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Cryptocurrency scam is a type of fraud in which a cryptocurrency startup ceases to exist due to the intentional actions of developers, the coin depreciates, investors lose money. Types of scam: pump and dump, shutdown of the site after collecting money, phishing, fraudulent ICO.
Over the past four years, cryptocurrency scams have become commonplace. It is easier for con artists to work with cryptocurrencies as many countries still do not have regulation for them, which is why the scammer can avoid prosecution. Therefore, before investing into digital currencies, the instruments need to be thoroughly checked. Let’s take a closer look into what a Crypto Scam is, the signs of it and how to avoid becoming a victim of scammers when investing.
Cryptocurrency Scam Definition
Cryptocurrency scams are scam companies stealing the money of users using cryptocurrencies. Cryptocurrencies are digital assets that can be used as a payment instrument. Crypto fraud is possible since many countries still have not introduced strict legislative standards of regulation of these assets. Absence of laws and regulations opens the door to fraud schemes, which are actively used by shady startups, digital exchanges and private individuals for illegal gains.
Token scams are also very popular. Tokens are a variety of digital assets, which are not a payment instrument, but are used to represent digital balance in a specific asset or access to some services in a crypto project. In some cases, tokens are even a certain analog of securities – stocks or bonds.
Token scams are even more wide-spread, as there is no need to build your own blockchain for them. Tokens can be created on the existing platforms. For example, the Ethereum platform allows to create tokens of the ERC20, ERC23, ERC721, ERC1155 standards and others. Thanks to simple creation and practically total absence of control, Cryptocurrency scams successfully develop schemes for stealing clients’ money.
Main schemes of Cryptocurrency Scams
There are many cryptocurrency scam schemes. There are unique methods of robbing you of your money, and there are general only, typical for other assets as well. Let’s review five examples of digital asset schemes, which are often used by the con artists.
A simple token, for example based on ERC20, is created and an ICO is launched.
The scammers start to actively publish large volumes of information about the ‘hot’ project the token is linked to. False news about the successes, articles and expert opinions about the high value of the token in the future are posted and published.
The ‘promo’ campaign incites interest of traders and investors, who start to buy up the digital asset, thus causing its value to rise. Growth of quotations becomes a catalyst of increasing demand, which then pushes the price even higher.
When it is discovered that all the messages were false, the quotations plunge to zero. The con artists take the money, while the traders lose all their funds.
In many cases, there is even no need to create a new token. The scammers simply take the existing coin with a low price and liquidity, inflate its value manyfold using some rumors or even without them. Once other traders join in on the ‘hype’, the scammers sell their coins, and the value drops dramatically.
Before buying an asset against the background of some good news, check whether the information is properly substantiated first.
Bitcoin Scams
Pyramid scheme is the primary scam for Bitcoin Scams. It involves creation of a certain investment company that promises huge profits for the clients.
As a rule, they explain the profits involving the following methods:
1
Investments into the purchase of Bitcoin and other cryptocurrencies at the exchanges;
Bitcoin scams using a pyramid scheme operate the same way as in case with stocks or Forex. They attract the clients by promising unjustifiably high interest rates. They offer a beneficial partnership program for their clients (as a rule, a three-level one). The clients distribute partnership links, attracting new users into the fraudulent project, forming new levels of the pyramid.
The schemers pay the money to investors from new payments from the investors of lower levels, leaving part of the money for themselves. Bitcoin Scams do not conduct actual business. They also convince the clients, who received the money, to reinvest their profit. As soon as the inflow of users ends or the number of negative reviews becomes too high, the pyramid ceases to exist. The schemers keep the money.
Crypto Scams also often use the Ponzi scheme. It is similar to the Pyramid scheme, but with some differences. In it, the fraudsters and not the users attract the clients. They find contacts in open sources, call on the phone, write on social media and emails, convincing potential victims to invest their money. As a rule, a Ponzi scheme does not feature a partnership program, but there are different promotions and bonuses.
Crypto exchange hacks
Crypto exchange hacks is yet another method of Cryptocurrency scams. Some crypto exchanges have rather weak security, which the hackers take advantage of. As a rule, the hackers try to hack specific wallets and withdraw cryptocurrency from them, since it is quite difficult to trace small transactions.
There have also been cases, when hackers hack an entire exchange and stole cryptocurrencies from thousands of wallets. These situations, however, are fewer and farther between, as the coins stolen in large numbers are monitored and the coins get marked.
Phishing
Phishing is a type of fraud that involves stealing personal data.
The attackers can use several methods to steal information, including:
1
Email phishing scams;
2
Malware;
3
QR code that leads to a fraudulent website.
