With dozens of cryptocurrencies launching each month, the rise in willingness to invest in a highly speculative market has made the investors in the blockchain community prone to various cryptocurrency-related crimes. In 2018, losses from such crimes amounted to US$1.7 billion where criminals used both old fashioned methods and new ways to cheat naive investors.
Blockchain technology and cryptocurrency is a rapidly developing space and it is very important to keep up with the new terminology and efficient ways to keep your money(cryptocurrencies) safe. This article discusses the various cryptocurrency-related scams and how to avoid them.
Fake ICOs (Initial Coin Offerings)
An ICO is a type of funding using cryptocurrencies. It is a quantity of cryptocurrency sold in the form of tokens or coins to investors or speculators in exchange for legal tender or other cryptocurrencies such as Bitcoin or Ethereum. The tokens sold are promoted as future functional units of currency if or when the ICO’s funding goal is met and the project launches.
Fake ICOs offer large amounts of profit to their investors in a very short span. These scammers provide fake white papers to lure their investors. A Bloomberg study suggests that over 80 percent of ICOs are fraudulent, with less than 8 percent reaching out. The People’s Bank of China notably banned domestic ICOs in September 2017, yet searches using keywords such as “ICO,” “blockchain” and “whitepaper” resulted in dozens of online stores on Alibaba’s Taobao platform in China that provide ICO white paper copywriting, design and fundraising consultancy services.
Most ICO frauds have taken place through getting investors to invest in or through fake ICO websites using faulty wallets, or by posing as real cryptocurrency-based companies. The $32 million Centra Tech garnered celebrity support (most famously from DJ Khaled), but was exposed for ICO fraud back in April of 2018.
Fake Bitcoin Exchanges
Surely one of the easiest ways to exploit inexperienced investors and traders is to pose as an affiliate branch of a respectable and legitimate organization. These fake exchanges may trick users by offering extremely competitive market prices that lure them into using these websites for a great deal.
BitKRX claimed to be a branch of the KRX (a creation of KOSDAQ, South Korean Futures Exchange, and South Korean Stock Exchange) and used this faux-affiliation to trap people to use their system. The scam was exposed in 2017.
There is nothing wrong with choosing a wallet to store and manage your cryptocurrency. These wallets have an easy interface which makes it easy for beginners to transfer cryptocurrencies.
But there have been many fraudulent wallets that have been taken down from Google’s Play Store. The latest crypto-wallet app to be cloned was Trezor. When a wallet gets cloned, all the cryptocurrencies in the wallet vanish, thus reducing your portfolio to nothing.
Ponzi Scheme (Pyramid Scheme)
The idea of a Ponzi scheme is to dupe an investor into investing money into your idea, in this case, cryptocurrencies, for very high returns. Once the cryptocurrencies have been transferred, the only way an investor could get his money back would be by getting new investors to invest in his idea. This idea keeps going on to the top where the owner of the idea (the scammer) is the ultimate winner.
A South Korean website MiningMax, which was not registered with the U.S. Securities and Exchange Commission, promised to provide investors with daily ROI’s over two years, and a $200 referral commission in exchange for an original investment of $3,200. The fraudulent crypto-currency scam was reported by affiliates, resulting in 14 arrests in Korea in December of 2017. Another example is OneCoin which was created in 2015. The creators of this virtual currency have asked interested users to exchange money for OneCoins. Some of this money paid for the amounts the other victims were expecting to receive after they also bought the investment. This cryptocurrency is not redeemable on any other platform. This company has stolen more than $50 million in a year of illicit sales. Italy became the first country to take a tight position against the company by imposing a fine of 2.5 million euros.
We all know how phishing works. Yet most people, even in the blockchain industry cannot protect themselves from various phishing scams. Scammers use psychological manipulation, to trick us into revealing our username, password, or billing information. The scammers simply send links to their fake sites. These pages look exactly similar to any legal crypto-trading service. In most cases, the users are asked to send a certain number of Bitcoins or Ether to a spiked MyEtherWallet.
