What are Common Crypto Scams? How to Secure Your Crypto Investment

Haseeb Awan
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December 23, 2022
Modified On
November 23, 2023

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A recent study has revealed that 2021 marked a high point in cryptocurrency-related fraud, with perpetrators managing to steal an estimated $14 billion in digital currency.

As per the latest "2022 Crypto Crime Report" from the blockchain data company Chainalysis, the amount of money taken by criminals in 2020 was nearly double the total of $7.8 billion. The results of the report were made public on Thursday, January 6th.

Noting the growth of cryptocurrency engagement during the last twelve months, William E. Quigley, a significant investor, and co-founder of WAX blockchain stated that "Olympic-level scammers" have taken advantage of the new opportunities for illegal practices. At a panel discussion organized by Light Node Media last month, Quigley added that crypto would continue to draw in sophisticated fraudsters due to its high-tech attributes.

Recently, people were tricked by a "Squid Game" scam. Allegedly, a SQUID cryptocurrency token and an interactive internet game are part of the scam. The creators made off with over $3 million when the currency's worth rose dramatically.

Before You Invest in Crypto:

Professional advisors suggest limiting your cryptocurrency investments to 5% of your total portfolio is prudent. They also advise against investing more money than you can afford to lose should the market experience a crash. Furthermore, it is essential to keep crypto investments from taking precedence over other important financial objectives, such as setting up an emergency fund, paying off expensive loans, and investing in more traditional portfolios for retirement.

No matter what one's opinion may be, those who invest in cryptocurrency expose themselves to the danger of being taken advantage of or deceived. Therefore, if you've already put your money into crypto or are thinking of investing in Bitcoin or Ethereum, here are a few of the most frequent scams and warning signs to bear in mind.

What Are Some Common Cryptocurrency Scams?

In the US, the Federal Trade Commission (FTC) reported that, between October 2020 and March 2021, people lost approximately $80 million to cryptocurrency scams. That is a dramatic increase from the same period the year prior, in which there were 570 crypto-related frauds resulting in a loss of $7.5 million. As cryptocurrency-related scams become more common, it is essential to be aware of these warning signs:

Demanding Crypto-only Payments

According to experts, if a reputable source or store states that it only receives cryptocurrency like Bitcoin or Ethereum, it's likely a con. As digital coins are a burgeoning asset class, trustworthy organizations should accept traditional payment methods such as wire transfers, checks, credit/debit cards, and cash, not just cryptocurrencies.

When someone asks you to pay them with Bitcoin, they may be trying to benefit from its increasing worth. Blockchain does not have the same know-your-customer (KYC) protocols as banks so people can open wallets without valid proof of identity, social security number, address, or contact details. Blockchain is publicly accessible, and all transactions are permanent. However, it is still possible to transact anonymously. That makes it simple for someone to deceive you, take your money, and go.

Anonymous or Fake Identities

Jonathan Padilla, the former head of blockchain strategy of PayPal and CEO and co-founder at Snickerdoodle Labs, a firm based in California centered on blockchain data security, pointed out that the lack of KYC protocols on the blockchain is an obstacle to its general acceptance. He stated that, in a decentralized system, there are no measures to establish a trustworthy actor and who is not; consequently, it is the buyer's responsibility to be vigilant.

It is encouraging that blockchain can bring a new level of transparency: As the information on the blockchain is unchangeable, all transactions are open to the public. In June, when Colonial Pipeline paid the hackers 63.7 Bitcoin (worth around $2.3 million), U.S. Justice Department investigators could trace the dealings on blockchain and recover the ransom funds.

According to Padilla, due to the transparency of blockchain technology, hackers who used a hosted wallet to move Bitcoin around were uncovered within five days. Coders have created sophisticated software to trace and monitor the movements of digital assets such as crypto tokens, non-fungible tokens, and other blockchain-based assets. Yet, it will take time for law enforcement to become aware of and utilize these tools locally. Padilla points out a potential problem of bad actors using these digital assets to launder money, citing the example of cartel money from Colombia laundering through purchasing an NFT.

Large-scale financial crime is not widespread, but the tools and measures to combat it must keep pace with current trends. According to Padilla, technology is just about tracking money flows. However, it was not available six months ago when cryptocurrencies and non-fungible tokens (NFTs) started to surge. Newcomers to the crypto sphere suggest sticking with the more well-known Coinbase and Gemini to avoid potential risks associated with less recognized exchanges. Additionally, those just starting with crypto should focus on the two most significant digital assets, Bitcoin and Ethereum, as these have a more reliable history of increasing in value than recent alternative coins.

Bitcoin Investment Schemes

Fraudsters approach those interested in cryptocurrency investments, introducing themselves as experienced "investment managers." They falsely assert that they have made substantial profits from investing in bitcoin and guarantee the same outcomes to their victims. At the beginning of the scheme, the perpetrators request an initial payment. However, the crooks take the money and run rather than generate wealth. They may also ask for personal information, pretending that it is necessary to transfer or deposit money, allowing them to gain access to the victims' bitcoin.