Scammers who use phishing disguise themselves as exchanges or investment platforms. They offer customers beneficial partnership conditions and offer to follow the link to learn more. Once the user follows the link, malware is downloaded to the user’s device, which transfers all logins and passwords from the trader’s crypto wallets to the scammer.
The other option is when the user sends his/her personal data to the scammer himself. For example, a fraudulent website is created disguised as a major crypto exchange. The client is offered to fund the account by specifying the number of the cryptocurrency wallet and passwords. However, instead of registration, the traders lose their wallet and the scammer steals cryptocurrency from it.
Money Laundering
Money laundering is a popular type of cryptocurrency fraud. People use crypto assets to launder the illegally obtained money. The money is invested in cryptocurrencies and the illegal gains are legalized as returns from investment.
In addition, cryptocurrencies may be directly used for illegal activity. Public authorities of many countries combat the use of digital assets for purchasing drugs, weapons, financing of terrorism, etc.
Rating of Cryptocurrency Scandals you Should Know
History knows many types of cryptocurrency fraud. Some of them were high-profile cases known all across the world. Let’s look at some of the most known examples of Cryptocurrency scams.
Stocks disguised as tokens – Telegram
One of the biggest high-profile cases involving cryptocurrency happened with the Telegram messaging app. In 2018, the app’s creator Pavel Durov announced the development of Telegram Open Network (TON), a new blockchain platform with cryptocurrency titled Gram. It was planned that the cryptocurrency would be used for internal payments for goods, works and services that will be sold via the platform.
The story was happening against the background of the cryptocurrency boom of 2018. Capitalizing on the success of digital assets, the team of Pavel Durov held an ICO (Initial Coin Offering) selling TON tokens. The project managed to raise USD 1.7 billion from 171 investors.
However, the launch of the TON project and Gram cryptocurrency kept being put off. In 2019, the United States Securities and Exchange Commission (SEC) filed a complaint against Telegram due to the violation of the emission procedure. SEC stated that under the U.S. laws, TON tokens are securities. Accordingly, Telegram should have provided the information about their business operations, financial condition, risk factors and management, which had not been done. The court supported the complaint filed by SEC and on May 12, 2020 Durov announced cancellation of the TON project. The investors continue to contest their rights in courts.
Eric Savics lost money due to phishing
Eric Savics, the host of Protocol Podcast, a popular US technology podcast, became a victim of phishing. The expert mistakenly installed a plugin for storing keys, as a result of which Bitcoins were stolen from his account.
The story happened in July 2020. Eric Savics believed a scam project Keep Key, which was a plugin for storing cryptocurrencies. The podcast host installed the Keep Key plugin in his Google Chrome browser and passed the registration procedure. However, the plugin requested the key to the Bitcoin wallet. Savics didn’t suspect a thing, so he entered the information, which led to theft of his money.
The scammers, who developed Keep Key, changed the key to the wallet, causing the podcast host to lose his money. At the moment of the theft, there were 12 BTC in the wallet, which at the exchange rate at the time amounted to USD 110,000. After the incident, the subscribers transferred Savics 0.7 BTC as donations. Savics promised he would return the money to the subscribers once he regained access to the crypto wallet.
KuCoin Hack
The KuCoin incident is one of the latest stories of cryptocurrency exchange hacks. Singapore-based cryptocurrency exchange reported the accident on September 27, 2020 on its official website. The hackers managed to steal around USD 150 million from the cryptocurrency exchange. The funds were withdrawn in Bitcoin, other cryptocurrencies and tokens, including ERC20.
The company reported that unidentified individuals managed to gain access to cryptocurrency wallets of KuCoin users. The exchange registered large withdrawals from the wallets on September 26. The security audit was immediately launched, which revealed that the platform was hacked.
Immediately after the hack, KuCoin suspended its operation. The team of the Singapore-based cryptocurrency exchange recommended its clients to transfer all coins to cold wallets and promised to cover the losses completely. As of January 2023, the operation of the exchange has been fully restored.
OneCoin Pyramid Scheme
OneCoin became one of the largest and best-known pyramids related to the world of cryptocurrencies. The company began its operation in 2014. Bulgarian Ruja Ignatova, the founder, sold ‘educational packages’ on cryptocurrencies using the multi-level marketing method. The pyramid’s creators developed their own cryptocurrency – OneCoin, which was positioned as an alternative to Bitcoin.
The ‘educational packages’ of the company featured 7 levels for the clients ranging in price from EUR 100 to EUR 118,000 each. The packages provided a specific number of tokens, which could be used for mining OneCoin and pay for the new projects. The company paid rewards in cryptocurrencies for referrals. The size of the reward depended on the package the new user purchased.
