Cryptocurrency Scams

What is a cryptocurrency investment scam?

Cryptocurrency scams all have one thing in common – the promise of guaranteed returns and crypto riches if you hand over some of your money to the trickster. They are fraudulent schemes designed to deceive individuals into sending digital assets or money to scammers under the pretense of an investment opportunity. Red flags may include high guaranteed returns, pressure to buy in quickly, and lack of clear information or dubious white papers. The Federal Trade Commission (FTC) and the Securities and Exchange Commission (SEC) provide resources to help consumers identify such scams.

Cryptocurrency scammers employ a variety of sometimes-ingenious schemes to lure in their unsuspecting victims. Their key advantage is that even ‘legitimate’ crypto companies are often unregulated and based in sketchy tax havens, so crypto investors don’t always immediately view those factors as warning signs. Even the most famous cryptocurrency, Bitcoin, was invented by an anonymous person or persons. These days it is not unusual for crypto investors to entrust their money to projects controlled by completely anonymous creators.

But knowing the identity of the person behind an investment scheme is not always enough either. One of the most famous scams, the multi-billion-dollar OneCoin fraud, had a well-known founder in German-Bulgarian businesswoman Ruja Ignatova, who even has a doctorate in law. She is still on the run, whereabouts unknown, but was seen as a Crypto genius. That is why it is so important to fully understand the nature of the venture you’re handing your money over to.

The most common cryptocurrency scams

Romance scams

In “romance scams”, fraudsters use dating apps to build trust with a victim, then propose a lucrative investment opportunity in cryptocurrency. The victim is often persuaded to provide sensitive information, including private keys to their digital wallets, leading to loss of their digital assets. The FTC has warned against such scams as they’ve become increasingly prevalent.

Bogus investment companies

Fraudsters sometimes set up websites offering fake investing services, where you deposit crypto assets and so-called “investment managers” will take care of your investment. Mirror Trading International was a very plausible-looking investment company, as you can see from their website screenshots. They were tapping into the growing demand for mirror trading. MTI promised to use algorithms to build profits quickly. Scammers like to use this ruse because it sounds clever. It’s also impossible to verify one way or the other, unless you have access to the source code of the ‘algorithm’. Of course you never do.

The South African CEO disappeared in December 2020 and it’s estimated by leading cryptocurrency research analysts Chainalysis that 588 million US dollars have vanished. The South African financial regulator first warned the public in August 2020 not to invest in MTI. Despite the warning, the number of investors rocketed from 60,000 to 280,000 before the site was shut down.

Bogus investment companies often accept a small initial upfront investment, then phone or send a text message to their ‘client’ to tell them the investment has performed incredibly well, but that the client needs to send more money in order to ‘release the profit’ back to their own bank account. It is at this point that many victims start to see red flags. But the company representatives can be very persuasive and very persistent, all the time dangling an enormous – but fictitious – ‘profit’ in front of the client.

Fake celebrity endorsements

Many of us have received emails claiming that some celebrity is ‘making a fortune’ by investing in a Bitcoin-themed investment. Inevitably, if you click on the links in the email, you’ll go through to a scam investment website similar to the ones I described in the previous section.

Usually, the celebrity in question is not involved at all! And some of them are very angry about it. Martin Lewis, the British money-saving expert, is probably the most prominent of these. All of Martin’s efforts to warn people apparently have not deterred the scammers, who still send out millions of these emails every day.

Fake social media celebrity accounts

Copycat accounts are the scourge of Twitter. They usually pretend to be a celebrity and promise to ‘double your money’ if you simply send the tweeter some Bitcoin.

This scam can be incredibly convincing, as it often comes from what looks like a genuine Twitter account, complete with blue tick to show the account has been verified by Twitter. The scammer simply hacks into or buys a verified Twitter account and then changes the name and photo to match a famous investor or celebrity.

Many people have lost their life savings by trusting scammers who they believed to be Elon Musk.

Scam coins

Sometimes new cryptocurrencies are invented to lure people into fake investments. These ‘cryptos’ may or may not have actual computer code written to make them a real cryptocurrency, but the result is the same and is known as a ‘rug pull’. This is a cryptocurrency scam project that raises funds with an initial coin offering, before the hackers abandon the project and run away with the money they have raised. This same approach can be taken using non-fungible tokens, or NFTs.

