Cryptocurrencies are a new and complex technology.
As digital asset technology evolves and new cryptocurrencies enter the market, this lends itself to difficulties for those participating in the currency markets to fully understand how the technology works.
Often lack of expertise and insight provide fertile ground for those looking to conduct scams and commit fraud.
Practicing due diligence is paramount. Research and continuous education of cryptocurrencies and the markets will arm you with the highest protection level possible. Below we break down familiar and not-so-familiar scams that continue to threaten cryptocurrency investors every day.
Some scams are “as old as the day,” but they continue to catch many off-guard. One recycled scam that shows up every year is a phone call or an email from the Canada Revenue Agency. The ‘agent’ contacts you and references back taxes, strict fines and legal action if you do not settle your debt. They pressure you to pay your back taxes’ in bitcoins or other cryptocurrencies. But rest assured, the Canada Revenue Agency never calls or emails. They contact individuals through conventional letters sent via the post office.
Malware is the original "weapon of choice" for online scam artists. The complexity of cryptocurrencies and the technology upon which they operate increases the efficacy of malware. Thieves and scammers in the crypto ecosystem write malware to attack your digital wallet, empty your accounts, spy on your clipboards to steal your cryptocurrency addresses, and swap out your exact addresses for those belonging to a scammer.
This type of malware is called 'Cryptocurrency Clipboard Hijackers,' and it works by monitoring Windows clipboards. Reports indicate that this malware has over 2.3 million bitcoin addresses. Even Mac OS users are vulnerable in some circumstances when using Slack and Discord chats. In some instances, malware converts your computer into a cryptocurrency miner. This tactic hijacks your computer and your electric bill for others to mine more bitcoins.
Keep your virus software up to date.
Never download or execute files unless you are confident, they are from a reputable source.
Never open a suspicious attachment.
Most of us are familiar with the term ‘phishing.’ It is hardly a new type of online fraud, but it is one that is increasingly popular among cryptocurrency scammers. This type of scheme comes to you from your crypto exchange or digital wallet provider. Thinking it’s an email from their exchange or wallet provider, investors click on the link provided, which takes them to a site that looks and feels exactly like their exchange or wallet site. However, the site is fraudulent. By entering your account and login information into this fake site, you give the scammers all the information they need to empty your accounts.
Keep your private key private. Never give it out.
Examine the URL in the link thoroughly to ensure it is the link to your exchange or wallet.
Never click on any link that you are not 100 percent sure of.
Fraudulent bitcoin exchanges operate in much the same way as phishing scams, and they look, feel, and sound authentic. Some methods employed in fraudulent wallet and exchange scams are to scare unsuspecting customers or provide outrageous offers such as generous ‘bonuses’ to those making large deposits. These ‘exchanges’ may then charge exorbitant fees to start draining your accounts. They also make it difficult or impossible to withdraw your funds or empty your accounts and disappear.
A cautionary tale of the BitKRX scam, which originated in South Korea, lulled investors into a false sense of security by incorporating the South Korean exchange name KRX. BitKRX claimed affiliation with KOSDAQ, the South Korean Stock Exchange and the South Korean Futures Exchange, which convinced many of its legitimacy until it was exposed in 2017.
The fraudulent wallet is another scheme for cryptocurrency investors to pay attention to. These sophisticated methods of theft trap you by offering mobile apps for your smartphone. Once you download and install them, they access whatever information they need on your smartphone and hack your accounts. One might think they can count on app stores to safeguard consumers from these high-tech thieves, but some apps find their way into the Google Play store.
Keep your business with the tried-and-true exchanges.
Never allow yourself to succumb to pressure to deposit funds or provide personal information.
Download only those apps for wallets and exchanges that you’re sure are legitimate.
Research any wallet or exchange service before taking the plunge to do business with.
Who is running that company? Where are they located? Can you confirm their legitimacy through any other source?
Social media platforms are heaven for celebrity impersonation frauds. Scammers set up celebrity profiles and announce giveaways or promotions where they ask people to send them small amounts of bitcoin with the promise of returning larger amounts in exchange, often promising double what you send them. This type of scam is rampant on Twitter but also pops up on live-streaming platforms.
Impersonation scams tend to appear very convincing as the Twitter accounts have the verified blue checkmarks. The scammers accomplish this by taking over a verified account and merely changing the name. They pad the number of retweets, likes, and other stats using bots to make the account look legitimate.
Examine the name and handle on the account closely to the celebrity’s real name.
Use the blockchain explorer to check on the address sending out this giveaway information.
Assume that any celebrity accounts which is giving away free digital currency are a fraud.
Blackmail never goes out of style. One typical bitcoin blackmail comes in the form of an email, where the scammer claims to have hacked your computer and can now access all your files. They threaten to release incriminating or embarrassing data that you might not like to be set loose on the internet. They may even threaten to send it to everyone on your contacts list or spam your social media connections unless you send them cryptocurrency.
