The American frontier, which people imagine as the Wild West, existed as a territory without laws that contained unknown regions between two extremes of danger and reward. People experience those same emotions whenever any new market or technological advancement, or economic transformation occurs, because it interrupts their normal business operations.
The cryptocurrency market today creates the same feeling of anxiety that people experience about unknown territory. The crypto markets now attract retail investors and institutional players, and everyday speculators who all pursue large profits while sharing the space with advanced criminals who include scammers and fraudsters, and thieves.
The Federal Trade Commission (FTC) Consumer Sentinel reported that between October 2020 and March 31, 2021, approximately 7000 individuals experienced financial losses exceeding 80 million dollars because of cryptocurrency scams. The current data shows a 12 times higher report rate than last year during this time period together with a 1000 times increase in reported financial damage.
The current situation requires people to understand existing scam patterns because it has become essential for them to learn self-defense methods.
Key Takeaways
The proliferation of cryptocurrency trading has been accompanied not only by serious investments but also by numerous scams that are trying to take advantage of the situation. Crypto scams typically seek to obtain personal information, like security codes, or trick someone into sending their crypto to a fraudulent digital wallet. Social engineering scams, which include romance scams, giveaways, phishing attacks, extortion attempts via email, and more, are common in our society today, but are particularly prevalent within the crypto world.
The Two Categories Every Crypto Investor Should Know
There are mainly two categories of crypto scams to be aware of. The first is one where the scammers try to gain illegal access to a target’s wallet or authentication data – i.e., attempting to get hold of the target’s private key or the security codes for the digital wallet. The second type involves tricking the target into sending money to the scammers’ wallets.
Social Engineering Scams
How Psychological Manipulation Fuels Crypto Fraud
Social engineering fraud relies on exploiting people’s trust rather than any technical weaknesses. The fraudster poses as a government agency, a legitimate organization, technical support staff, a colleague, or even a friend. The effort required to win their victim’s trust is not spared in this case, and once gained, that trust is exploited to steal account details or initiate direct payments. It is worth remembering that when someone you know and trust suddenly asks you to pay using cryptocurrencies, it should raise a red flag.
Romance Scams
Romance fraud takes place on dating websites, where scam artists set up realistic profiles and build what they hope to be lifelong relationships. Once they establish an emotional connection, they begin talking about investments in cryptocurrencies and eventually ask for payments or access to account details. About 20 percent of the funds lost in romantic scams were in cryptocurrencies.
Imposter and Giveaway Scams
The scammers also pretend to be celebrities, renowned entrepreneurs, and cryptocurrency influencers. The typical way is to employ a “giveaway scam,” which involves promising to double the cryptocurrency deposited into their account. A polished message posted by someone who apparently is a verified user on social media sites makes the whole thing legitimate and urgent by claiming a “once-in-a-lifetime” offer. Between September 2020 and March 31, 2021, it was discovered that more than $2 million worth of cryptocurrency had been transferred to fraudsters posing as Elon Musk. As per FTC statistics, 14% of reported losses incurred through impersonation are related to cryptocurrency.
Phishing Scams
Phishing attempts on cryptocurrency platforms are primarily aimed at getting one’s private wallet keys. These phishing attacks start by sending a message to the user containing a URL for a spoofed website, where the victim will be asked to provide personal information. This will allow the attacker to steal the cryptocurrencies in their possession. The number of victims suffering through phishing attacks in 2019 is alarming. According to the FBI, more than 114,700 people were duped by phishing scams and lost around $57.8 million, or $500 each.
Blackmail and Extortion Scams
There is also a threat-based email scheme in which the scammer threatens to expose the individual’s browsing history for accessing adult or criminal websites, demanding private keys or cryptocurrency transfers as payment not to reveal the data to the authorities. This is considered a crime of extortion that needs to be filed immediately at local police stations or the FBI.
Investment and Business Opportunity Scams
“If it sounds too good to be true, it probably is.” This saying is universal in any form of investment, but most especially crypto. Fraudulent sites will make promises of guaranteed income or an intricate system that requires substantial investment for an even more significant reward. The individual will find out later that all these promises are just lies and that they have lost all their money.
ICOs and NFTs: New Frontiers for Fraud
With the arrival of Initial Coin Offerings (ICO) and Non-Fungible Tokens (NFT), there are new opportunities for fraudsters. They create fake ICO websites and ask users to transfer cryptocurrency into hacked wallets. There are also fraudulent ICO projects themselves, where the hackers distribute unregistered tokens or lure investors with deceptive marketing tactics.
DeFi Rug Pulls
DeFi (decentralized finance) has become one of the most groundbreaking fields of the crypto world in recent years, as well as one of the most heavily targeted by hackers. In the rug pull scheme, the developers launch a DeFi platform, gather substantial investments from interested parties, and flee with the money. With the rising popularity of yield-generating DeFi products, rug pulls have become more widespread and lucrative than ever before.
Cloud Mining Scams
The cloud mining systems present themselves as a chance for retail investors to be able to buy continuous mining power, but without having to handle the equipment. Many of these cloud mining schemes, though, don’t control the hash power they claim to manage and won’t ever pay out after accepting their fees upfront. It’s true that the practice of cloud mining is legitimate, but due diligence is crucial in making an investment in any particular service.
Are Cryptocurrency Scams on the Rise?
Sadly, yes. Cryptocurrency schemes have been rising in tandem with the cryptocurrency phenomenon itself. According to cryptoasset risk management firm Elliptic, DeFi users and investors incurred losses amounting to $10.5 billion in November 2021 due to theft and scams — seven times more than the $1.5 billion lost in 2020.
Warning Signs of a Potential Crypto Scam
Here are some of the warnings from the FTC to watch out for when considering a crypto opportunity. Never believe promises that you’ll be able to make money; even if celebrities make those promises, remember that they can be faked. Promises of guaranteed huge profits are a huge red flag. Don’t believe any offer of money — whether real cash or cryptocurrency — that you’ll receive for free. Finally, promises that lack any sort of information are another warning sign to take into consideration.
How to Protect Yourself From Crypto Scams
As explained by AARP, several simple recommendations will help you stay safe. Don’t put your money into cryptocurrency investments if you don’t truly understand what you’re doing, and always be ready to lose whatever amount you plan to invest. Never take investment advice from strangers you’ve met online, and completely disregard any offers you find through social media sites. Most importantly, never reveal your private keys to anyone or store them on your computer, but instead keep them safely away in case someone hacks you.
The Bottom Line
This gold rush in the crypto world has also been associated with the same volatility of the classic wild west era. As the system becomes more complex and large-scale, it will continue to draw innovative fraudsters. There have been only two major categories of threats that have remained constant: socially engineered tricks that exploit the victims to steal account details, and manipulation techniques that lure the victims into transferring funds into fake wallet addresses. To become familiar with such scamming tactics is to protect oneself from falling prey to them.
In general, investments in cryptocurrencies and ICOs carry high risks and uncertainties. This post does not intend to encourage readers to invest in cryptocurrencies or ICOs. It is important to consult a professional before taking any investment-related decisions, since every individual case is different.