Information about cryptocurrencies fills our newsfeeds: celebrities are endorsing crypto, friends talk about crypto, and financial bulletins include crypto market data alongside traditional stock exchanges. Many of us are taking the leap with investments in crypto despite not understanding it completely. All of this hubbub about crypto makes it seems mainstream – although it still is not. Not investing in crypto makes many people feel they are missing out on a great opportunity.
Investments in cryptocurrencies grew by over 900 percent in recent years, proof that many people are willing to take a risk with their money.
The environment is ripe for scammers who prey on the uninitiated. The Federal Trade Commission reports that more than $14 billion was lost to crypto scams in 2021.
Common Crypto Scams
Some people think all of crypto is a scam because it is new, not linked to any national currencies, and blockchain technology is unfamiliar. Many cryptocurrencies have silly names and foreign-sounding functions for a futuristic world that may or may not be evolving. Still, a few people have made millions of dollars on speculative investments, riding fast-moving bubbles of investor interest.
Offers to multiply an investment should be met with caution. To verify the advisor's authenticity use a reverse email lookup tool. Think through all the possible outcomes before transferring any funds. Use the following list of scams for comparison:
- Fake exchange apps – A potential investor is approached via social media or phishing email and invited to join a new crypto exchange. An exchange is an app or online "bank" where crypto investments are held and traded for different types of coins or digital currencies. In this case, the investor deposits funds in a fake exchange manipulated to appear to multiply his initial deposit. The rapid growth of the investment prompts the person to put more money into the exchange. Suddenly, he is locked out and realizes the exchange was fake and his money was stolen. He never owned any of the cryptocurrencies he believed he did.
- Promises of returns – Nobody can promise investors a certain percentage of returns. When a well-dressed pitchman with a flashy watch and expensive car guarantees that you'll make at least five or ten percent on your investment in a short period, step away. Nobody can guarantee interest on investments, and cryptocurrencies are too new to have much of a track record of such results.
- Fake account breach – If you've established a cryptocurrency account, your data may be sold to other advertisers or even sold on the dark web, making your email and perhaps phone number accessible to scammers. This may result in fraudulent emails or phone calls that claim your account has been breached. An email may ask you to click on a link to verify your password. A phone call may sound urgent, saying that you should provide your account password and PIN in order to check your balance. Avoid speaking to or emailing responses that make allegations of account fraud. Instead of responding directly, find the direct number for the company that holds your crypto wallet and call them to confirm account security.
- False giveaways – Be skeptical of opportunities to make money without any effort. Giveaway scams pretend to make a person wealthy by matching donations to a communal fund. Unfortunately, most victims fall for the urgent message by acting quickly rather than thinking logically. As part of this scam, currency transferred willingly is unlikely to be recovered because it is not considered stolen.
- Blackmail scams – Scammers demand payment in cryptocurrency to withhold publishing embarrassing or incriminating photos, browsing history, or steamy personal letters.
- Crypto-only purchases – Companies that offer great deals but accept payment in cryptocurrencies are also a source of concern. Customers are unlikely to have any protection or ability to return defective equipment as they would using a traditional credit card for the purchase.
- Pump and dump – Scammers hype a cryptocurrency investment as a sure winner, but when their victim invests significantly in the coin, driving the price up, the scammers sell their holding, and the price plummets, leaving the victim with worthless shares.
- Cryptomining scams – Cryptocurrencies are created by computer algorithms, known as "mining." Computers create complex blockchains that can be used to trace the origin and ownership of each coin. Some scammers offer to rent mining equipment (computers) to those seeking to make money by creating a blockchain. These opportunities may appear legitimate but actually cost the renter more than he can make.
How to Avoid Crypto Scams
Be skeptical of all get-rich-quick schemes. If it's too good to be true it usually is not true. Always do a background check on the individual promoting the scheme or coin they are promoting. If the leadership of an organization, new crypto wallet app, or founders of a new coin are not clearly named and easily researched, stay away.
Step back and watch what happens to others who take advantage of the opportunities offered.
Remember that scammers may use sophisticated algorithms to identify people who are curious about crypto but unfamiliar with how it works. They may even buy data or mailing lists from companies that provide crypto wallets, allowing them direct access to your email and personal details. This information allows them to target you with phishing scams and social media ads.
It's difficult to ignore the promises of easy money. At the same time, it's essential to do research before committing large sums to risky schemes. Experts say not to invest more than five percent of your income in potentially fraudulent crypto offerings through emails and targeted ads.
If you research first and feel confident that you are taking steps to invest in crypto without undue influence from outside forces, proceed with caution. There are too many stories about people who have had their life savings stripped away because they trusted a scheme that was too good to be true.