Cryptocurrency is a brand new industry. It is unregulated, and rapidly developing, which leaves it exposed to many different types of risks. I was recently doing some research on a transaction and thought it would be helpful to discuss some of the pitfalls, and scams, to look out for before you make a transaction. I hope it is helpful!
Keep reading for the 10 most common types of scams you will find in the cryptocurrency space.
10 Types Of Scams
1) Ponzi Schemes:
These are common in every part of the financial industry. One major clue to identifying a ponzi scheme is determining if there is a legitimate service being provided. If someone promises you high returns, and there is an absence of a product or service, it is likely a ponzi scheme. In addition, if there is a financial reward solely because you have recruited someone you might want to be on alert. There have already been many of these in the crypto space which have imploded or been shut down.
How to avoid these types of scams:
Be aware of the actual service being provided. There are a lot of great services being developed that provide true value to a customer. Referral bonuses and affiliate commissions are legitimate if the product or service solves a need in the end users life. If not, avoid it.
- Initial Coin Offering (ICO) Scams:
Initial coin offerings are a new way for a company to raise funds for future growth. The problem is that this way of raising money is unregulated and there is very little guidance protecting a would be investor. Many ICO's, promising a great future service, have raised millions of dollars and then quickly disappeared the next day leaving the investor nothing to show for it.
How to avoid these types of scams:
Be sure to review each projects white paper before you invest. A white paper is the companies mission statement and intention for future growth. If it is poorly written or unclear, makes lofty promises, or doesn't answer obvious business questions, it is probably not worth the risk. Also, take time to research the team of people working on the project to be sure they have the experience enough to follow through on the promises they are making in their white paper.
- Fake Coins:
Someone calls you and offers you an opportunity to invest in a new up and coming cryptocurrency token. You send money only to find out there is no such coin in existence. This is the same as if someone called and said you won a sweepstakes that you have never entered.
How to avoid these types of scams:
Know who you are dealing with. Most likely, no one is going to seek you out for a legitimate investment unless you know them personally. Even then, be sure to do your due diligence before blindly throwing money at something.
- Corrupt Exchanges:
Exchanges promise to make a safe transfer of your fiat currency into cryptocurrency. Unfortunately, many exchanges do not follow through on their promise. Guidelines and regulations remain unclear, leaving the possibility of poor business practices and corrupt exchanges. In addition, some exchanges are based in foreign countries with different rules and practices. Obviously, this brings risk in and of itself.
How to avoid these types of scams:
Only use exchanges that are well known and have proven themselves in the industry. See my Resource Page for the most trusted exchanges.
- Fake Cryptocurrency Wallets:
Someone builds a cryptocurrency wallet app. You download it and transfer your cryptocurrency into it. The only problem is that the wallet you just downloaded is fake and they now have stolen your cryptocurrency. Several of these types of scams have been found in popular app stores.
How to avoid these types of scams:
Keep in mind that every wallet is not created equal. There are a lot of legitimate, and well known wallets, that have proven themselves over time. Don't venture to far of the beaten path on this one. Check my Resource Page for my list of trusted cryptocurrency wallets.
In addition it may be helpful for you to read : "Which Cryptocurrency Wallet And How To Use It?"
- Phishing Schemes:
Someone is asking you questions attempting to gain information that will help them access your accounts. This can be done through email, phone calls, social media or any other kind of media. For example, you receive an email from a cryptocurrency company saying that they need to verify your private keys for security. (P.S. Never Give Anyone Your Private Keys...Ever!) It is never a good idea to give anyone any information about you unless you are 100% confident you know who you are dealing with.
How to avoid these types of scams:
Know who you are dealing with and if you do not, use extreme caution.
Always double-check URLs to make sure you’re visiting the genuine website.
Don’t click on suspicious links that are emailed to you.
Never disclose your private key.
- Pump and Dumps:
An individual or group buys a cryptocurrency at a low price. They hire a celebrity, or otherwise hype the coin so that it is artificially or unnaturally inflated to a higher price. The original purchaser quickly sells off at this higher price. This happens across the whole financial sector, but cryptocurrencies have been especially susceptible due to overall market hype and poor investor education.
How to avoid these types of scams:
Recognize that if one coin or token suddenly jumps to extremely high prices for no clear reason, it is probably being artificially manipulated. Don't blindly jump into a trade just because you are afraid you may miss an opportunity. Be sure to follow a well laid out investment plan and strategy.
- Impersonators:
People will create social media profiles that closely mimic the big influencers in the industry in order to mislead you in another direction. They may be spreading false information or trying to get you to invest money in their own project.
How to avoid these types of scams:
Remember that an authentic following has to be earned. An authentic profile usually has posts or updates that speak directly to their audience. Fake profiles often have weak content, low amount of posts, high spam content, and/or high follower numbers with low engagement. Also, check to make sure authentic verification badges are present if the social media site provides these. For example, Twitter has a light blue badge when it is the official users name.
- Fake Websites / Mimic Websites:
This is along the same lines as social media impostors. People will create websites that closely mimic the popular, more authoritative website. The hope is to divert traffic to their website and gain your information or money. Cryptocurrency exchanges have been very susceptible to these kinds of scams. People create an account with a fake website, transfer their cryptocurrency into a wallet at the fake website, and then the true owner never has access to it again. There money is gone.
How to avoid these types of scams:
Double check to make sure the website you are dealing with is secure and that it is the official website that you are looking at. Secure websites have a closed lock symbol in the search bar. Don't give any information to a website that you are not familiar with before verifying its authenticity.
- Ransom:
I questioned whether to put this one in the list because it is so alarming. However, I decided to include it because truth is truth and this is the world we live in.
People, or proprietary information, are kidnapped and held for ransom to be paid in cryptocurrency. Sadly, there have been a few well known cases where the captor demands cryptocurrency in exchange for loved ones. Pretty sick but unfortunately it is true.
This probably happens more with regular fiat currency but unfortunately it has happened with cryptocurrency also.
How to avoid these types of scams:
Always be aware of your surroundings and be humble with your business dealings.
How to Identify Potential Scams - WARNING SIGNS!
-URL is not secure.
-Promise of high returns or rewards.
-Poorly written white paper
-No updates on white papers.
-No clear roadmap outlining in detail the project's plan for success
-Lots of spammy content on website or social media profile.
-Limited posts with low engagement.
-Quick rise in price for no apparent reason.
-Misleading details.
-Poorly constructed development team. Little or no information about the developers and their past experience.
Scam ICO Warning Signs:
-Owner of the project owns more that 50% of the cryptocurrency.
-No ending date on when the ICO will finish being sold.
-Coin or Token not found on major exchanges. Only found on obscure exchanges.
-Codebase is not found on Github. Scammers will not provide codebase or they will try to hide it.
Conclusion:
Ok...so now that I have scared you with all of this negative information, I wanted to take a minute and say that there are plenty of good, reputable and legitimate ways to be involved with cryptocurrency. This industry is just like any other financial industry. There are both legitimate and illegitimate uses for it. The most important thing to realize is that this industry is so new that the rules are still being written. It is easy to be taken advantage of if you are not well educated on your surroundings. My final suggestion would be to take your time, dig deep into your research and due diligence, and follow your plan before making any emotional decisions. The long term, upside potential this industry offers is amazing and I wish you the best on safely taking advantage of it.
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