Two brothers from Israel were arrested in 2019 for an alleged phishing scam that lasted for three years. During this time they are alleged to have stolen over $100 million in cryptocurrency by luring investors from crypto trading forums such as Reddit onto websites that mimicked prominent crypto exchanges.
The concept of an airdrop involves the distribution of small amounts of free crypto tokens to individual wallets. Airdrops are used as a marketing tool to gain publicity before the actual release of the tokens by blockchain startups or projects. People can subscribe for airdrops through google forms or directly registering through links mentioned on the project website. Many people hear about airdrops through other channels who gain referral tokens for bringing in new participants, reducing the cost of advertisement for the developers.
The most common types of air-drop scams are –
- Dump Airdrop – The goal for the developers is to generate short-term buzz about a token so that people will be eager to buy it when it hits exchanges. Once it does, the developers quickly sell (dump) all their tokens for a nice profit. Since the project has been abandoned, the tokens held by the investors now become worthless.
An excellent example is the dump airdrop of the EDOGE in 2017, wherein the developers claimed to be trying to bring Dogecoin back to life. The project sent 5 million EDOGE to those who registered for the airdrop. Once the buzz was created, EDOGE was launched on various exchanges but the recipients were unable to sell them. Soon the prices plummeted as the developers sold off all of their tokens thus making the remaining tokens worthless.
- Private Key Scams – Private Key scams are entirely fake and easily detectable. In these scams, the forms or links ask for the private key to our wallet instead of the public keys. Genuine airdrops never ask for private wallet keys.
Altcoins Ethereum Nowa (ETN) and Ethereum Classic Vision (ETCV) were reportedly obtaining the private keys of users which was uncovered in 2019. The official website of the Ethereum Nowa project — which did not contain a white paper — described the process that users were supposed to engage in to obtain ETN. The user would first send ETH to an address, and then export the private key and redeem the cryptocurrency using the dedicated online tool.
Pump and Dump
Online Telegram and Discord groups conspire to pick up micro-cap coins having low volume on various exchanges. Sometimes traders blindly follow the rising price and indicators mentioned in these groups without actually consulting or performing their own analyses. Once the scammers pump up a certain coin enough, skyrocketing its value, they cash out and dump these coins onto the naive investors who bought those coins thinking it was the next big thing.
Pump and Dump occurs in two particular ways. First, by spreading Fake News where social media, blogs, and message boards are extensively used and secondly through Flash Pumps where a closed group of members drives the price of a low price high-risk coin in one direction.
Malware has long been the hallmark of many online scams. But with cryptocurrency, it poses an increased threat given the nature of the currency in and of itself.
The CryptoCurrency Clipboard Hijackers (a malware), works by monitoring the Windows clipboard for cryptocurrency addresses, and if one is detected, it will swap it out with an address that they control and transfers the coins to the scammers instead. According to the Asia Times, even macOS malware has been connected to malware scams involving cryptocurrency investors using trusted sites like Slack and Discord chats.
Tips To Avoid Such Scams
- Make sure that the exchange platforms you use comply with the laws of the country it is based in. Please ensure that the platforms and the wallets you use are authentic and based on blockchain technology.
- For fake ICOs it is very important to read through the white paper of the blockchain project or startup to verify its authenticity. Scammers do not spend much time cloning the original websites. Any discrepancies in the text, incomplete website pages or hidden team members on these websites indicate that they are more likely to be scammers.
- Always remember to conduct your own research before investing in any project. A rise in price for any cryptocurrency especially an altcoin does not imply it will be the next Bitcoin. Always keep your private information, especially the private key to your wallet with yourself. Real projects do not ask for such information.
We would also request you to read our blog which will help you to be safe on cryptocurrency exchanges.
It is a rapidly growing field with new innovations each day. As more people are getting engaged in this field, more people are also likely to pull off a scam. The only way to avoid getting tricked or scammed is by reading the latest news about cryptocurrencies and Blockchain Technology.