Cryptocurrencies may be revolutionizing electronic payments and transfers, but they also provide the perfect platform for criminals. Crypto transactions are instantaneous and impossible to reverse by nature, while the underlying technology provides pseudo-anonymity that makes it hard to track down scammers.
Let’s take a look at some common crypto scams and lessons that you can take away from them to avoid becoming a victim.
Lesson 1: Crypto ‘giveaways’ will steal your money
Many scammers pose as celebrities on Twitter by copying their profile picture and choosing a username that’s very similar to the real account. When replying to a post from the original celebrity, these tweets can look very convincing to unsuspecting victims that haven’t come across the scam.
The giveaway scam begin with a request for a small amount of cryptocurrency to qualify for the giveaway with the promise of a much larger amount in return. Since there’s a limited amount of cryptocurrency in the giveaway, there’s a strong sense of urgency to act immediately to qualify for the payout.
Twitter bots reply to the scammer’s original tweet with confirmation that the giveaway is legitimate. The sheer frequency and volume of messages encourages victims to abandon their common sense and act before the giveaway ends, while providing manufactured social proof.
A recent Elon Musk version of the scam may have snagged more than 28 Bitcoin worth $175,000 from victims, according to Ethereum World News, although some of that amount could have been transferred from the scammer’s associates and accomplices to gain notoriety.
You can avoid giveaway scams by keeping these tips in mind:
- Be wary of any giveaways that promise free cryptocurrency, since they are rarely legitimate.
- Look for Twitter’s Verified Account badge to confirm the identity of celebrity Twitter users.
Lesson 2: There’s no such thing as a guaranteed return in crypto
Most people recognize and avoid crypto scams that promise instant and guaranteed returns, but more sophisticated scams are disguised as legitimate investment opportunities.
For example, High Yield Investment Programs, or HYIPs, are a popular type of unregistered investment firm. Unlike any conventional investment, these programs promise high rates of return at little or no risk to the investor. They may also be referred to as prime bank programs.
Bitconnect was the most famous example of this scam in action. By ‘lending’ Bitcoin to a trading firm, you could generate between 0.5% and 1% daily returns after a lock-in period. Shorter lock-in periods and higher returns were reserved for those with higher ‘lending’ amounts. And the platform even included an affiliate program designed to incentivize users to invite their friends and colleagues.
At its peak, Bitconnect was among the largest crypto exchanges with a roughly $1 billion market capitalization. It collapsed after a little over a year of operation and all “loans” were canceled and converted to Bitconnect coin. Not surprisingly, these coins quickly lost almost all of their value and “investors” lost millions of dollars.
You can avoid investment scams by keeping these tips in mind:
- Remember that there’s no such thing as a risk-free return on investment.
- Stick to investment firms that are registered with the SEC or subject to oversight.
Lesson 3: Do your due diligence on any ICO investments
Initial coin offerings, or ICOs, have become a popular way to raise capital in the cryptocurrency world. For example, Ethereum’s ICO was a wild success that ended up creating one of the world’s most popular cryptocurrencies. Early investors realized a significant return on their capital.
Many ICOs are compared to initial public offerings, or IPOs, in the conventional securities industry, but there are some important differences. IPOs involve the sale of an ownership stake in a company to investors, while ICOs sell digital tokens to the public that have no equity value.
PlexCoin is one of the most famous examples of a failed ICO. The company aimed to become the world’s premier private internet currency with faster transaction speeds than Bitcoin and increased storage efficiency. The company even promised that users would be able to conduct transactions in real-life on a PlexCard VISA anywhere in the world.
In addition to promising high returns, founder Dominic Lacroix surrounded himself with industry ‘experts’ that provided an air of legitimacy to the project. These experts also helped hide his own past crimes — in 2013, his micro-loan business pleaded guilty to six counts of misleading users.
After launching PlexCoin’s ICO in August 2017, the company raised $15 million in capital from investors. Three months later the SEC halted the ICO, froze the $15 million in proceeds, and jailed founder Dominic Lacroix. This became the first formal action the SEC took against an ICO issuer.
You can avoid ICO scams by keeping these tips in mind:
- Research the backgrounds of individuals behind ICOs to see if they have a past criminal record.
- Avoid any investments that aren’t registered with the SEC or subject to some kind of oversight.
- Look for ICO opportunities backed by founders that have already experienced success in the past, as well as ICOs where the coins have real utility.
The Bottom Line
The rise of cryptocurrencies has made them a target for criminals looking to steal millions from unsuspecting victims. Due to the nature of the market, stolen funds are nearly impossible to recover, and criminals enjoy anonymity that protects them from being found in many cases.
By keeping the tips we’ve discussed in mind, you can avoid becoming a victim of several common crypto scams and protect your investment capital over the long run.
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