Although cryptocurrency While an attractive investment, it is more susceptible to scams than any other payment method. More than $1 billion was reported stolen by crypto scams between January 2021 and June 2022, according to a report by the Federal Trade Commission.
Crypto scams are a type of investment fraud that can take many forms, from phishing scams to carpet pull. Since cryptos blockchain technology is not regulated by a central authority such as a bank, bad actors can easily take advantage of hopeful investors.
Crypto transactions are also pseudonymous (users communicate through coded addresses, not legal names) and irreversible, so you’re unlikely to be able to recover any money lost to a scammer. Here are the most common crypto scams, how to avoid them and what to do if you’ve been scammed.
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Why is crypto prone to scams?
Cryptocurrency is particularly attractive to scammers for three main reasons: a lack of centralized authority, irreversible transactions, and the ability to be nearly anonymous.
Decentralized: Since crypto assets and applications are part of a decentralized financial (DeFi) system, which is meant to be used without oversight from a bank or government, there is no central authority to stop a transaction or flag something if it looks suspicious.
Irreversible: Because of the way the blockchain works, there is no way to get your funds back once you’ve sent a crypto transaction.
Pseudonym: Crypto users interact through wallet addresses, not legal names, so it’s difficult to track down specific users, especially if they’re trying to stay hidden.
While crypto may be more prone to scams than other assets, “a lot of the scams that are happening happened before crypto existed,” says Sol Nasisi, founder of cryptocurrency gifting service GiftaBit.
“With crypto, both the risks and rewards are strong,” says Nasisi. “And as with any new technology, there will be bad actors who exploit it.”
What are the different types of cryptocurrency scams?
There are many different scam techniques in the crypto space. Here are some of the most common:
Leave scams
Exit scams occur when developers of new crypto projects deceive investors by promising huge returns, but pocket the funds or abandon the projects before investors can benefit.
Initial coin offering (or ICO) scams, also known as “pump and dump” schemes, happen when developers promise that their new coin or crypto platform will generate huge returns, then disappear with investors’ funds by selling all the tokens at once.
Mat pulling, which get their name from the expression “pull the rug out,” involves a developer attracting investors to a new cryptocurrency project, usually in DeFi, and then pulling out before the project is built, leaving investors with worthless currency. These scams can sometimes include a version of a Ponzi scheme, where investors profit by recruiting other users with false financial promises.
Celebrity endorsements often fits into this category as well: Developers will pay famous actors or internet personalities to promote a coin or platform to attract investors, then pull the plug. It can also be phishing scams when scammers use fake images, videos or websites to claim that public figures have endorsed their scheme.
Phishing scams
Phishing scams are nothing new, but transactions are harder to detect and reverse with crypto. These can look like job offers or requests for help, usually through random contact by email, phone or social media.
Offers and solicitations may go to a professional-looking website or describe an “unmissable” investment opportunity. Scammers may ask for a direct crypto transfer and stop communicating once payment is received, while others may request that you share the private keys used to secure your crypto wallet so they can access and empty your account .
Scammers may also try to create fake versions of popular crypto exchanges or online wallets under similar domain names to get investors to log in with their credentials.
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How can you avoid cryptocurrency scams?
Cryptocurrency scams are common and can involve sophisticated tactics, but it’s possible to avoid them. Using common sense measures and proven security protections can go a long way. Here are some useful methods:
Protect your wallet: You need some form of storage, like a wallet, to keep your crypto safe. If a firm asks you to share your private keys to participate in an investment opportunity, it is almost certainly a scam. Use security backup methods such as a seed phraseA set of passcodes that can unlock your wallet like a master password can provide additional protection.
Ignore cold calls: If you are contacted out of the blue about a cryptocurrency investment opportunity, it is likely a scam. Never give away your personal information or transfer money to someone you don’t know.
Ask yourself if it’s too good to be true: Cryptocurrency scams often promise high returns on your initial investment that are too good to be true. Any company offering get-rich-quick investment opportunities is likely to be fraudulent.
Crypto is a high-risk investment, and no asset can reliably guarantee high returns.
Take your time: If a company is trying to pressure you into investing quickly, it’s probably a scam. Some scammers even offer bonuses or discounts to entice you to invest right away. Take your time and do your research before investing any money.
Avoid social media hype: Scammers often use social media to advertise fraudulent cryptocurrency investment opportunities. Some also use images of celebrities – often without their permission – and high-profile people to “endorse” their company and make their investment look legitimate.
Read the white paper: Developers release documents called white papers that explain the technology they are working on and the purpose of the coin or project. It is usually published online and easily accessible.
“If you don’t know anything about the supporters, or if the project doesn’t solve any need, it’s not a good idea to invest,” says Nasisi.
What to do if you have been scammed
Falling victim to a cryptocurrency scam can be devastating, but it’s important to act quickly if you’ve made a payment or shared personal details. You should contact your bank as soon as possible if you:
Made a payment with a debit or credit card.
Made a payment via bank transfer.
Shared Personal Information.
Scammers often target victims of cryptocurrency scams or sell their details. Make sure you change your security details and passwords, especially for online banking, if you think you’ve been caught in a scam.
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How to report scammers
Whether you’ve fallen for a cryptocurrency scam or just seen one online, reporting it is important because it helps officials investigate fraudulent companies and stop them from targeting other people.
Some scams fall outside US jurisdiction, so law enforcement may not be able to enforce consequences, but it’s still helpful to report them. You can report a crypto scam to:
Disclaimer for Uncirculars, with a Touch of Personality:
While we love diving into the exciting world of crypto here at Uncirculars, remember that this post, and all our content, is purely for your information and exploration. Think of it as your crypto compass, pointing you in the right direction to do your own research and make informed decisions.
No legal, tax, investment, or financial advice should be inferred from these pixels. We’re not fortune tellers or stockbrokers, just passionate crypto enthusiasts sharing our knowledge.
And just like that rollercoaster ride in your favorite DeFi protocol, past performance isn’t a guarantee of future thrills. The value of crypto assets can be as unpredictable as a moon landing, so buckle up and do your due diligence before taking the plunge.
Ultimately, any crypto adventure you embark on is yours alone. We’re just happy to be your crypto companion, cheering you on from the sidelines (and maybe sharing some snacks along the way). So research, explore, and remember, with a little knowledge and a lot of curiosity, you can navigate the crypto cosmos like a pro!
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