The cryptocurrency industry is worth more than $2.5 trillion, according to the latest estimates from the International Monetary Fund (IMF), so it’s hardly surprising that as it has risen in popularity, the industry has also seen a significant increase in cryptocurrency scams — all of which are designed to trick traders into parting with their valuable assets.
If you’re a cryptocurrency newcomer, it’s imperative that you are familiar with the most common scams and understand how to avoid them. If you know what to look out for, it’s much easier to take the necessary precautions to ensure you don’t become a victim. Find out all you need to know in this AAG Academy guide.
There are a wide range of cryptocurrency scams in use today, and almost all of them are designed to trick you into handing over your cryptocurrency wallet login information, or parting with your tokens and other digital assets. Scammers know those assets are worth something, even if it’s not a great deal, so their primary goal is to take them from you.
No matter what tactics they use — whether it’s posing as someone else in an effort to persuade you to share your wallet’s seed phrase, or promising free cryptocurrency tokens for simply connecting your wallet to their decentralized application — it is considered a scam.
What are the different types of crypto scams?
The most common scams used throughout the cryptocurrency industry today include:
Phishing Phishing is one of the oldest scams in existence, and it’s just as prevalent in cryptocurrency as it is elsewhere. Phishing is when hackers steal sensitive data, such as cryptocurrency wallet seed phrases and login credentials, by pretending to be someone else. They may pose as employees of an exchange, cryptocurrency promoters, or just generous donors.
Phishers will often tell you that they need you to verify personal details to keep your wallet secure, or they will offer to give you large amounts of cryptocurrency for free as part of some “promotion.” All you have to do, they claim, is confirm your wallet’s seed phrase (the combination of words used to log into your wallet), or provide access to it.
Of course, these claims are completely false. In reality, once the attacker has gained access to your account, they’ll transfer everything you own into their own, leaving you with nothing. Again, if a deal sounds suspicious or too good to be true, don’t get involved. And never connect your cryptocurrency wallet to an unknown service that you do not trust.
Spoofing Much like phishing, spoofing is when an attacker sets up a fake social media account, decentralized app, or website that’s designed to look genuine. They’ll use the name and images of a high-profile and trusted individual, or create fake sites that look like the real deal. They then try to convince followers to invest in scam projects, or to connect their cryptocurrency wallets to services that will empty their accounts.
Pump and dumps One of the most common cryptocurrency scams is the “pump and dump,” which is when project “fans,” influencers, or other individuals pump up the value of a cryptocurrency project by buying large quantities of the token, then selling them all at a significantly higher price when other, unsuspecting investors have put their own cash into it.
Those who facilitate pump and dumps tend to claim that a project is on the verge of a major takeoff, and convince the public to follow their lead and invest their own money into it. They will often promote the project heavily on social media, in YouTube videos, and through other channels — usually with lots of hyperbole.
This causes the price of the token to rise or “pump” — sometimes significantly, depending on how big the influencer is — at which point, the influencer sells off or “dumps” their investment and takes a big profit. This sell off inevitably causes the price of the token to crash, so everyone else who invested is left with tokens that have little value. The reality is that the project was never going “to the moon,” so only the influencer has benefited from this scheme.
Rug pulls Rug pulls are somewhat similar to pump and dumps in that they are designed to convince unsuspecting cryptocurrency enthusiasts to invest their hard-earned cash into a token. But it is the token’s creators, rather than an influencer, that are behind the scam. They hype up their new cryptocurrency to attract as many supporters as possible, then once they’ve convinced enough people to buy their project’s token, they take off with the liquidy pool.
There are two types of rug pull to be aware of, and these are “hard pulls” and “soft pulls.” A hard pull is when developers use hidden code in a smart contract to create a “backdoor,” which can later be used to steal the project’s funds. A soft pull occurs when creators dump their own tokens quickly, leaving a severely devalued project with no future.
It’s more difficult to pull off rug pull scams these days now that seasoned cryptocurrency traders know what to look out for when vetting new projects. But that doesn’t stop them cropping up on a regular basis.
