Why Are There So Many Cryptocurrency Scams?

Common types of cryptocurrency scams to watch

When civilisation took to exploring the seas, piracy followed closely behind. When we journeyed treacherous rural roads, dashing highwaymen waited to intercept travellers. For as long as we’ve made progress, there has been an element of danger when taking those giant leaps.

And the same is true for the cryptocurrency world — scammers use any means they can to part people from their money.

Photo by Phil Hearing on Unsplash

Cryptocurrencies are simply being used as a lure due to the widespread hype surrounding them and the involvement of many first time investors. These people may misunderstand the nature of investing and, unfortunately, scammers prey on the vulnerable. Earlier in 2018, search engines and social networks went as far as banning cryptocurrency related adverts due to the high number of scams.

The internet also makes it easy to spread scams through spam emails, social media and search engine advertising. Some scams can be set up with very little effort or expertise, which is another reason they’re so common. The widespread media reporting on any cryptocurrency related stories means you’ll tend to hear a lot about scams, especially large or audacious ones.

As cryptocurrencies are currently unregulated for the most part, there are fewer safeguards for investors and you can’t rely on regulators to protect you. That means you need to do your own due diligence before risking your money.


Common cryptocurrency scams

These are some of the most common types of cryptocurrency scams to watch out for:

Phishing

Always check the URL or email address first.

Phishing attacks may involve fake websites, emails, social media accounts, messages, or adverts that look like they come from a trusted entity. You might, for example, receive an email that looks like it’s from your cryptocurrency wallet provider asking you to log-in and check on some recent activity. If you click the log-in link, it will take you to a fake website. Once you enter your details, the scammers can use them to access your real account.

Always check the URL or email address first.


Fake exchanges and wallets

Be sure to research any financial entity you interact with.

Fake exchanges and wallets are websites that look like a legitimate Bitcoin exchange or wallet. But if you sign up and deposit local currency or cryptocurrency, the organisers simply steal it. Unlike a genuine exchange or wallet, it’s intended as a scam with no actual product behind it. Fake exchanges may lure you in with supposedly lower prices or promises of free Bitcoin. Remember that exchanges don’t set prices, they just act as a platform to match buyers and sellers.

Be sure to research any financial entity you interact with.


Scam coins and fraudulent ICOs

Having seen the colossal price rise that Bitcoin experienced in 2017, many investors proceed into the cryptocurrency world looking for ‘the next Bitcoin’. One of the easier options for the average person is to buy coins or tokens in an ICO. This creates the perfect breeding ground for scammers looking to take advantage of new buyers who have a narrow understanding of how the cryptocurrency industry works.

This has resulted in an increase in the number of fake ICOs that make use of sleek marketing and a fancy white paper to lure people into investing in a project where the cryptocurrency doesn’t exist. We recommend heavily researching any ICO project prior to buying in order to separate facts from fiction.

Keep up-to-date with working directories of known phishing and scam domains at on badbitcoin.org and etherscamdb.info.

Giveaways

Giveaways shouldn’t have an ‘entry fee’

Scammers also promise free Bitcoin to promote fake giveaways. These may promise the chance to win large amounts of cryptocurrency if you just send them a small amount first. Fake giveaways often spread on social media and, in the end, the only ones who win are the scammers who steal the cryptocurrency they’re sent. Some will use fake accounts that look like a well-known person to promote them. Always make sure that the platform is trusted and if you’re asked to first put up money (usually as an ‘entry fee’), it’s probably not legit.

Remember, giveaways shouldn’t have an ‘entry fee’


Pump and dump schemes

Pump and dump schemes are a classic scam in the stock market, but scammers are now using them to profit from altcoins (alternative cryptocurrencies). The organisers will buy an unknown, close-to-worthless altcoin. They’ll then spread the message that its price is about the drastically increase. If people believe this and start buying, the price will indeed go up. The scammers will then sell their own holdings at a profit. We’ve written a complete guide to avoiding pump and dumps if you’d like to learn more.

Fraudsters target small market cap coins for the same reason they target small market cap stocks: it’s far easier to manipulate prices.


Malware and ransomware

Install a malware blocker

Malware is software designed for malicious purposes, often to steal financial information. This may include Trojans (a malicious version of legitimate software you download without realising), spyware (which records data from your computer, such as passwords you enter) and ransomware (which blocks access to your computer until you pay a ransom). Malware has been used to steal cryptocurrency by recording your wallet log-in details. You can protect yourself using a malware blocker like MalwareBytes, but we recommend consulting a specialist regarding ransomware for more serious cases.


In person sales

Before we had easy access to exchanges like Luno, it was common for people to buy Bitcoin in person. However, this makes them vulnerable to scams or even physical harm. We don’t recommend buying in person from anyone you don’t know well — while meeting up with strangers from the internet is now an everyday thing to do, it’s risky when it comes to cryptocurrency.


Ponzi schemes

Ponzi schemes and pyramid schemes are, like pump and dumps, an old classic scam which has now spread to the cryptocurrency world. Both Ponzi and pyramid schemes tend to offer high returns in exchange for an initial deposit. Pyramid schemes offer more returns if you recruit new participants. Ponzis use the deposits of the earlier ‘investors’ (read: the marks) to pay the newer ones before the entire scheme collapses.


Staying safe

Remember that investing begins with education, not with making a purchase. We suggest you always research first and keep in mind that anything that seems too good to be true probably is.

As a rule of thumb:

  • Always check the URL to make sure it’s one you recognise (use bookmarks you’ve created yourself)
  • Never share your password or payment details by email or message
  • Keep up-to-date with known phishing and scams on badbitcoin.org and etherscamdb.info
  • Pay attention to your intuition — if something feels wrong, double check it

Read further on “How to identify and avoid Bitcoin scams” and “How to protect your crypto from hacks, scams, and phishing”.