The modern world has emerged with new ways of representing assets and the use of cryptocurrencies is becoming integral to finance. As you know, cryptocurrencies are built on blockchain technology and, as a result, aren't reliant on any government or centralized body.
While the decentralized system has its advantages, the fact that it is not regulated brings about certain issues. There has been a surge in the rate of crypto scams.
Scammers stole a record USD$14 billion in crypto scams in 2021, according to Chainalysis, a blockchain data firm.
Crypto Scams: An Overview
The ideology behind cryptocurrencies dictates that cryptos are a better alternative to legacy finance.
The traditional system is criticized for its data silos, honeypots and dependence on government policies, including diplomatic decisions.
In the wake of realizing that people's finance shouldn't be at the behest of governments, cryptocurrency emerged as the solution.
With great power comes great responsibility
As much as cryptocurrencies ruptured the traditional ways of transferring money, blockchain technology, a distributed public ledger on which the cryptocurrencies are built, has been subject to gross porosity by scammers who've been steadily devising new ways of stealing.
And people have fallen victim to crypto scams via many fraud channels.
Twitter is the melting pot for all things crypto
…And that includes crypto scams. Some of these fraudulent activities have been motivated by the increase in people's interest in cryptocurrencies.
Influencers on social media understandably contributed to this rise, one of which is Elon Musk, the famous business magnate and the CEO of SpaceX.
He touted Dogecoin as the 'people's coin' in 2021, and the cryptocurrency bulled its way to a 4000% increase in value.
Unfortunately, a wave of influencer endorsement scams ensued.
Most common crypto scams in 2022
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Influencer Endorsements
Scammers use the power of social media and the gullibility of some users to make a bank. They pose as successful business people to influence social media users to invest in a coordinated virtual crypto Ponzi scheme.
Another common one is to trick people into sending money into a “smart contract” that will send back a larger amount. - These are always scams.
Sometimes it goes even further than impersonation, though. That happened on the 15th of July, 2020, when a cyber criminal compromised about 130 high-profile Twitter accounts to promote a bitcoin scam.
Verify the identity of social media influencer accounts before investing in any business with them.
If they are someone well known, they will have the blue badge next to their user name, like so:
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Phishing
Phishing has been one of the most frequently used fraud channels, especially since Ledger’s e-mail database got hacked.
Phishing is a type of cybercrime where prospective victims get contacted by e-mail. Victims receive emails that look like they're an update note from your crypto exchange or crypto wallet.
These mails have links embedded in them which, if clicked, could result in the scammer obtaining your exchange login or your wallet seed phrase. Once you type in your data into the malicious form, your wallets get drained.
To avoid this, make sure you:
- Always download your updates directly from the wallet interface (Ledger Live, Trezor Suite, Exodus app) - never ever from an email.
- Use multi-factor authentication on all exchanges.
- Use wallet whitelisting on all exchanges.
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Crypto Investment Scams
Investment or business opportunity scams are common in crypto. You will find new crypto tokens and investors parading themselves as the new overlord with great potential. They feed on the 'fear of missing out syndrome of crypto investors.
Since the rise of Bitcoin, millions of investors have been looking for the next big cryptocurrency to invest in and make life-changing money.
The consequence is that some will invest in tokens that sound too good to be true, only to realize later that they've been scammed.
Identifying fundamental value of cryptos can help improve your judgement, but practically, the road of risk management tends to have better results in crypto.
One example from history of crypto: Ethereum started out by sending unsolicited messages to r/bitcoin subscribers and presented itself very much like a typical scam.
- The safe approach would have been to avoid ETH.
- The risk-aware approach would have you invest only a tiny amount of money into Ethereum’s ICO.
If you consider your risks before your potential profits, then the riskier the venture sounds, the smaller amount you invest. You may still lose, but the loss will not be devastating.
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Sham Websites
The first thing you should consider as a trader is the safety of the assets you deposit into custodial exchanges. A sad amount of crypto trading takes place on websites that are very transparently dodgy.
- Does your new crypto project promise unrealistic returns?
- Does it project its coins as mooning (rising) when they're not even trading?
- Is there an 'About Us' page for information about the company on the website?
- Can you prove the identity of anyone involved in the company?
If you have unsatisfactory responses to these questions, you should not deposit money into that platform.
Bottom line
You can identify and avoid crypto trading scams if you plan to start trading or already are trading crypto.
It's crucial to be vigilant as a crypto trader because if you fall victim to a crypto trading scam, getting justice in an unregulated industry is a castle-in-the-air dream.