Hackers and scammers steal billions of dollars from unsuspecting cryptocurrency users yearly. And worse, they usually get away with it, thanks to the pseudo-anonymous nature of the blockchain. Fortunately, you can avoid becoming a victim of crypto scams by learning to recognize them and taking simple protective measures.
In this article, we'll look at the most prevalent crypto scams and three strategies you can use to avoid becoming a victim.
Crypto Scams on the Rise
Hackers stole $1.9 billion worth of cryptocurrency between January and July 2022, according to Policy Affairs, which is a 37% increase over the same period last year. While a single theft led to a $615 million loss, ten other attacks resulted in more than $100 million in losses each, demonstrating just how common major heists have become.
The biggest crypto thefts of 2022 (so far) include:
- Axie Infinity - $615 Million
- Wormhole Crypto Bridge - $320 Million
- JuicyFields.io - $273 Million
- PARAIBA World - $267 Million
- Nomad Bridge - $190 Million
In addition to these thefts, billions more dollars have been lost thanks to rug pulls, exit scams, flash loan scams, romance scams, and other criminal activity. For example, the Thodex rug pull alone resulted in more than $2.6 billion in losses last year. And in the U.S., unsuspecting victims lost more than $185 million to romance scams during just the first quarter of 2022.
4 Most Common Crypto Scams
The first step to avoiding crypto scams is learning to recognize them. While they come in many shapes and sizes, most scams share some common characteristics. Many arise from immature or insecure platforms, while other scams make unrealistic claims with scant information about the project's founders or backers.
Today's most common crypto scams include:
- Hacks & Exploits – Crypto theft occurs when hackers exploit a problem in a protocol's smart contract code or steal private keys. For example, the Harmony Horizon Bridge lost $100 million after a hacker found a software bug. And IRA Financial Trust lost $37 million after hackers accessed its master key on Gemini.
- Rug Pulls – Crypto rug pulls occur when a developer or creator promotes a new coin (ICO) or non-fungible token (NFT) and then disappears with investor money. For example, Blur Finance disappeared with $600,000 worth of crypto tokens in August after developers took out over $600,000 of BLR and caused a 90%+ crash in value.
- Flash Loan Attacks – Flash loans enable crypto users to borrow digital assets without collateral. Unfortunately, scammers use them to buy a majority stake in a project's governance tokens, allowing them to withdraw all the funds. Or, they can manipulate the price of a crypto asset on one exchange with the loan and quickly resell it on another exchange. For example, a flash loan on the Fei protocol resulted in a $79 million theft in August.
- Social Engineering – Crypto scammers commonly use social engineering to manipulate victims into handing over their money. Recently, con artists have been fond of romance scams targeting victims in dating or social media apps to invest in fake crypto projects. Other scams involve fake social media profiles.
Of course, tomorrow's scams could use the same techniques in novel ways. For instance, social engineering could move onto metaverse platforms, or rug pulls could transition to NFTs rather than ICOs. But still, the core concepts behind these attacks remain intact, and knowledge is power when it comes to avoiding them.
3 Strategies to Reduce Risk
You can take several steps to avoid becoming a victim of crypto scams aside from simply being aware of them. These steps include securing your crypto assets and conducting more robust due diligence before investing in a crypto project. While avoiding every scam is impossible, these steps minimize your risk.
The three most effective strategies include:
- Use Cold Wallets – Long-term investors can safeguard their crypto assets by keeping most of their holdings in cold wallets. By only keeping some of your holdings in hot wallets or exchanges, you have far less risk of losing everything in a data breach. And as a bonus, you're less likely to succumb to FOMO when you have to take the time to transfer tokens out of a cold wallet.
- Do Your Due Diligence – The cryptocurrency market is far less regulated than conventional stocks or bonds. As a result, due diligence is even more essential to avoid fraud. Reading whitepapers, evaluating management teams, and looking at market depth and other technical factors can help you determine if an ICO or NFT is an excellent value or a potential fraud.
- Delay Your Decisions – Most crypto scams rely on victims making rash decisions without much thought. Therefore, one of the most effective ways to avoid these scams is to delay decisions by a day or two. By that time, the FOMO or urgency that scammers use will wear off, making well-informed decisions easier.
Scams Aren't the Only Risk
Crypto scams aren’t the only way to lose cryptocurrency. According to Cane Island Digital Research, 4% of available Bitcoin is lost yearly, and 20% of the total supply is lost or inaccessible. These figures don’t include Ethereum or any of the thousands of other popular cryptocurrencies.
These losses occur in a few ways:
- Sending cryptocurrency to the wrong wallet by getting addresses mixed up.
- Losing physical devices containing crypto, such as computers or cold wallets.
- Burning cryptocurrency for various reasons, such as a proof-of-burn process.
Crypto users should consider these risks when sending cryptocurrency or using hardware wallets. After all, lost cryptocurrencies are gone forever, and casualty losses are only covered if they’re attributable to a federally declared disaster (e.g., a federal casualty loss).
The Bottom Line
Crypto scams are becoming more common each year. While they come in many flavors, most use the same familiar tactics to deceive victims.
You can avoid becoming a victim by understanding how common scams work and taking simple preventive measures. While preventing every crypto scam is impossible, you can safeguard your assets from most of them with the techniques discussed in this article.
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