Cryptocurrency Scams (and how to avoid them)


Cryptocurrencies are money, and like with any other forms of money are targets for scams and thieves. Investment frenzies attract unscrupulous individuals searching for easy prey, and digital money is no different. However, cryptocurrency does not have the same protections as physical currency. 

Cryptocurrency scams tend to be from one of seven common categories, and scammers love them because none of them are reversible.  

  • Fraudulent ICOs
  • Shady Exchanges
  • Fake Wallets
  • Pyramid or Ponzi Schemes
  • Phishing Scams
  • Pump & Dump Groups
  • Impersonators

With the number of currencies coming online each month, they are also difficult to track and defend against. However, there are some simple things you can do to save your money and avoid the scammers. 

Types of Cryptocurrency Scams

Millions of investors become victims of cryptocurrency scams every year, losing as much US$1.7 billion in a single year. These scams come in many forms from the old-fashioned to new technology tactics, which only work on digital money exchanges. 

Fraudulent ICOs

With dozens of new cryptocurrencies, tokens, and coins coming online every month, it is no wonder why fraudulent initial coin offerings (ICO) are the most common type of cryptocurrency scam. 

The market for cryptocurrency continues to expand exponentially despite the many disasters of the past few years. Investors everywhere are hungry for the latest innovation in wealth generation.

With so many people just throwing money at the industry, scammers can easily find new victims. Plus, it is often as simple as creating fake ICOs along with some good old-fashion marketing hype. People are lining up to be victimized.

Luckily for most investors, these scams typically target new investors who dream big but have no experience in the cryptocurrency market. 

Some common signs of fraud ICOs include:

  • Half the team is anonymous
  • Copied whitepaper
  • Mismatch of written and said words
  • The team ignores hard questions
  • Unusual hurry in execution
  • No strong reasons for the token economy
  • The team has no roadmap for success

Shady Exchanges

While you can find fraud ICOs on the legit cryptocurrency exchanges, you are more likely to find them on the shady ones. Fraudulent currency exchanges pop up overnight and start bragging about how many investors buy cryptocurrency through them. 

They are by far the second most common type of scam because they can be very alluring. They present investors with the innovations they want, only to disappear once you trust them enough to put money into them. 

Besides the fraudulent ones, you may also come across small legit exchanges that have no way to scale and grow with the market. While they look and sound like good investments, they can easily vanish with your money with a moment’s notice.

Fake Wallets

Investors store their cryptocurrencies in virtual wallets, financial databases that log their transactions. While these wallets let them keep track of their investments, they also make them easy to scam. 

Cryptocurrency wallets come as apps for your mobile device. Because nothing is regulating them, you may find many of them are fraudulent. Fake wallets claim they keep and store your money, but are fronts for criminals to acquire your information and your cryptocurrency.

To make things worse, these fake apps let criminals use your credentials to debit from your other wallets and investments, as well.

Many of these fake apps lure you in by promising big things such as the seed and control over your finds. Thus, you want to do your due diligence and thoroughly evaluate any wallet app you find, or you will lose money. 

Pyramid or Ponzi Schemes

While not limited to just cryptocurrency, people still fall for pyramid schemes despite how noticeable they are. 

Crypto Ponzi scams look like their traditional cousins. They are projects which encourage recruiting new investors to maximize your profits. They ask that you join in and scan those who enter because of you so that you can reap some absurd rewards.

Phishing Scams

Phishing scammers take advantage of the confusion caused by the fake ICO, wallets, and exchanges mentioned above. These scams use their fake front ends to collect your account credentials from the legitimate cryptocurrency marketplace through either Punycode or a fake airdrop. 

Pump and Dump Groups

Pump and dump scams are also nothing new. They are also just traditional currency scams ported over to the crypto market. Sure, you can make money from them, but only if you are among the first few the jump into the chats.

These scam groups fill chat groups with thousands of fake users in an attempt to control the price of the currency market. Their goal is to cash in on fast-growing cryptocurrencies by quickly crashing them.

Their member sizes make them easy to spot though. Therefore, you know to avoid the rather large currency discussion groups. 

Impersonators

As the most sophisticated scan type, impersonators do all of the previous scam types are the same time. These scammers make fake social media accounts to impersonate actual legitimate cryptocurrency projects or their spokespeople. 

