The cryptocurrency sector has grown at exponential rates over the past few years. The value of Bitcoin alone increased to over $50,000 in 2021 as more people poured cash into the markets. Unfortunately, the number of scams in the industry has also increased.
Interested in cryptocurrency? Before you take the plunge, you should be aware of the different types of cryptocurrency scams and frauds taking place.
An Overview of Cryptocurrency Scams
The abstract nature of cryptocurrencies and the technology under the hood make it easier for scammers to successfully execute their fraudulent schemes in the sector. Often, cryptocurrency scammers combine marketing jargon with false claims about cryptocurrency technology to convince unsuspecting victims of the legitimacy of their schemes.
The huge potential of cryptocurrency for scams has become increasingly apparent. In 2019 alone, over $4 billion was lost through cryptocurrency scams.
Scammers that are more technically inclined than others use hacking techniques and social engineering to advance their cryptocurrency schemes. While blockchain networks and the encryption techniques used to secure them are reliable, many victims of scams fail to recognize the need to watch out for effective tricks such as email phishing.
Here are cryptocurrency scams you need to know before buying bitcoin or any other cryptocurrency.
1. Initial Coin Offerings
An initial coin offering (ICO) is a fundraising exercise that uses smart contracts and cryptocurrency to automate payments between an organization and its stakeholders. ICOs are used by cryptocurrency companies to raise money from future users. While a lot of great companies have been built using ICOs, many of the fundraising exercises have turned out to be scams.
A study in 2018 found 80% of ICOs to be scams. In the earlier days of ICOs, a lot of projects spent months promoting their fundraising exercises. Different techniques were used, including the offer of bounties for guerilla marketing. Despite not having working products, many projects were able to raise funds before ceasing communication with their investors.
A lot of ICOs seemed to be operated by legitimate entrepreneurs with good track records. In many cases, it would later be found that the supposed “entrepreneurs” were actually faceless criminals using the identities of other people. Some projects go as far as getting the public support of notable names in the industry.
It is often difficult to distinguish between a legitimate ICO and a fake one. This is partly because of the fact that the majority of ICOs have been carried out online with almost no face-to-face interaction between the organization and stakeholders.
Even legitimate ICO projects lose the money of their funders as a result of hacking attacks on them. A study in 2018 found that $400 million out of $3.7 billion was stolen from ICO projects through hacks. Common methods such as phishing were used to trick legitimate ICO projects into releasing their funds.
2. Bitcoin Mining Scams
We’ve updated our Report on Security Breaches & Fraud Involving Crypto. Our review now includes data for all of 2020. There have been 124 security breach attacks & 23 fraudulent schemes, with approx. $7.8 billion of crypto stolen since 2011. More here: https://t.co/5l3CmsOhFj pic.twitter.com/notQbKlyDr
— Crystal Blockchain (@CrystalPlatform) January 13, 2021
Bitcoin mining is a process that uses computational power to securely add transactions to the blockchain ledger. Computers on the blockchain network solve complex mathematical problems that help to confirm transactions before adding them to the immutable ledger. Many other cryptocurrency projects also use similar mining techniques to secure their networks.
Over the years, the process has become much harder to carry out with just any device. Now, making a profit from Bitcoin mining operations requires more advanced hardware which is often more difficult to acquire and use for the average person. This makes a lot of people more willing to outsource cryptocurrency mining to others.
Many scammers have taken advantage of people’s willingness to employ cryptocurrency mining services. The operators of cryptocurrency mining scams try to convince their victims to invest in their mining pool so that they can gain significant returns. The scammers usually stop responding to the messages of their victims after they receive the funds.
The criminals behind Bitcoin mining schemes may also try to convince their victims to bring in new investors. These types of schemes usually involve money being taken away from new investors to pay earlier investors until the cycle of payments can no longer be sustained.
