters stole $14 billion of crypto that year. If you’re interested in crypto, it’s important to be aware of the risks. Read on to find out more about common crypto scams, how to spot them, and how to avoid them.

Cryptocurrency investment scams

There are many types of crypto scams. Some of the most common include:

Fake websites

Scammers sometimes create fake cryptocurrency trading platforms or fake versions of official crypto wallets to trick unsuspecting victims. These fake websites usually have similar but slightly different domain names from the sites they attempt to mimic. They look very similar to legitimate sites, making it difficult to tell the difference. Fake crypto sites often operate in one of two ways:

As phishing pages: All the details you enter, such as your crypto wallet's password and recovery phrase and other financial information, end up in the scammers' hands.

As straightforward theft: Initially, the site may allow you to withdraw a small amount of money. As your investments seem to perform well, you might invest more money in the site. However, when you subsequently want to withdraw your money, the site either shuts down or declines the request.

Phishing scams

Crypto phishing scams often target information relating to online wallets. Scammers target crypto wallet private keys, which are required to access funds within the wallet. Their method of working is similar to other phishing attempts and related to the fake websites described above. They send an email to lure recipients to a specially created website asking them to enter private key information. Once the hackers have acquired this information, they steal the cryptocurrency in those wallets.

Pump and dump schemes

This involves a particular coin or token being hyped by fraudsters through an email blast or social media such as Twitter, Facebook, or Telegram. Not wanting to miss out, traders rush to buy the coins, driving up the price. Having succeeded in inflating the price, the scammers then sell their holdings – which causes a crash as the asset's value sharply declines. This can happen within minutes.

Fake apps

Another common way scammers trick cryptocurrency investors is through fake apps available for download through Google Play and the Apple App Store. Although these fake apps are quickly found and removed, that doesn't mean the apps aren't impacting many bottom lines. Thousands of people have downloaded fake cryptocurrency apps.

Fake celebrity endorsements

Crypto scammers sometimes pose as or claim endorsements from celebrities, businesspeople, or influencers to capture the attention of potential targets. Sometimes, this involves selling phantom cryptocurrencies that don't exist to novice investors. These scams can be sophisticated, involving glossy websites and brochures that appear to show celebrity endorsements from household names such as Elon Musk.

Giveaway scams

This is where scammers promise to match or multiply the cryptocurrency sent to them in what is known as a giveaway scam. Clever messaging from what often looks like a valid social media account can create a sense of legitimacy and spark a sense of urgency. This supposed ‘once-in-a-lifetime’ opportunity can lead people to transfer funds quickly in the hope of an instant return.

Blackmail and extortion scams

Another method scammers use is blackmail. They send emails that claim to have a record of adult websites visited by the user and threaten to expose them unless they share private keys or send cryptocurrency to the scammer.

Cloud mining scams

Cloud mining refers to companies that allow you to rent mining hardware they operate in exchange for a fixed fee and a share of the revenue you will supposedly make. In theory, this allows people to mine remotely without buying expensive mining hardware. However, many cloud mining companies are scams or, at best, ineffective – in that you end up losing money or earning less than was implied.

Fraudulent initial coin offerings (ICOs)

An initial coin offering or ICO is a way for start-up crypto companies to raise money from future users. Typically, customers are promised a discount on the new crypto coins in exchange for sending active cryptocurrencies like bitcoin or another popular cryptocurrency. Several ICOs have turned out to be fraudulent, with criminals going to elaborate lengths to deceive investors, such as renting fake offices and creating high-end marketing materials.

How to spot cryptocurrency scams

So, how to spot a crypto scam? Warning signs to look out for include:

Promises of guaranteed returns: No financial investment can guarantee future returns because investments can go down as well as up. Any crypto offering that promises you will definitely make money is a red flag.

A poor or non-existent whitepaper: Every cryptocurrency should have a whitepaper since this is one of the most critical aspects of an initial coin offering. The whitepaper should explain how the cryptocurrency has been designed and how it will work. If the whitepaper doesn’t make sense – or worse, doesn’t exist – then tread carefully.

Excessive marketing: All businesses promote themselves. But one way that crypto fraudsters attract people is by investing in heavy marketing – online advertising, paid influencers, offline promotion, and so on. This is designed to reach as many people as possible in the shortest time possible – to raise money fast. If you feel that the marketing for a crypto offering seems heavy-handed or makes extravagant claims without backing them up, pause and do further research.

Unnamed team members: With most investment businesses, it should be possible to find out who the key people behind it are. Usually, this means easy-to-find biographies of the people who run the investment plus an active presence on social media. If you can’t find out who is running a cryptocurrency, be cautious.

Free money: Whether in cash or cryptocurrency, any investment opportunity promising free money is likely to be fake.