These scammers constantly announce fake airdrops, fake ICOs, fake updates, and fake news in general. Some of these criminals pose as customer support staff from these real projects as well. 

How to Identify Cryptocurrency Scams

With all the new cryptocurrencies and scams coming online every month, you might be wondering how you can spot a scam. 

With a keen eye, most scams make themselves known in fairly simple ways. Sure, you might have to do some work, but the result could lead to big investment gains with much lower risks than both cryptocurrency and traditional currency investing.

While we cannot guarantee that you will spot every scam that comes your way, you can eliminate most of your vulnerably with the following procedures. 

Get to Know the Team

It all starts with the project team behind the cryptocurrency. A coin’s developers and administrators are the key components to the success of that coin.

Many projects lead obtain celebrity status to the point some superstars such as Ethereum founder and developer Vitalik Buterin. Often it only takes having their names attached to a project to make that project a success in the market. 

The hype surrounding these superstar developers also attracts scammers in droves. Many scams involve creating fake founders and biographies that sound convincing enough to bring in unsuspecting investors.  

Thus, you can protect yourself from most scams simply by researching the project leads. You should do this before you invest in anything, but especially with digital coins. You should be doing at least a background check for every principle player.

Your first indicator that something is amiss is if you cannot find anything on the development team. That includes the strange lack of any account on LinkedIn, Twitter, or any other social media platform. If your research reveals nothing, you should stay clear of anything associated with that team.

However, if you do find their profiles, that does not mean you should trust them. You want to examine the profiles for anything suspicious. For instance, they report activities and histories which conflict with the follower counts.

One such conflict is having lots of followers despite no engagements from the founder. People rarely follow brands that do not interact with them on some level. Thus, if you see this mismatch, many of those followers could be fake. 

You also want to see if what experience they claim on both their project page and social media profiles. You want to see if their qualifications are appropriate to the project and if they are real and plausible.

Read the Whitepaper

All cryptocurrencies have a whitepaper. Their project teams release them upon their first announcement and then publish a revision with their ICO. These whitepapers serve as the foundational documents and operating charters for their projects. 

Within these documents, you will find each project’s background, strategies, goals, concerns, and implementation schedule and deadlines. No blockchain-based project can go without one. They are among the first things a new project should make.

It is this importance that makes these whitepapers so good for your cryptocurrency research. They reveal things that may not reach a project’s website for any reason. This is because whitepapers are legal documents requiring more effort from the developers to properly write.

For instance, a website frequently asked questions may contain errors and spelling mistakes. Meanwhile, the company’s whitepaper may flawless details rock-solid concepts and carefully crafted plans for implantation and release. 

Because a cryptocurrency whitepaper will contain technical concepts, new investors may be averse to reading them. You must overcome this anxiety to thoroughly read and evaluate a whitepaper before you buy into the currency. 

Besides the whitepaper, all legitimate currency projects will provide other complimentary resources as well. Some of these other documents include legal concerns, financial models, SWOT analysis, operating plans, and implementation roadmaps.

Thus, you want to avoid any project which does not provide a whitepaper. 

You might have to ask them directly for it. So, you should take some precautions even here, but, if they refuse to provide their whitepaper, they are a scam.

Even then, you might not be out of the woods. Some fake ICO offered whitepapers in the past, and more will so in the future. Still, a whitepaper is a good sign. 

Look to the Token Sale

As a cryptocurrency project reaches ICO, the team will use a token or currency system to crowdfund their operations. Real companies and projects will handle this system themselves, making the tole sale process simple and easy for investors to view and understand. 

Therefore, you can learn a lot about a company just by watching how the sale progresses. You should check the token sale figures occasionally throughout an ongoing ICO. You to see how easy it is to track, and how easy it is to determine the number of current investors.

Scammers will make this information difficult, if not impossible, to obtain. They will hide their token sale data under the pretense of individual investor confidentiality. However, all they are doing is making sure you cannot see how much they raised and how long the sale will last. 

Thus, if you cannot chat the progress of an ICO, then the ICO could be fake. A legit ICO may do it to generate urgency, but that is still a sure sign of currency in trouble.

How Feasible is the Project?

Like any venture, the ICOs and cryptocurrencies that can last with the greatest chance for success are those who have all their fundamentals in order. History is filled with currency launches that failed to muster support after their initial hype wore off. 