However, subsequently, OneCoin started to attract investment directly for the development of the cryptocurrency. Ignatova claimed this digital asset could destroy Bitcoin. However, mining of the asset could only be done via the websites controlled by OneCoin and all databases were centralized. Due to this, the media began calling OneCoin a pyramid as early as in 2015.
The first official claims were brought by the regulator of Bulgaria – The Financial Supervision Commission (FSC) – in 2015. In 2016, the UK regulator – Financial Conduct Authority (FCA) – launched an investigation. Both authorities claimed the company had shown signs of a financial pyramid. In 2017, Ignatova disappeared, but the pyramid lived until 2019.
According to different estimates, the OneCoin pyramid inflicted EUR 4 – EUR 15 billion damage on the investors. Also, the Bank of New York Mellon, which performed OneCoin transactions, was involved in the scandal.
How to avoid Cryptocurrency Fraud: top 5 tips
Only your vigilance can help protect you against cryptocurrency fraud. It is extremely difficult to return your money in these cases, so it is better not to risk it. We offer your five tips to help you avoid cryptocurrency scams.
1
Check the information and reviews about the company
A cryptocurrency exchange or an investment company must provide important information about them.
In particular, before registering, check the following:
1
Date of registration;
2
Registration certificate;
3
Legal and business address.
If the companies are registered in unreliable, offshore jurisdictions, or don’t provide important information – it is highly likely that they are scams.
Also reviews will help choose the right company. Use only independent sources to read the reviews about organizations. For example, on the Traders Union website, you will find honest and unbiased opinions about different cryptocurrency-related projects.
2
Use a cold wallet
Cryptocurrency storage is an important aspect of protection against scams and hacks.
There are two methods to store digital assets:
1
Hot – online wallets accessed via the internet;
2
Cold – cryptocurrencies are stored directly on your devices – computers, smartphones, hardware wallet, etc.
A cold wallet is more secure. It is much harder for a hacker to break into your storage without having access to the device. If you keep cryptocurrencies in cold wallets, you will reduce the probability of a hack and theft of your digital assets.
3
Protect your wallet
To avoid losing money, you need to properly protect your wallet.
There are several simple methods of protection, which practically all storages offer:
1
Two-factor authentication;
2
Email and text notifications and special code for access confirmation;
3
Biometric authentication (if you are using a smartphone);
4
Secret word or phrase.
When choosing a crypto wallet, make sure that a large number of methods of protection against theft are offered. In addition, do not forget to regularly update the app, as the teams of the projects regularly release updates, improving their security.
4
Protect yourself from phishing
Protection against phishing primarily depends on your attentiveness and vigilance.
The tips here are as follows:
1
Do not click on the links that came from unknown sources;
2
Do no download and install files, if you are not 100% sure that they are secure;
3
Check and recheck that the links are correct. The scammers often use the same name, but change the domain or 1 symbol in the name;
4
Never provide the key to your cryptocurrency wallet.
Only your own vigilance and caution will help protect you against phishing. So always be suspicious of any, even most enticing offers with links and unknown files.
5
Check Cryptocurrency information
In order to avoid becoming a victim of the Pump and Dump scheme, do not rush to invest into an asset if you see an appealing message or quick growth of quotations. Any increase of value must be substantiated, which is why you need to learn as much information as possible about the asset before investing in it.
Check the available information about the cryptocurrency or token online. See whether the company that mines it is reliable, whether there is any confirmation to the information distributed by the company in support of its token. For example, if it is a contract with some large organization, you need to check information about it on the official website of that organization.
If you see that the value of the asset is quickly growing, while there are no reasons for it, do not risk investing into such cryptocurrency. First, you need to understand why it is happening and whether it is safe to invest money.
Cryptocurrency Investor Safety Rules
1
Store assets only in a cold wallet
2
Use two-factor authentication
3
Don't follow links from unfamiliar sources
4
Always check the information provided
5
Don't chase super profits
Trustable Cryptocurrency Exchanges Rating
You can trade and invest in cryptocurrencies only through trustworthy cryptocurrency exchanges. A trading platform must be reliable and secure. Traders Union has chosen three crypto exchanges that have proven they can be trusted: Binance, BitMEX, and Coinbase.
Binance — Best Choice of Crypto Assets
Binance is the largest cryptocurrency exchange in the world. The exchange was founded in 2017 and was registered in Hong Kong, but in 2019 the crypto exchange re-registered in Malta, although the Malta Financial Services Authority (MFSA) later denied this information. The company protects its clients using special access control features, including two-factor authentication. Trading on the platform is available only to verified clients.
