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A complete guide on detecting, preventing, and safeguarding against crypto scams

The emergence of cryptocurrencies introduces a new era that can be referred to as the “Wild West”. Similar to the Wild West era of America, the current crypto space involves exploring unknown territories, earning huge returns, but with immense risk. Thousands of investors, both individual and institutional, are jumping into the profitable crypto sector. Unfortunately, among them are criminals applying advanced methods to trick investors and obtain their data for use in future attacks.

According to the Consumer Sentinel Network Data Book of the Federal Trade Commission, between October 2020 and March 31, 2021, there was an exponential rise in crypto-related scams. During that time, there were more than 7,000 reported cases of crypto scams, where over $80 million were lost. The number of cases increased by a factor of 12 compared to last year, with losses increasing by up to 995%. In the face of a constantly changing crypto space, crypto scammers will not hesitate to target innocent crypto investors.

Key Takeaways

• The sudden surge of interest in cryptocurrency has not only attracted the attention of legitimate users but also that of scammers.
• Most crypto scams try to steal sensitive personal information, such as access codes, or have victims transfer cryptocurrencies to a hacked cryptocurrency wallet.
• Some social engineering scams that exist in the crypto world include giveaway scams, romance scams, phishing attacks, and extortion.
• Knowledge about the types of scams and how to protect oneself from them has never been more crucial in the face of rapid fraudulent activity.

How Cryptocurrency Scams Work?

In summary, the following can be observed with regard to cryptocurrency scams:

• Credential scams – In such instances, the scammer tries to get hold of credentials to gain entry to a user’s cryptocurrency wallet.
• Transfer scams – In such situations, victims are made to willingly transfer their cryptocurrency to the scammer’s wallet by various methods like impersonation and fake investments.

Types of Cryptocurrency Scams

Social Engineering Scams

Social engineering attacks depend not on technical skills but rather on psychological tricks and lies. The scammers train the target to perceive the party at the other end of the communication as trustworthy – an official organization, popular company, IT department, coworker, or friend. The perpetrators will invest all the time they need in building up trust before coming out into the open with their real motives. They might take weeks or months of socializing before making requests for cryptocurrency payments or access credentials.

Romance Scams

The scammers take advantage of dating apps to have victims believe that their online connection with another person is not a scam but rather a real and lasting romantic relationship. After building a rapport, the discussion soon revolves around investments involving cryptocurrencies that can generate profits for them, culminating in the transfer of cryptocurrencies or credentials needed to verify accounts. Scammers through romance scams do make use of cryptocurrencies, and according to statistics, about 20 percent of losses from such scams involve cryptocurrencies. Victims of these scams are too embarrassed to come forward.

Impersonation and Giveaway Scams

As we travel down the chain of influence, the fraudster will pose as a celebrity or influential figure in the field of business or cryptocurrency. Many of the scammers have used the strategy of doubling or multiplying the amount that the victim sends in what is popularly referred to as the “giveaway scam.” Through carefully crafted messages on social media accounts, the fraudster creates an aura of legitimacy, thereby instilling a false sense of urgency in the victim to send the money immediately. Prior to March 2021, about $2 million worth of cryptocurrency has been transferred to persons impersonating Elon Musk. According to the Federal Trade Commission, 14% of all imposter scams now involve cryptocurrency.

Phishing Scams

The phishing scams in the field of cryptocurrency aim to steal information regarding the user’s wallet account. The phishers especially look for getting the user’s private key of their crypto wallet account since private keys help in accessing the wallet account and transferring any amount from the wallet account. The phishing scam process is similar to other phishing schemes, where the phisher sends the victim an email instructing him to visit the fake website and provide his private key information. After getting the victim’s private key information, he drains all coins from his crypto wallet account.

Blackmail and Extortion Scams

Blackmail through unsolicited emails is another method of social engineering employed by online fraudsters. In this scenario, the hackers threaten to make public the evidence they have gathered that the victim frequents illegal sites or adult websites if the victims fail to provide their keys or transfer cryptocurrencies to their wallets. The actions above constitute extortion and must not be entertained under any circumstances. Instead, the victims are encouraged to report the cases to an enforcement body, for example, the FBI.

Investment and Business Opportunity Scams

The ancient saying, “If it seems too good to be true, then it probably is,” is applicable in many aspects of crypto investment. There exist many fraudulent individuals who create fake websites that guarantee profits or ask the investor to pay huge amounts of money in order to receive bigger profits. At the start, funds flow easily until an investor tries to get his or her money back, only to find out that withdrawing any money is impossible or that there are extra charges to be paid with no results.

