Common Cryptocurrency Scams

As cryptocurrencies continue to grow in popularity, the crypto community has become an increasingly lucrative target for a wide range of hackers and other malicious actors. And while investors’ crypto tokens are usually protected by relatively secure wallets or institutional custodians, cybercriminals are increasingly preying on human error in order to achieve their ends.

Phishing Scams

During a phishing scam, a malicious actor impersonates a credible authority figure or organization in an attempt to trick a victim into disclosing sensitive information or granting unauthorized access to their funds. The messaging in a phishing attack usually expresses some form of urgency — either to prompt you to impulsively react to an alleged ‘emergency’ or to claim a time-sensitive reward.

Phishing attacks can be difficult to identify since they can be presented in an endless array of formats. For instance, phishing might take the form of misleading phone calls, text messages, advertisements, or emails — essentially any form of communication. In many instances, these phishers will claim to be tech support or the trusted representatives of a bank or company you’re familiar with and ask you to confirm some personal details.

Phishing scams can also come in the form of misleading website URLs, advertisements, or entire fake cryptocurrency exchanges and other websites that have been designed to look legitimate. And in 2020, a new type of phishing scam was discovered, that involves the changing of the symbols used in the prefix before a website URL to disguise malicious links — a change that bypasses many standard email scanners and can be easily missed by most people.

Simply put, the most effective way to prevent phishing scams is to be careful about who and what you engage with whenever you’re online. Pause and check the authenticity of every email sender’s contact, every hyperlinked URL, and any other identifying information for red flags before engaging, and skew towards cautious when you’re unsure what to do. And Since phishing attacks are made possible entirely through human error, using tools such as two-factor authentication (2FA) or a password manager can mitigate the risks of these attacks in the event an account password is compromised.

Ponzi Schemes

Ponzi schemes, also known as ‘pyramid schemes’, involve tricking people into contributing to a fraudulent enterprise or investment and convincing others to join the scheme — either knowingly or inadvertently. These scams rely on a continuous stream of new victims to participate in the scheme, and victims are usually lured in with the promise of easy profits or sizable returns down the line.

Early victims are typically rewarded with the scammers’ initial seed money or the funds from newer victims, which often gives these victims the confidence to invite others to join the scheme or put even more of their own money into it. Left unchecked, this system typically perpetuates until either the scammers are satisfied with their bounty or the perpetrators of the scheme are unable to attract enough new money to cover the earnings earlier victims have come to expect. In both instances, these schemes typically end with the scammers making a quick exit with the funds they’ve accrued.

Ponzi schemes are fairly common, but they are also fairly easy to identify. Essentially all investments within the crypto space and beyond entail a certain level of risk, and investments that are marketed as lucrative guarantees should be viewed with a healthy dose of scepticism. Even if an investment seems promising or is recommended by a friend, be sure to conduct your own due diligence instead of being swept up in a wave of unchecked enthusiasm.

Pump and Dumps 

During pump and dump scams, a group of instigators will coordinate their efforts to pump up the price of an investment to attract other investors, before dumping their investment stake at a higher price. And while pump and dump schemes are illegal and considered securities fraud by the SEC on traditional exchanges, they continue to flourish on unregulated cryptocurrency exchanges.

When scammers want to execute a crypto pump and dump, they will oftentimes try to garner interest in the cryptocurrency they are targeting by shilling the investment on multiple social media platforms, investment forums, or messenger apps. If the scammers convince enough investors to buy into their investment, this surge in demand may spike the investment’s price, which may consequently trigger yet another round of FOMO. In most instances, pump and dump scammers will select crypto projects with a small market cap, since the price of these investments are more easily manipulated by the artificial surge in demand they hope to incite. Once the prices rise high enough, the scammers will typically sell off all their holdings at the inflated price  as quickly as possible. Since the scammers purchased the investment at a much lower ‘pre-pump’ price, they will likely have accrued a substantial amount of the crypto’s circulating supply. As a result, their massive sell-off will typically result in a precipitous drop in the investment’s price, leaving the other investors deep in the red.

Given how new the crypto space is, it’s not always easy to tell the difference between credible projects that are attracting legitimate interest and a fake cryptocurrency designed to be a pump and dump. As a result, the main way to avoid falling for a pump and dump is to take a closer look at the projects you’re interested in rather than basing investment decisions on pure hype. Additionally, the digital engagement metrics of the accounts shilling investments on social media platforms — such as the ratio of a user’s follower count vs. the average number of comments on their posts — can serve as a quick assessment of whether these accounts have an engaged following. However, these engagement metrics can also be gamed, so it’s important to view every hyped investment — and the entities that promote them — through a critical lens and multiple angles.

There Will Always be Scammers

The crypto space is brimming with exciting projects at various developmental stages, and while we hope investors continue to take well-informed chances on the projects they have faith in, it’s important to remember that there will always be scammers looking for a way to exploit your enthusiasm or carelessness.

As the cybersecurity industry continues to develop more advanced technical security solutions, we expect more scammers to focus on human fallibility when carrying out their attacks. So while you should take full advantage of whatever cybersecurity tools you have at your disposal, keep in mind that your vigilance and caution is your first and most important line of defense.