Therefore, you can reduce your scam risks just by looking for projects with goals that appear achievable with a compelling concept.  If the currency cannot maintain itself over the sort or long terms, you should avoid it. 

Besides feasibility, you want to only invest in cryptocurrencies that are transparent in their development. Projects with feasible concepts and models tend to boast the good news to the broader community. Thus, you want to invest in a cryptocurrency with lots of community engagement.

How to Avoid Cryptocurrency Scams

Because of how new it is, there is no such thing as low-risk cryptocurrency trading. The entire market is inherently risky and highly speculative. Even the most successful and legitimate ICOs and cryptocurrencies can fail overnight from the nature of speculative investing.  

May scam victims become victims because of the lure of getting rich quick from investing in a hot new project. The idea can be so tempting that even seasoned veterans can fall for the traps along with the beginners.

Still, you can reduce your risks from cryptocurrency scams by following a few rules, know what is hot today could be cold tomorrow. You just have to invest cautiously as you would with any other investment opportunity. 

Generally, cryptocurrency investing involves:

  • Investing only want you can lose
  • The market is more turbulent than stocks and bonds
  • The Industry moves quickly

Thus, you should only begin cryptocurrency trading with the full understanding that you can lose everything overnight for any reason, scam, or otherwise.

Do Your Research

As mentioned above, you can reduce your vulnerabilities by thoroughly research any investment opportunity that comes along. You can read reviews on brokers and exchanges, just as you would with a more traditional market. 

You can find this information by joining and browsing through the legitimate cryptocurrency discussion groups and blogs such as our site or Reddit’s Cryptocurrency sub. These places will show which new products and exchanges are real and good for your investment.

Look out for projects which sound too good to be true. Experienced cryptocurrency experts will always recommend that you scrutinize every detail and profile you find, assuming any piece of missing information as a potential red flag for a scam.

That also means you should check your research with other resources to verify the accuracy of your assumptions and the projects involved. If certain information confuses you, do not feel afraid to ask the project or the cryptocurrency community your questions. 

Trade in Cryptocurrency CFDs

If you are new to the market, you can speculate in cryptocurrencies without the risk by investing in Contracts for Difference (CTD). CTDs let you test the market’s movements without the hassle of actual cryptocurrency ownership. 

Your CTD value comes from the difference from the purchase price of a currency and the current price. It goes up and down with the price, letting you speculate in a fully-regulated environment. You get the benefits of cryptocurrency with the safety that comes from reputable traditional financial institutions. 

Sure, you will find a few fraudulent CTD brokers, but you can shield yourself from them through your normal risk management tools and best practices.  

Report Cryptocurrency Scams as You Find them

While it will not protect you the first time, you can reduce your risks for future cryptocurrency scams by reporting the ones you come across to the appropriate authorities. 

For instance, you can notify the Federal Trade Commission (FTC) about any suspicious cryptocurrency activity through their complaint line. Please provide as much information in your report as possible. The criminals change their locations often, and your info may be the only lead the FTC has. 

You can also report any cryptocurrency scams to the Commodity Futures Trading Commission (CFTC)or the U.S. Securities and Exchange Commission (SEC)

Is Cryptocurrency a Safe Investment?

With all these scams and instability, you might be wondering if cryptocurrencies are safe investments. While there is no such thing as a safe investment, cryptocurrencies do post higher risks than traditional investments. However, that also makes them more lucrative.

Luckily, you can reduce the risks inherent in buying and selling cryptocurrencies. You must understand the marketplace and take some precautions, but you can see high returns on your investments in the digital coin market. 

The trick is investing in the right cryptocurrency.

Every cryptocurrency on the market has its own risk and rewards. You must research them all before deciding which one to invest in.

You want to learn everything you can about the project:

  • Who made it? 
  • Who runs it now? 
  • Can you find it on safe exchanges? 
  • Is there a screening process before you buy it?
  • Do recognizable brands endorse the currency?

These are just some of the questions you should be asking. These questions will go a long way to keep your risks low and your vulnerability to scams at a minimum. 

Will My Coins Get Stolen?

However, even the answers to those questions may not protect your money. Cyber-attacks on the cryptocurrency market rose as the market expanded and became more popular.  If you find yourself a victim, you may not be able to get your money back. 