In an industry where some of the biggest profits are made by investing early in tiny new projects founded by anonymous shadowy figures, it is all too easy to suck investors into rug-pull scams. Sometimes the ‘coin’ is a straight-forward ponzi scheme, a fraud set up to enrich the founders at the expense of its members. The implosion of Bitconnect in 2018 cost investors billions. One such investor, who became famous for his enthusiasm at Bitconnect’s peak, was Carlos Matos, shown below screaming with excitement at a huge audience in Thailand back in 2017. Three years later, The US financial regulator, the SEC, brought charges against the Bitconnect founders.

Cryptocurrency phishing scams

Thieves design phishing emails and messages to look like communications sent by a cryptocurrency platform you have a genuine account with. They will usually tell you to click a link in order to access your crypto account. The link will then go through to a fraudulent website with all the same graphics and branding as the real crypto platform, so it will often look quite genuine.

Typically it will ask you to input your account name, password and other security details. Of course the scammers will then be able to use these to access your account and possibly to transfer your funds to themselves.

Coinbase users are sometimes victims of phishing scams. The fraudsters choose Coinbase because it is the most well-known crypto platform in the world.

Always think carefully before clicking!

Why cryptocurrency scams can be difficult to identify

Cryptocurrencies typically operate so far outside of a government regulatory umbrella that it can be very difficult to tell what is legitimate and what is not. A scammer may create a website in the morning, fully code a cryptocurrency and release it onto the market by lunchtime, and it can be worth millions by dinner time. The biggest winners are usually those who get in super-early. Fortunes are sometimes made overnight.

For example, meme cryptocurrency Shiba Inu, which is nothing more than a simple payment mechanism based around the cartoon image of a dog, became worth tens of billions of dollars in 2021. One investor put in $8,000 which then became worth $5.7 billion! With fortunes like this appearing in the international press, many investors want to rush in. It is crucial to take a breath and carry out some due diligence on the project. Remember, for every overnight billionaire, there are thousands of people losing their life savings to cryptocurrency scams, extortion and crypto fraud. Sadly, their stories rarely make the international press.

Establish whether your cryptocurrency holdings are safe

What checks have you performed?

When you visit your cryptocurrency platform or private Crypto wallet, you need to ensure you are not visiting a spoof site. Do not click on a link in an email or message. Instead, type out the website address and make sure you can see the padlock symbol on the left.

Highlight what you can do to protect yourself

If you are accessing your account or wallet through an app, make sure it is a genuine app. Check the app store and ensure that many thousands or millions of other users also downloaded that app. Only download your crypto apps from the Apple App Store or from the Google Play Store.

What can I do if I’ve been scammed?

The first thing to do is to see if you can get your money back! If you paid the scammer using a credit card, contact your card company and tell them you have been scammed. You may be able to claim back the money you lost.

If you paid using a bank transfer, then contact your bank’s security team and explain the situation. If you get no joy from them, it is time to contact your country’s financial regulator. They may be able to help you get compensation and they will also hopefully publish a warning about the scam to deter other investors.

My top 5 tips: How to avoid cryptocurrency scams

1. Beware of handing over your money to any person or company to invest in Crypto for you. The exceptions are well-known regulated financial companies and banks. You should at least check the person/company is licensed by their country’s financial regulator. Do not just take their word for it!
2. If you ignore my advice in point 1, then scrutinise the company’s claims. Any ‘guarantee’ of regular x% per month profits should immediately ring alarm bells for you. Crypto markets are volatile and uncertain. Profits are impossible to guarantee in advance, future returns are always fraught with risk and uncertainty.
3. Any project or company that employs multi-level marketing strategies, paying existing members to recruit new members, must be viewed with suspicion. It may be a pyramid scheme. Legitimate businesses often use these tactics too, but it can be a warning sign.
4. Most legitimate cryptocurrencies are openly traded on large exchanges that resemble stock exchanges. Thousands or even millions of people buy and sell those cryptos. If the company offering the crypto will only allow you to trade through their own private ‘exchange’ that should ring alarm bells too. It could mean they are pocketing your money and will never return it.
5. It’s worth stressing again our earlier point about phishing emails and messages. Never click on a link unless you are absolutely certain it came from your crypto platform or exchange.

Which cryptocurrencies are the most reliable and why?

