cryptocurrency scam

How Cryptocurrency Scams Work

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The findings of a 2022 crime report compiled by Chainalysis indicate that investors lost more than $14 billion worth of cryptocurrency in 2021. That’s almost double the amount that scammers stole in the year before.

No one ever believes they can fall for a scam—until they do. Fraudsters often aim to gain victims’ personal information by working various angles ranging from old-fashioned scamming techniques to employing new-age technology to swindle unsuspecting investors of their hard-earned assets.

What is a cryptocurrency scam, and what are some of the red flags you need to keep an eye out for? Here’s everything you need to know.

How Cryptocurrency Scams Work

A cryptocurrency scam can take many forms. Regardless of which route a scammer decides to take, most of them typically involve tricking you into parting with sensitive personal information related to your digital wallet. They then use this information to gain unauthorized access to your wallet and empty the cash, cryptocurrency, and crypto assets you’ve stored in it.

Crypto scams are a favorite for cybercriminals for several reasons. For starters, there’s the anonymity factor. Once they transfer your crypto assets, it is near-impossible to trace them to an individual.

There’s also the fact that crypto transactions cannot be reversed. The only way to get them back would be to ask the recipient for a refund, which, once again, would be impossible because you don’t know the scammer personally and the not-so-small issue of anonymity.

Finally, the lack of legal protection makes the crypto world a haven for criminal elements. If you get scammed, the chances of recovering your money are slim to none. You could pursue legal action against the exchange and digital wallet provider for a lapse in their security protocol.

This, however, is easier said than done since the burden of proof would rest on you proving that the theft of your crypto was the direct result of the provider in question.

Top 5 Crypto Scams to Keep an Eye Out For

Below is an overview of some of the most common scams plaguing the online world of cryptocurrency. If you look closely, you’ll realize that most of them are basically old-school scams with a crypto twist.

1. Fake E-Wallet

The internet is rife with hundreds of fake crypto wallet apps, which have led to the theft of assets worth millions of dollars. Hackers have painstakingly created numerous fake e-wallets designed to be identical replicas of the real ones, such as Trust Wallet, Bitcoin, imToken, MetaMast, and so forth.

Scammers employ a host of techniques to target unsuspecting victims, including:

  • Sending out emails and text messages containing malicious links that auto-download the fakes apps the moment the recipient clicks on them
  • Creating fake digital wallet websites whose layout and design is identical to the real ones and rank very high in Google search results
  • Posting fake tech support messages on various crypto discussion forums and social media pages with links to their fake websites

2. Cash App Scams

These are a remake of the classic giveaway scams. Here, the scammer impersonates a celebrity or a major brand to promote a lucrative giveaway that potential victims would find hard to resist.

The swindler promises to double winners’ prizes if they deposit Bitcoin, Ethereum, or other crypto assets into a specific wallet address provided. The moment they do, they lose their cryptocurrency forever.

3. ICO Scam

A scammer claiming to be the “founder” of a hot new cryptocurrency launches an initial coin offering (ICO). An ICO is the crypto version of an initial public offering (IPO). Once the ICO goes live, they sell millions’ worth of their new currency, only to then disappear with the cash. As soon as they do, the coin’s value crashes to $0, leaving investors penniless.

4. DeFi Rug Pulls

In the crypto world, the term “rug pull” refers to a scam in which the founders of a cryptocurrency launch a project, collect investor funds, and then abandon it shortly after, making away with a ton of money in investor funds. DeFi is short for “decentralized finance,” and DeFi rug pulls target the decentralized world of cryptocurrencies.

5. Crypto Phishing

In the context of the crypto world, phishing scams target user information held in digital wallets. More specifically, scammers are interested in investors’ crypto wallet private keys. Once they get ahold of them, they use these keys to steal the funds, cryptocurrency, and crypto assets held in victims’ wallets.

Like traditional phishing scams, the genesis of crypto phishing is often an email or text message containing a malicious link to a fake website designed as an identical replica of the original. The website then prompts the user to enter their login credentials which consist of their private key.

The scammer captures this information from the backend of the fake website, uses it to access the victim’s wallet on the real one, and then proceeds to steal their crypto assets.

Are Cryptocurrency Scams Illegal?

The answer to this question isn’t as straightforward as you might think. A crypto scam may not be illegal in itself since the sector remains largely unregulated, but it does cross the threshold when the scam in question breaks certain laws.

Case in point: Bitconnect.

The company’s director and promoter promised users that they would cash in on huge profits if they “invested” their Bitcoin for a specific period. An automated bot would do the trading for them.

The DOJ established that it was all an elaborate scam and that the company used money from the newer investors to pay the older ones in a classic Ponzi scheme. In September 2021, the director and promoter were charged criminally in a California federal court.

How to Avoid Cryptocurrency Scams

While there’s no single formula to avoid getting scammed, the best way to avoid becoming the next victim is to stay up-to-date on the latest crypto red flags.

Always keep your private key and any other sensitive information private, and double-check the website domain name before entering your digital wallet login credentials.

Finally, before investing in anything, ensure you do due diligence beforehand to avoid getting duped.

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