A different kind of investment fraud consists of using fake celebrity endorsements. Fraudsters take legitimate pictures and insert them into false accounts, advertisements, or posts to make it appear that the famous person is advertising a substantial financial benefit from the investment. The sources for these assertions are valid, using renowned business names like ABC or CBS with professional-looking websites and logos. Despite this, the endorsement is not genuine.

Digital Collectibles and Games

We have witnessed the emergence of the "Squid Game" fraud, where cunning programmers can generate new games and entire imaginary universes on the blockchain. They can do it as quickly as the next popular Netflix series takes off.

A standard method to deceive new blockchain users is to urge them to buy a specific fresh token or coin for a game. If sufficient people boost the cost through supply and demand, it gives the initial swindlers a chance to liquidate all their possessions and hurry away, an operation known as a "rug pull."

Unlike bank accounts for officially regulated currency, there is no such thing as fraud protection or FDIC insurance on the blockchain. If your cash stoles on the blockchain, the only possible way to get it back is for the recipient to pay you back directly. On a decentralized exchange, that is highly unlikely. Even if mainstream crypto exchanges have better fraud security systems than lesser-known exchanges, there is still no assurance that investors to recoup stolen crypto.

Rug Pull Scams

Scammers who perpetrate rug pull scams inflate the value of a new venture, NFT, or cryptocurrency to get people to invest. When they receive the money, they abscond with it. The coding of these investments keeps people from selling the bitcoin they bought, leaving them with worthless assets.

A famous example of this scam is the Squid coin scam, called after a Netflix series. People who wanted to gain crypto had to play games to get tokens. The worth of the Squid token raised from a penny to 90 dollars per token.

In the end, trading stopped, and the money vanished. The token's value was zero, as buyers couldn't sell their tokens. The scammers made around 3 million dollars from the investors.

Rug pull scams are also prevalent for NFTs, one-of-a-kind digital items.

Cryptocurrency Investment Schemes

New digital currencies create constantly, and when new tokens introduce to the digital ledger system, it is called an initial coin offering (ICO). Unfortunately, ICOs also utilize to scam people. A company or individual might purport that there is a one-of-a-kind prospect to invest in a novel cryptocurrency with a guaranteed 1,000% return. They could then pressure someone into transferring a large amount of the new coins into a hacked digital wallet, or they may "pump and dump" by buying the cryptocurrency and then selling it once the cost rises exponentially.

Romance Scams

There is a high prevalence of crypto swindles in dating apps. The FTC reported that from October 2020 to March 2021, affectees paid one-fifth of the money lost from romance scams in cryptocurrency. This fraud often occurs in long-distance or virtual relationships, where one person pressures the other to buy a crypto asset that is a ploy for stealing money.

Phishing Scams

Since the inception of the internet, scams have been rampant. However, there are other implications with cryptocurrency. Much like a traditional phishing attack, malicious actors send emails with links to deceive people into revealing their private details, which comprise the crypto wallet key info in the case of blockchain wallets. A unique feature of blockchain's decentralized design is that one single entity cannot control the information; however, this may be a problem if a person needs to switch their key.

Man-in-the-middle Attack

When someone accesses their cryptocurrency account while they are in public, they are at risk of having their confidential information taken by a scammer. A thief can acquire passwords, wallet keys, and other details when a person is logged in through a "man-in-the-middle attack," where they intercept Wi-Fi signals from nearby trusted networks. It would be best to use a virtual private network (VPN), which will encrypt all data that is being sent, thus making it inaccessible to thieves.

Social Media Cryptocurrency Giveaway Scams

It is common to find deceptive posts on social networking sites that guarantee Bitcoin gifts. These scams also include bogus celebrity profiles that advertise the giveaway to entice people. When someone clicks on the giveaway, they send to a fraudulent page where they demand to conform to acquire the Bitcoin. The confirmation entails making a payment to validate the account is authentic. If someone falls for this trap, they can lose the payment they made, or even worse, they can click on a malicious link and have their personal information and cryptocurrency stolen.

Ponzi Schemes

Ponzi strategies finance elderly speculators utilizing the returns from new ones. To draw in new speculators, digital currency hoodlums will tempt them with Bitcoin. It's a plan that runs in circles, as there are no real ventures; it's about focusing on new financial specialists for money.

The essential impetus of a Ponzi plan is the assurance of immense benefits with negligible hazards. There are constant dangers related to these speculations and no ensured returns.

Fake Cryptocurrency Exchanges

Crooks could draw in investors with the pledge of beautiful digital currency exchange - maybe even some extra bitcoin. Nonetheless, there is no exchange, and the investor only acknowledges it's counterfeit after they lose their deposit. To avoid foreign exchange, stick to well-known crypto exchange markets - such as Coinbase, Crypto.com, and Cash App. Before inputting personal data, research and check industry websites for details regarding the exchange's reputation and legitimacy.