Simple. It is the biggest ones, particularly Bitcoin and Ethereum. Their networks are considered very secure, so if you keep your cryptocurrency holdings in a reputable private digital wallet, and keep the passwords safe, it is very unlikely your crypto will be stolen. Investors consider many other major cryptocurrencies to be pretty safe too.

The one glaring exception is Tether, which is very different from most other big cryptos. Tether is a ‘stablecoin’, linked to the US dollar, whereby 1 Tether = 1 US dollar in value. Tether’s management supposedly have one dollar available for every Tether unit in existence and so if everybody decided to cash in their Tethers for dollars, the company would give them all back their dollars. The only problem is… they may not actually have enough dollars to pay everybody back! U.S. regulators have fined and criticised the company for lack of transparency. So if you keep any of your money in Tether currency, keep one eye on the exit at all times. You never know if or when the currency may suddenly collapse and become worth a lot less or even nothing at all.

After that miserable warning, let’s just remember that most major cryptocurrencies are wonderfully secure and very difficult to steal. The problem is not usually with the cryptocurrencies themselves but with the wallets, platforms and cryptocurrency exchanges built around them.

Who polices the cryptocurrency world?

The short answer is… nobody! Yes, people do not call it the Wild West for nothing. There is no overriding authority and quite often there’s nobody to hold your hand if you get scammed.

Every country has its own financial regulator and they all have different attitudes and approaches to cryptocurrency. For instance, in the UK people look to the Financial Conduct Authority, but actually they have no jurisdiction to regulate cryptocurrency at all! They encourage crypto companies to register in the UK, but that is a different thing to properly regulating the operations of these companies. What the FCA mostly does is warn about the dangers of investing in cryptocurrency.

In the United States, regulators and politicians are starting to take a more proactive approach. They still like to warn people about investing in crypto but they are also trying to figure out regulation. We are likely to see a lot of new rules from the SEC and the CFTC regulators in future.

Which cryptocurrency trading platform offers the safest wallet?

In my opinion the safest wallet offered by a platform has to be Coinbase’s wallet. Coinbase is an American company and it went public on the Nasdaq stock exchange in 2021. Because of this, it has a greater level of outside scrutiny than any other crypto exchange. It is still a corporation with employees and so it’s vulnerable to insider thefts.

That means its wallet isn’t perfectly secure. But the small amount of U.S. regulation provides a degree of reassurance.So-called ‘cold wallets’ stored on hardware devices not connected to the internet are the safest wallets of all. However, most crypto traders find that level of security a little too inconvenient.

Conclusion

The golden rule for avoiding cryptocurrency scams is simple:

“If it seems too good to be true, it probably is”.

Put your sceptical hat on whenever you watch or read anything to do with crypto investing. Even when they aren’t blatant cryptocurrency scams,  many projects offer little value and exist purely to separate you from your money.

The trouble is it’s the sketchy little projects that often offer the greatest potential profits, so a lot of people find themselves sucked into rug-pulls and other scams. There is gold in them there hills, but do your utmost to ensure what you are digging up is not just fool’s gold but the real thing.

Frequently Asked Questions

Is cryptocurrency trading legal?

Cryptocurrency trading is not legal is every country. China is the most high-profile example of a country that has made it illegal. Some major crypto exchanges have limited Chinese crypto traders to selling only.

How do crypto scams affect the cryptocurrency ecosphere?

Cryptocurrency scams contribute to an overall atmosphere of suspicion with institutional traders. This makes them reluctant to invest. Many criminals swirl around the crypto world, which makes the whole industry look grubby. That’s a shame, because most people in the crypto industry are simply busy trying to build useful apps.

How can I protect myself from cryptocurrency scams?

To protect yourself, stay informed about common scams and red flags. Always research an investment opportunity thoroughly, scrutinize white papers for ICOs, and confirm wallet addresses before transferring any digital assets. Keep your private keys and sensitive information secure. Never invest more than you can afford to lose. And remember, if an investment sounds too good to be true, it probably is.

What are the biggest four common cryptocurrency scams?

The four most common cryptocurrency scams include Initial Coin Offering (ICO) scams, pump-and-dump schemes, giveaway scams, and romance scams.

Is cryptocurrency safe to invest in?

‘Safe’ is never a word I’d use for crypto investing. It is a high-risk investment asset class. Most crypto prices buck up and down wildly. If you can learn how to tame that wild animal, the rewards can be tremendous.