‘Celebrity’ giveaways In the past, a number of high-profile celebrities have supposedly offered up millions of dollars worth of cryptocurrency tokens — almost always Bitcoin because it’s the biggest and most exciting — to their followers on social media. They say that all you have to do to claim it is send some of your own cryptocurrency to their address, and they’ll send back double.
The likes of Elon Musk, Bill Gates, Jeff Bezos, and even Kanye West have run these “giveaways” on social media in recent years. There’s just one problem. They’re all a scam. The messages are posted by hackers who gain access to a celebrity’s social media accounts, then use it to rob unsuspecting fans of their valuable Bitcoin tokens.
How to spot a crypto scam
Spotting a cryptocurrency scam isn’t always easy, since some scammers go to great lengths to conceal their activities and trick unsuspecting traders, but there are some things you can look out for. Here are some common signs of a cryptocurrency scam:
Emails or messages that request wallet login details or seed phrases
Unsolicited offers of support from random people
“Giveaways” that promise free cryptocurrency tokens
Projects with anonymous creators
Projects that have not had an independent audit
Projects that have seen a sharp and unexplained fluctuation in value
Websites with unusual URLs
How to avoid a crypto scam
Now that you know some of the biggest things to be aware of when it comes to identifying a cryptocurrency scam, it should be much easier to avoid them. For instance, you shouldn’t trust emails and messages at face value, and when someone offers support that you didn’t ask for, you should always be suspicious — especially if they ask for sensitive information.
When looking to invest in cryptocurrency projects, carry out your own research. Be sure that project creators can be identified, which is a sign that they are happy to be associated with the project and that they back it, and look for evidence of independent audits. Be aware that a sharp increase in value can be a sign of a pump and dump, and a sharp decrease in value can suggest that a project has lost support and is dying out — or that it was a rug pull.
Most importantly, never share your wallet’s access information or seed phrase with anyone, or connect it to untrusted DApps. When you want to use a DApp, use the DApps browser built into your wallet, or enter the URL manually into a web browser. Don’t connect your wallet to services using links sent to you in an email or instant message.
Another great way to avoid scams is to use the new MetaOne wallet from AAG. It gives you the freedom to access DApps while eliminating the need for private keys, passphrases, and hardware that can easily fall into the wrong hands by using a multilayer security system. It also flags potentially harmful websites so that you aren’t tricked into using them.
Finally, be sure to see the AAG Academy guide to protecting your cryptocurrency assets, which details some of the steps you can take to make your wallet as secure as possible.
The predominantly decentralized and anonymous nature of the cryptocurrency industry means that if you do fall victim to a scam, recovering lost assets can be very difficult. However, there are some steps you should take to protect yourself.
If you’re using a centralized wallet and you still have access to it, the first thing to do is change your password, then report the scam through the relevant support channels. The exchange should be able to recover your wallet if the password has been changed by someone else, though recovering any lost assets may be more difficult.
If you’re using a decentralized wallet, it’s not possible to change your wallet’s seed phrase, so if someone else has gained access to it, you’re going to need to start from scratch. Create a new wallet and you can then transfer any digital assets you still hold to that one so that they are safe. Remember, you will need access to your original wallet to make that transfer, so be sure you don’t delete it until it is empty.
You may also choose to report the scam to the relevant authorities in your country, such as the Federal Trade Commission (FTC) in the United States, or Trading Standards in the United Kingdom. Simply search “report cryptocurrency scam” on Google to find the appropriate authority wherever you live.
You can report a cryptocurrency scam to your wallet provider if official support channels are available, though this usually only applies to centralized exchange wallets. You can also report the scam to the relevant authorities in your country, such as the Federal Trade Commission (FTC) in the United States, or Trading Standards in the United Kingdom.
Follow the tips outlined in this guide to identify and avoid cryptocurrency scams. The most important things to remember are that you should never share your wallet’s password or seed phrase with anyone; you should never use untrusted services, and you should be sure to carry out your own research before investing in new cryptocurrency projects.
Senior copywriter for AAG Marketing team with the focus of educating our community on all things web3, blockchain and Metaverse.
This article is intended to provide generalized information designed to educate a broad segment of the public; it does not give personalized investment, legal, or other business and professional advice. Before taking any action, you should always consult with your own financial, legal, tax, investment, or other professional for advice on matters that affect you and/or your business.