While these attacks are a cause for concern, most attacks are the typical cyber-attacks all web services face and not scams. Criminals hack into the exchanges and wallet providers and just steal the data. You can lower your risks simply by storing backups of your information offline.

Cryptocurrency market experts recommend storing your information on a “cold-storage device”, such as paper or an external hard drive. You generally keep your cryptocurrency address and key on this external storage and only bring it online when making a transaction.

What Backs Cryptocurrency?

Scammers target cryptocurrencies for the same reasons legitimate investors do. Digital coins are not back by any government or organization. They get their value through other means.

All cryptocurrencies are mediums of exchange. That is, they store value rather than be a value in themselves.  

As mediums of exchange, digital coins offer an effective means to conduct financial transactions. Thus, they get their value because people use them. They have the flexibility to facilitate any exchange of value with trackable histories but with all the benefits of anonymity. 

In this way, cryptocurrencies hold credit. 

As David Graeber noted in his 2011 book, “Debt: The First 5,000 Years,” credit served as excellent mediums of exchange since the dawn of time, and digital coins bring it back in spades.

  • Digital coins are more flexible than traditional money and will become even more so as their networks expand.
  • Being digital, they work well for international trade and transactions without the mess that comes with conversion fees.
  • The blockchain technology at the heart of all cryptocurrencies handles trust and reciprocity much better than a central bank.
  • Their technologies also make digital coins difficult to manipulate or attack. 

For the most part, investor perceptions are the only challenge cryptocurrencies must overcome. Even cryptocurrency scans just reflect the inexperience of the investor rather than the nature of the money itself. 

Sure, they must reduce their volatility and price swings before they can become a legitimate replacement for traditional money, the future of cryptocurrency is bright. 

Thus, if you feel a digital coin will make it, you should invest in it while its price still makes it profitable for you. As long as you stay clear from the currency if you believe it will not overcome the challenges. 

Governments DO NOT Back Cryptocurrencies

Let us reiterate this. No government insures the value of any digital currency. Your digital money does not have the same protections as your traditional money accounts do. 

Only the companies which hold your digital wallet ensure your cryptocurrency portfolio. If they go out of business or gets hacked, no one can help you get your money back.

On top of that, the volatile nature of digital money can change the value of your money every hour without warning. Investments worth thousands of U.S. dollars today may drop to only a few hundred tomorrow with no guarantee for future growth. 

Thus, if you want to jump into cryptocurrencies, you must manage your risks as you would do with any investment. The digital coin market works like any commodities exchange, but without the usually failsafe procedures in place, brokers, or broker fees. 

Can You Convert Cryptocurrencies into Cash?

With the above precautions, cryptocurrencies make for great investments, but they are not for everyone. If you are still worried about being scammed, you can convert your digital coins into traditional money. 

You can also transfer your money out of the cryptocurrencies if you simply want to use them as well.  While cryptocurrencies will become legal tender for every purchase; eventually, they are not at the moment.

You can also debit your money out of the digital market if it declines. If you believe the value of your digital coins will continue to drop, you can always transfer their value to something else.

How Can You Move Digital Coins to a Bank Account?

Regardless of your reason, you have several options for converting your cryptocurrency to cash and deposit it in a bank account. 

These methods include:

  • Selling your coins on a cryptocurrency exchange. Selling your currency is the easiest way to convert one currency to another, even to another cryptocurrency. 
  • Use a Cryptocurrency ATM – While not as widely available as traditional ATMs, you can cash out your coins at one of the over 2000 crypto ATMs around the world. 
  • Use a Cryptocurrency Debit Card – Some exchanges offer debit cards in exchange for your digital coins. 
  • See your coins to friends – You do not need an exchange to sell your cryptocurrency. You can sell your coins to anyone who wants them. If you have friends who want them, nothing is stopping you from given your coins to them.  

However, you must consider the following when transferring your investments into cash. While they may seem obvious to some, these pitfalls can creep up on you if you do not plan for them. 

Taxes- As they say, death and taxes are inevitable. While people debate over the jurisdictions that govern cryptocurrencies, most tax agencies consider digital coins as a commodity. As such, they also tax any profits received from their transactions, especially after you convert them to cash.

Fees – Most currency transfers require a fee. This is true for both traditional money and cryptocurrencies, as well as transferring between the two. The only time you may waive the fees if is you are selling your coins to friends. 

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