By Markus David
Director of Professional Services
Cryptocurrency scams are on the rise, utilizing various techniques such as rug pull scams, Ponzi schemes, and phishing scams. Lloyds Banking Group reported a 23% increase in cryptocurrency scams in the UK in 2023 compared to the same period in 2022.
But what are these scams and how can you avoid falling victim to them? Let us explore some of the most common cryptocurrency scams that you should be aware of and how to protect yourself from them.
Bitcoin investment schemes: These are fraudulent offers that promise high returns on investing in bitcoin or other cryptocurrencies. They often use fake testimonials, websites, and social media accounts to lure unsuspecting victims. Once the victims send their money, the scammers disappear with it. How can you spot them? Look for red flags such as unrealistic guarantees, pressure tactics, and lack of transparency. Always do your research and verify the legitimacy of any investment opportunity before sending any money.
Rug pull scams: Scams in which a new cryptocurrency project is launched with a lot of hype and marketing, attracting investors to buy its tokens. However, once the price reaches a certain level, the developers or promoters sell all their tokens and exit the project, leaving the investors with worthless coins. How can you avoid them? Be cautious of new and unproven projects that have no track record, no clear roadmap, or no audited code. Do not invest more than you can afford to lose and diversify your portfolio.
Romance scams: Attempts by a scammer to pretend to be interested in a romantic relationship with a victim, often through online dating platforms or social media. The scammer then asks the victim to send them money or cryptocurrency for various reasons, such as travel expenses, medical emergencies, or gifts. The scammer never meets the victim and cuts off contact once they get the money. How can you prevent them? Be wary of strangers who profess their love too quickly or ask for money or personal information. Never send money or cryptocurrency to someone you have not met in person or verified their identity.
Phishing scams: Emails or other messages sent by a scammer that look like it comes from a legitimate source, such as a bank, cryptocurrency exchange, wallet provider, or government agency. The scammer tries to trick the victim into clicking on a link or downloading an attachment that contains malware or leads to a fake website. The scammer then tries to steal the victim’s personal information, login credentials, or cryptocurrency. How can you protect yourself? Do not click on links or open attachments from unknown or suspicious sources. Check the sender’s email address and the website URL for any typos or discrepancies. Use antivirus software and update it regularly.
Man-in-the-middle attacks: Attacks in which a hacker intercepts the communication between a victim and a legitimate website or service, such as a cryptocurrency exchange or wallet provider. The hacker then alters the information or transactions that are sent or received by the victim, such as changing the recipient address or amount of cryptocurrency. How can you avoid them? Use secure connections or VPNs when accessing online services. Double-check the recipient address and amount of cryptocurrency before confirming any transaction. Use two-factor authentication (2FA) whenever possible.
Social media giveaway scams: Fake offers by scammers impersonating a famous person or organization on social media, in which they offer to give away free cryptocurrency to their followers. The scammer asks the followers to send a small amount of cryptocurrency to a specified address to verify their identity and receive their reward. However, the scammer never sends any cryptocurrency back and keeps the money that is sent by the followers. How can you spot them? Be skeptical of any offer that sounds too good to be true. Do not send any money or cryptocurrency to anyone who claims to give away free money or cryptocurrency. Verify the authenticity of the social media account by looking for verified badges, followers, and posts.
Ponzi schemes: A scammer promises high returns on an investment that does not exist or is not profitable. The scammer pays out some of the investors with the money that is collected from new investors, creating an illusion of legitimacy and profitability. However, the scheme collapses when the scammer runs out of money or when too many investors try to withdraw their funds. How can you avoid them? Be wary of any project or program that promises unrealistic returns with little or no risk. Do not join any scheme that requires you to recruit new members or pay fees upfront. Do your own research and check reviews and ratings from reputable sources.
Fake cryptocurrency exchanges: Be on the lookout for websites that look like they are those of legitimate cryptocurrency exchanges but are really run by scammers. They offer low fees, high liquidity, and attractive features to attract customers. However, once the customers deposit their money or cryptocurrency, they find out they cannot withdraw or trade it. The scammers then close down the website and disappear with the funds. How can you protect yourself? Do not use any exchange that is not regulated, licensed, or audited by a reputable authority. Check the reputation and reviews of the exchange from other users and experts. Use only trusted and secure payment methods and wallets.
Flash loan attacks: A hacker exploits a vulnerability in a decentralized finance (DeFi) protocol that allows users to borrow large amounts of cryptocurrency without collateral for a short period of time. The hacker then uses the borrowed funds to manipulate the prices of other cryptocurrencies or tokens on decentralized exchanges (DEXs) and profit from arbitrage opportunities. The hacker then repays the loan and keeps the profit. How can you avoid them? Be careful when using DeFi protocols that involve borrowing or lending cryptocurrency. Understand the risks and fees involved in using such protocols. Monitor the market movements and price fluctuations of the cryptocurrencies or tokens that you are trading or holding.
AI scams: Scams in which where a scammer uses artificial intelligence (AI) tools to create fake content, such as images, videos, audio, or text, that can deceive or influence victims. For example, a scammer can use deepfake technology to create a video of a famous person endorsing a cryptocurrency project or asking for donations. The scammer can also use natural language generation (NLG) to create convincing emails or messages that can persuade victims to send money or cryptocurrency.
How Can You Spot Them?
Crypto scams are becoming more common and sophisticated, but some signs can help you avoid falling victim to them. Here are some tips to spot a crypto scam:
- Be wary of promises of high returns or guaranteed profits. If it sounds too good to be true, it probably is.
- Do your research before investing in any project or platform. Check the credibility and reputation of the developers, the whitepaper, the roadmap, and the community feedback.
- Avoid clicking on links or attachments from unknown sources or unsolicited messages. They could lead you to phishing sites or malware that can steal your private keys or funds.
- Always use a secure and reputable wallet to store your crypto assets. Never share your private keys or seed phrases with anyone, even if they claim to be from a trusted source.
- Be careful of social media influencers or celebrities who endorse or promote certain projects or platforms. They could be paid or compromised by scammers to lure you into a trap.
How Can You Protect Against Them?
- Digital wallets should be protected through good security practices, strong passwords, secured connections or VPNs, and choosing safe storage.
- Cryptocurrency is not insured by the Federal Deposit Insurance Corporation (FDIC), so users should be careful about where they store their funds and how they access them.
- Reporting cryptocurrency scams is important to help authorities track down and stop scammers and warn other potential victims.
Cryptocurrency scams are becoming more sophisticated and prevalent as the popularity and adoption of cryptocurrency grows. Users should be aware of the common types of scams and how to avoid them. Users should also do their own research and due diligence before investing in any cryptocurrency project or program.
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