Employment Offers and Fraudulent Employees

Fraudsters will also pretend to be employment agents or job applicants to obtain access to digital currency accounts. They do this by offering a tempting job and requiring cryptocurrency as payment for job training.

Hiring remote employees has become a target for scams too. For example, North Korean IT professionals are taking advantage of remote job openings by submitting attractive resumes and claiming to be from the United States. The US Department of the Treasury has cautioned against this North Korean tactic of targeting companies dealing with cryptocurrency.

These IT freelancers request projects related to virtual currency and use access to the currency markets. They then hack into systems to acquire money or data for the Democratic People's Republic of Korea (DPRK). Additionally, these employees participate in other specialized IT tasks and utilize their knowledge to gain insider access that helps the DPRK in their unlawful cyberattacks.

How Investors Can Protect Their Crypto?

Despite the expertise and passion of cryptocurrency specialists, there are still many threats and challenges in the crypto realm. For example, blockchain investor Ian Balina experienced a substantial financial loss of $2.5 million when he exposed his wallet key details during a hack into his Evernote account. It shows the potential for misfortune and deception present with such an unsteady asset class, even for experienced enthusiasts.

Financial specialists suggest that most passive investors should have at most 5% of their crypto portfolios and never spend money intended for emergency funds or expensive debt on crypto. If you are ready to begin investing in crypto, here are some tips for preserving your wealth:

Cryptocurrency Red Flags

To begin with, you should be aware of a few specific warnings that are comparable to traditional money transfer scams and credit card deception:

  • Incorrect punctuation and obvious misspellings in electronic mails, on web-based media entries, and during any interaction
  • Vows to expand your cash
  • Authoritative commitments that bind you to possess digital currency without having the capacity to sell
  • Bogus superstars or cases to be a renowned person
  • Psychological control, such as blackmail or blackmail
  • Large web-based media digital money frameworks
  • Assurances of free cash
  • Foggy subtleties regarding where your cash is going

Know When to Use a Crypto Wallet

It is essential to shield your online wallets from cyber attackers, similar to how you would secure large sums of physical money by storing them in a secure place or a savings account that the FDIC insures.

Experts claim that if you own a few hundred dollars worth of cryptocurrency, it is alright to keep it on a commonly used exchange platform like Coinbase. On the other hand, if you have thousands of dollars worth of cryptocurrency, it would be more reasonable to use a wallet to provide extra protection.

Crypto wallets divide into two categories, known as "hot wallets" and "cold wallets." Hot wallets are hosted or stored on the web and are secure but are more prone to being hacked than cold storage, which is when you store cryptocurrency offline on a physical device. Cold storage can be associated with a safe and more secure, but if you forget your password or misplace the device, you can lose your funds forever.

Unlike funds held in financial institutions, FDIC insurance does not cover cryptocurrency in hot wallets. It is essential, then, to ensure that any platform or wallet where you store your crypto has strong security safeguards, such as:

  • Keeping a part of its investments in an offline storage facility.
  • Two-factor authentication
  • Individuals can purchase insurance plans to protect against robbery or cybercrime (not covered by the FDIC).

Keep Track of Your Wallet Keys

Mac Gardner, a certified financial planner from Florida and the founder of FinLit Tech, insists that you had provided one exclusive key to access your wallet. If it is stolen or lost, it will mean that you have lost the cryptocurrency altogether. He adds, "You must be mindful in protecting your wallet key - it is not like forgetting a username and password. Every code is particular, having a specific number of characters. It is an essential element of the virtual world; anyone could get in and take your stuff if it wasn't."

Report Fraud

You need to notify the following organizations if you suspect any fraud or suspicious activity involving cryptocurrency:

  • The United States SEC: sec.gov/tcr
  • The Commodity Futures Trading Commission (CFTC): CFTC.gov/complaint
  • The Federal Bureau of Investigation (FBI) if the fraud involves blackmail or extortion.
  • The FTC: ReportFraud.ftc.gov

It is also important to tell the crypto exchange that you used for the crypto transaction if you have any evidence of malicious behavior.

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Haseeb Awan
CEO, Efani Secure Mobile

I founded Efani after being Sim Swapped 4 times. I am an experienced CEO with a demonstrated history of working in the crypto and cybersecurity industry. I provide Secure Mobile Service for influential people to protect them against SIM Swaps, eavesdropping, location tracking, and other mobile security threats. I've been covered in New York Times, The Wall Street Journal, Mashable, Hulu, Nasdaq, Netflix, Techcrunch, Coindesk, etc. Contact me at 855-55-EFANI or haseebawan@efani.com for a confidential assessment to see if we're the right fit!

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