3. Cryptocurrency Giveaways Can Be Scams
From today, if I participate in #Airdrops, then selectively. My statistics for half a year. Of the hundreds of airdrops, a little more than a dozen paid off the promised tokens and only about 5 have real value.#cryptocurrency #scam
— Voland04 (@Voland04) February 16, 2019
Cryptocurrency giveaway scams involve the use of social engineering to convince investors to send their cryptocurrencies in order to receive a larger volume of tokens. Such scams can be quite convincing, especially when scammers impersonate celebrities to convince their victims.
Different types of social media sites have been used to carry out cryptocurrency giveaway scams in the past. Scammers added text to videos of technology leaders they uploaded on YouTube. The text convinces viewers to participate in fake cryptocurrency giveaways. Many people assume that the giveaways are legitimate because the videos have high-profile names of the technology industry in them.
Twitter accounts have also been used to steal money from people expecting giveaways of cryptocurrency. Criminals impersonate celebrities and high-profile figures of the technology industry to gain the trust of users on the platform. Giveaway posts are made from the scammer’s fake profile to their timeline and the posts of other Twitter users.
4. Fake Websites and Crypto Scams
Fake domains can be used to present web forms as though they belong to legitimate organizations in the cryptocurrency industry. Fake websites have been used to make fake wallets and cryptocurrency exchanges look legitimate.
Hackers are able to gain access to the data of cryptocurrency wallet users once they obtain their exchange and wallet information. The information obtained can be used to log into the personal accounts of victims.
Fake websites may also prompt the user to download software. A user, believing they are using a legitimate website, may download the software which has malicious code that steals information from their device.
5. Yield Farming Incentives
A smart scammer would wait as long as possible before running with the funds – letting the money pool increase in the meantime. Therefore those who stake first have a significant competitive advantage: they recoup their investment fast and get to play with free money.
— Alex Krüger (@krugermacro) September 2, 2020
Yield farming is a decentralized finance innovation that makes it possible to earn returns from staking cryptocurrencies. Yield farming software built on top of the Ethereum blockchain automates lending processes, allowing for people to earn interest from providing liquidity. Some yield farming projects also use Bitcoin.
There are many legitimate yield farming projects made by top developers in the decentralized finance ecosystem but there are also many crypto scammers who may simply copy the code of existing projects and add their malicious code in order to steal funds. Other scammers have gone as far as to pretend to be legitimate for long periods of time before pulling the rug from investors and fleeing with all the funds.
The faceless nature of the yield farming ecosystem makes it very difficult to ascertain whether a project is legitimate or not. Even where projects are legitimate, there is always a risk that the code of the project could have bugs that are exploited for profit.
In more recent times, concerns have grown that more scammers will create fake hacks so that they can shift the blame for the loss of money from themselves to an “unknown” criminal.
6. Email-Based Crypto Scams
It is no secret that online privacy is slowly becoming a thing of the past for most of us. Data leaks and privacy-averse user agreement policies have become so prevalent in recent years. This makes it much easier for scammers to obtain your contact details from the dark web or from legitimate services that you use.
With your contact details, a scammer can pretend to be a service you use and email you to request that you click a link in the email body. The email could contain a description of an issue requiring immediate attention. This is done to make the victim more willing to click on a malicious link or access a fake website where they may give away their details without realizing it.
Email scams can be very easy to fall for due to the fact that most people have a lot of trust for the services they use and would not usually expect an email from a familiar service to be malicious.
Staying Safe in the Crypto Wild West
While cryptocurrencies are changing the world in incredible ways, there are many people whose lives have been destroyed by scams in the sector. It is very important to always look out for red flags (both new and old) when using cryptocurrency platforms.
Cryptocurrency technology has automated many financial processes and put banking in the hands of the people. This can mean that you could be the weakest link in the cybersecurity chain and the target of a crypto scam. The technology and people behind the platforms you use should also be given a lot of consideration when deciding if you should use a cryptocurrency platform.
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