Binance has a special compensation fund called Secure Asset Fund for Users (SAFU), where the company transfers 10% of received commissions. The fund is used for compensation of the losses to the clients in case the exchange is hacked.
Binance provides clients with access to 280 cryptocurrencies and tokens. Also, the exchange has its own cryptocurrency – Binance Coin (BNB). The platform operates as a crypto exchange and as a currency exchange. Marginal trading is available. There is also access to USD and cryptocurrency futures trading.
Commissions on Binance depend on the 30-day trading volume. If the trading volume is lower than BTC 250 or BNB 0, the Maker fee is 0.01% and Taker fee – 0.05%. The higher the trading volume the lower the commissions.
BitMEX (Bitcoin Mercantile Exchange) is one of the first cryptocurrency exchanges, operating since 2013. Throughout the entire period of its operation, the exchange has not been involved in any scandals related to the theft of cryptocurrencies from the trading platform. BitMEX is secure because it stores the funds of the clients in cold wallets. The service uses two-factor authentication for access. For deposits and withdrawals, there is a multi-signature system, where the transaction must be approved by several users.
The trading volume at BitMEX is USD 3.21 billion. The platform provides access to 13 cryptocurrencies, 8 types of coins for futures contracts and two more types of coins for quanto futures. Trading with a leverage of up to 1:100 is available. Maker fee for Bitcoin is - 0.025%, Taker – 0.075%.
Coinbase cryptocurrency exchange is a U.S. trading platform, registered in San Francisco. The company was founded in 2023. The platform is secure, as all funds are stored in cold wallets. Access to a wallet is granted via two-factor authentication. Only the users who passed a 4-step verification can work on the platform.
The choice of currencies on Coinbase includes only five major coins – BTC, LTC, ETH, BCH and ETC. However, there is support for all tokens based on ERC20. Maker fee is 0.5%, while Taker fee varies depending on the trading volume ranging from 0.04% to 0.50%.
Cryptocurrencies are one of the most popular investment assets of our time. Some investors work only with them, while others use them to diversify their investment portfolio. However, heightened interest towards cryptocurrencies on the part of the traders and investors also heightens interest towards them on the part of scammers.
Considering that cryptocurrencies are still not regulated in the majority of countries, it is not possible to rely on the help of public authorities. The only thing that can help you avoid being scammed is your own vigilance. Carefully choose cryptocurrency projects. Turn on as many methods of account protection as possible and choose only reliable crypto exchanges. Always verify information that comes from outside sources.
Rinat Gismatullin,
Author and business expert
FAQ
Can I return the money in case of a crypto exchange hack?
If the hack happened at the fault of the cryptocurrency exchange, and was not your fault, there is a possibility that you will get the funds back. As a rule, the exchanges have a special fund for this purpose.
Can I earn a profit from a cryptocurrency pyramid?
We do not recommend working with cryptocurrency pyramids. Even if you manage to earn a profit, it is not a given that you will be allowed to withdraw your profit.
Is it possible that crypto exchanges won’t let me withdraw profit?
Unfortunately, there are scam crypto exchanges that do not allow withdrawal of funds. This is why the choice of the exchange is so important. Respected trading platforms always allow the clients to withdraw their money.
Are there countries where cryptocurrencies are fully prohibited?
Yes, for example, it is prohibited to work with cryptocurrencies in India or Pakistan.
Alamin Morshed is a contributor at Traders Union. He specializes in writing articles for businesses who want to improve their Google search rankings to compete with their competition.
Over the past four years, Alamin has been working independently and through online employment platforms such as Upwork and Fiverr, and also contributing to some reputable blogs. His goal is to balance informative content and provide an entertaining read to his readers.
His motto is: I can dream or I can do—I choose action.
Rinat Gismatullin is an entrepreneur and a business expert with 9 years of experience in trading. He focuses on long-term investing, but also uses intraday trading. He is a private consultant on investing in digital assets and personal finance. Rinat holds two degrees in Economy and Linguistics.
Gismatullin has been an author at Traders Union since 2019. His focus is creation of detailed reviews of brokerage companies and cryptocurrency exchanges, as well as analytical and educational articles on finance.
Rinat’s motto: Always be open to new experiments. By overcoming the hardships you will reach the stars that open to those who seek.
Mirjan Hipolito is a journalist and news editor at Traders Union. She is an expert crypto writer with five years of experience in the financial markets. Her specialties are daily market news, price predictions, and Initial Coin Offerings (ICO). Mirjan is a cryptocurrency and stock trader. This deep understanding of the finance sector allows her to create informative and engaging content that helps readers easily navigate the complexities of the crypto world.