Fake ICOs and NFT Scams

However, the growth of ICOs and NFTs has also led to scammers finding new ways to take advantage of the enthusiasm of investors. For example, scammers might create an elaborate website for an ICO and ask users to send their cryptocurrency funds to fraudulent wallet addresses. The ICO itself might be conducted by scammers, offering tokens that are not regulated by United States securities law, as well as advertising the ICO falsely regarding its purpose and team behind it. Even NFTs can be targeted by scammers, with the creation of fraudulent minting websites and scams by project creators.

DeFi Rug Pulls

DeFi, which stands for decentralized finance, is a potent driver of innovation within the crypto world, seeking to eliminate financial intermediaries from the transaction process. However, this sector has also been plagued by many malicious players. A “rug pull” entails the development of a DeFi protocol, investment of huge sums of money, and abrupt abandonment of the scheme, thereby absconding with the funds. The trend has been rising due to speculative crypto investors allocating their resources to the DeFi platform. Elliptic states that the losses incurred by DeFi participants amounted to $10.5 billion by November 2021, up seven times higher than the previous year’s figure of $1.5 billion.

Cloud Mining Scams

The idea behind cloud mining schemes is that the companies selling cloud mining services promise their customers steady streams of mining power and earnings in return for an initial investment of money. However, in fraudulent cloud mining schemes, the companies do not have the hash rate that they say they possess, and do not ever send out the rewards to the customer after having received the initial payment. Cloud mining itself is not necessarily a fraud, but a proper investigation must be done before investing in such a company.

Warning Signs of a Potential Crypto Scam

Some of the things that the Federal Trade Commission notes are warnings to be highly suspicious of include:

• Making money guarantees – any business is not going to promise to ensure that you make money; therefore, any investment opportunity that claims such guarantees should be highly suspect.
• High returns on investment – if you see a promise of huge returns with a guarantee that you will receive returns on your investments, it should be considered highly suspicious.
• Free money offers – any investment opportunity that claims to provide you with free money is almost certainly going to be fraudulent. This may come in terms of cash or cryptocurrencies.
• Exaggerated claims without any additional explanations or evidence – legitimate investment businesses have all the necessary documentation and are registered.
• Pressure tactics – fraudsters often apply pressure to their victims to convince them to invest within a certain period.

How to Protect Yourself from Crypto Scams

Knowledge is your best protection. Below are some tips suggested by AARP and cybersecurity professionals that can keep you safe when dealing with cryptocurrencies:

• Invest in cryptocurrency only if you fully comprehend it; otherwise, if you do not know what particular coin or system is about, avoid making such an investment. Never gamble with capital you cannot lose completely.
• Do not listen to any investment suggestions from a stranger whom you met on the internet – it is one of the most frequently used scenarios for social engineering schemes.
• Ignore all the social media posts suggesting that you should take part in some cryptocurrency giveaway schemes – real companies never ask you to transfer money in order to obtain money.
• Always keep your private keys secret from everyone else at all times — your private keys act as the master key to your cryptocurrency wallet. Keep them safe, ideally offline, so that no hacker can access them.
• Always research an organization or a coin before investing any money — find out whether there is a business entity registered, audited smart contracts, a verifiable founding team, and unbiased reviews.
• Always report a possible scam when you see one — contact the Federal Trade Commission, the FBI, or whatever cybercrime reporting body in your respective country.

Are Cryptocurrency Scams on the Rise?

Unfortunately, yes, and the trend is worrying indeed. The number of cryptocurrency-related scams has skyrocketed over the last few years in line with the rise in popularity of cryptocurrencies as an asset class. According to cryptoasset risk management firm Elliptic, DeFi-associated losses jumped seven times over the course of a single year, from $1.5 billion in 2020 to $10.5 billion in November 2021. The FTC stated that crypto fraud losses had increased by almost 1,000 percent in one year in 2020-2021, reflecting a 12-fold rise in the total number of reports received.

With advances in blockchain technology leading to new financial products like decentralized finance platforms and NFT marketplaces, the attack vector has widened in line with the evolving technology itself.

The Bottom Line

For many individuals, the influx into cryptocurrencies has brought up memories of the Wild West days, characterized by a similar sense of adventure, thrill, and even illegal activity. Just as the Wild West was home to both law-abiding pioneers and bandits, the crypto space is also inhabited by both legitimate entrepreneurs and scammers.

By recognizing the two basic types of scams in the crypto industry, which include credential theft due to social engineering and direct transfer fraud, as well as the tactics used in each particular type of scam, including romance scams, impersonation schemes, phishing operations, extortion, fraudulent investment opportunities, rug pulls, and cloud mining scams, you will be able to recognize a scam when one occurs.

Always remain suspicious and vigilant, and never ignore the red flags that are warning you about a scam attempt. The consequences of a scam are dire and cannot be reversed within the realm of cryptocurrency.