In this case, the blackmailers usually never possess incriminating information. They play a game by sending out as many blackmail letters as possible, knowing that some small percentage of investors will fall for the scheme and provide the ransom. Using a virtual private network (VPN) when you surf the internet will be one way to keep blackmail emails at bay.
Ponzi schemes are nothing new. Named after Charles Ponzi (circa 1920), early variations of this scam date back as early as the mid-nineteenth century. One of the more notable Ponzi schemes in recent memory was run by Bernie Madoff. What a Ponzi scheme does is sell to investors a promise of high returns. As they continue to sell the promise to new investors, the schemer pays out a portion of the new incoming investment funds to earlier investors who think they are legitimate returns. Believing the investment is a good one, they pour even more funds into the shame.
At some point, either it becomes too much of a challenge to entice enough new investors into the scheme to continue paying out to earlier investors, or the scammer absconds with the money. In either case, the scheme collapses. Cryptocurrencies are not immune to such schemes. In 2017, Bitconnect closed its exchange after some alleged it was a Ponzi scheme. It promised a return on investment of 40 percent, which drew attention and suspicion from the financial industry regulators. South Korean site MiningMax was another crypto Ponzi scheme. Unregistered with the SEC in the U.S., it asked investors to recruit new investors for $200 apiece while paying daily ROIs for a $3200 investment. This scam resulted in arrests in 2017. Any crypto investment promising returns too high to make sense or one that asks others to recruit new investors should raise red flags for you.
Cloud mining is a variant of cryptocurrency mining that enables miners to mine without using expensive hardware. Cloud mining services rent out server space at set rates to allow miners to mine their coins. While this is legitimate, scammers often promote mining opportunities with absurdly high returns and exorbitant hidden fees designed to empty your accounts.
It is worthy to note that even honest cloud mining operations fall short compared to simply purchasing cryptocurrency. Leasing any mining equipment is typically a more flawed investment than investing in coins. This is baked into bitcoin economics; no matter the price fluctuation, buying is superior to mining similar digital currency amounts.
Made famous by the movie ‘The Wolf of Wall Street’, the Pump-and-Dump scam has been around for a long time. This scam comes to life when an investor or a group of investors identify an alternative coin with a small market cap and buy out the digital currency. Along with false promotion, this triggers a buying spree in the market by investors not wanting to miss the next big thing. When the price—and profits—reach a favourable point, the initial pumpers dump it. This is an old trick in the traditional finance and investing industry and a highly illegal one. No such regulations exist in cryptocurrency markets yet to prevent this. It is quite common.
In 2018, an account on Twitter claiming to be that of John McAfee promoted the altcoin called GVT. Trading volumes doubled, and prices jumped from $30 to $45 in minutes and then dropped back down to their starting price when the scammers sold off and disappeared.
The rise in the price of bitcoin is nothing short of meteoric over the past few years. Those who got in early have reaped the benefits of seeing prices jump to the tens of thousands of dollars. Naturally, cryptocurrency investors are on the lookout for the next bitcoin to snap up early and see similar gains. However, knowing that investors are eager to find the next big score, scammers are just as keen to ensnare them.
One of the best ways to get in early for a particular coin is to purchase during an initial coin offering or ICO. Buying these coins and tokens during an ICO is the easiest way to get in early. Despite ICO funding dropping off significantly from 2018’s $11 billion-plus high-water mark, this is a scam of which investors should remain wary. Grifters create enticing marketing campaigns and generate hype that draws in those looking to strike it rich, only to find out the coins they purchased do not exist. Most recent reports put the number of ICOs launched in 2017 that were fraudulent were as high as 80 percent.
Bitcoin Savings & Trust was such an operation. They created a fake coin and used a Ponzi scheme to get people to invest. The man behind the scam, Trenton Shavers, received 720,000 bitcoins from investors by promising seven percent in weekly interest. He used the proceeds to pay old investors and stash it in his bank accounts. The SEC shut Bitcoin Savings & Trust down in 2014 and fined them over $40 million.
Even legitimate coins often fail and are at best a very risky proposition. This is another area where doing your homework pays off. Read the white papers, ascertain what the currency is for, what technology is behind it, and what team is behind it.
If an overseas or local scam operator has victimized you, you are probably out of luck, especially where cryptocurrencies are concerned. But you can always report the scam so that others may not fall prey to it. You can report any sort of cryptocurrency scam to Canada's Financial Consumer Agency (FCAC) or the Canadian Anti-Fraud Centre.
Cold storage wallets.
Only conduct business with known and reputable service providers.
Keep your keys private; never share them.
Confirm all addresses.
There is no magic bullet when it comes to avoiding cryptocurrency scams. As cryptocurrencies gain popularity, more scammers and scams are sure to follow. The best thing you can do for yourself is to keep reading and educating yourself about the crypto ecosystem and stay current on all the trends and scams that arise.Start Trading
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