Cryptocurrency scams are generally more harmful than traditional scams because cryptocurrency transactions cannot be reversed. For this reason, be extra careful with your cryptocurrency - once you lose it, it’s gone forever! This article explains what a cryptocurrency scam is and provides tips on how to avoid becoming a victim.
By: Billy Garrison | Apr 10, 2020 | Modified Apr 17, 2020
A cryptocurrency scam is a generic term for when someone (the “scammer”) tries to trick another person (the “victim”) into giving them their cryptocurrency. There are many types of cryptocurrency scams, but they usually work in one of two ways: The victim either sends cryptocurrency to the scammer, or the scammer manages to obtain a copy of the victim’s private key or password.
The most common scam in the cryptocurrency space is the exit scam. An exit scam occurs when customers send funds to a seemingly legitimate company and then the company disappears, or stops doing business, without returning any funds to the customers. Historically, there have been many exit scams where cryptocurrency exchanges stop operating and fail to return funds to customers. There have also been many exit scams done by companies conducting initial coin offerings (ICOs).
Companies that are creating new cryptocurrencies sometimes conduct ICOs to help fund development. To raise these funds, companies pre-sell an allotment of their new cryptocurrencies.
During 2017 and 2018 there was a lot of hype around blockchain technology. This led to a wave of companies conducting ICOs. Hundreds of companies raised tens of millions (or in some cases billions) of dollars through their ICOs.
Some of these ICO companies had honest intentions and are still working towards building out their promised visions. Many of them, however, turned out to be outright scams where the founders earned huge profits and abruptly left the projects, making the new cryptocurrencies worthless.
A phishing scam is one where the victim is tricked into giving their personal information to a scammer who is disguising themselves as a legitimate entity. Users are asked to enter their private key or exchange password into a fake website which appears to be a real wallet or exchange. The scammer then uses this information to transfer the users’ cryptocurrency to their own wallet.
Another common cryptocurrency scam comes in the form of giveaways. Using social media, email, or other means, the scammer impersonates a famous person and claims to be doing a cryptocurrency giveaway. The giveaway is usually advertised in the form of “Free BTC giveaway! Send 0.1 ETH to this address and receive 1 BTC in return!”, but after the victims send their money the scammers disappear without giving the promised reward. People often fall victim to this type of scam because these scammers go to great lengths to appear legitimate.
These classic scams look something like “buy our coins, recruit 3 people, and make a guaranteed profit!”. Any time you see a promise for risk-free profit, you can be fairly certain that it’s a Ponzi scheme (or some other type of scam). Ponzi schemes are scams because they do not actually generate profits for their users – they use the money paid by new recruits to enrich the founders and earlier adopters. Eventually, the last people getting into these schemes are guaranteed to lose money.
Using regular computers to mine cryptocurrencies is no longer a worthwhile investment of your time or money. Bitcoin, for example, can only be practically mined using specialized mining computers called ASICs which cost over a thousand dollars each. Miners typically use many ASICs at once in order to mine more efficiently.
Some scammers offer “cloud mining” services, where they claim to host ASICs which you can rent. Customers of cloud mining services blindly trust these companies/scammers to run the mining computers and pay out the profits honestly. However, there is no way to know if these companies are running any ASICs at all. Even if they were running ASICs, it’s impossible to know whether you are being paid your full profits, or if the companies are keeping some for themselves. Consider this: If this type of mining was indeed profitable, why wouldn’t the cloud mining companies just use the computers to mine for themselves?
Cryptocurrency malware is malicious software disguised as cryptocurrency wallets and miners which can steal your passwords and private keys if you install them. Be very careful when deciding what software you install. Some cryptocurrencies only exist as a means to distribute malware to steal private keys.
Be careful and be skeptical: If it seems too good to be true, it probably is.
Have a plan and stick to it: Don’t react quickly to emotions like greed, or the fear of missing out on profit. Make an investment plan and stick to it.
Store your funds safely: The more securely you store your funds (for example, on a hardware wallet), the less likely you are to fall victim to phishing or malware scams. Storing your funds on a hardware wallet, such as the Ledger Nano X, will also make you think twice before sending your cryptocurrencies anywhere.
Send a test transaction: Not sure if you have malware? Send a small test transaction first to see whether the funds make it to the receiving address or not. If they don’t make it, you can be pretty sure there is something fishy going on.
Talk to mentors and peers: As an example, if you are considering investing in a new cryptocurrency project, it would make sense to discuss this with other people who are knowledgeable about cryptocurrencies. They might be able to detect a scam that you otherwise would have fallen for.
Avoid guaranteed profits: These are almost always a scam. Even the ones that aren’t blatant scams will probably end up costing you money in some way.
While not exactly scams, when most people think of losing money in cryptocurrency they think of online exchange hacks. The most famous exchange hack was MtGox in 2014, when approximately 650,000 BTC were stolen in the hack. Those bitcoins were worth around $350,000,000 when the hack occurred, and at the time of writing this article they are worth over $4.3 billion!
The most famous examples of outright scams were probably the cryptocurrency Ponzi schemes Bitconnect and PlusToken. Bitconnect was well known because it was in the spotlight during the 2017-18 ICO bubble, when there were lots of people trying to make money in cryptocurrency. PlusToken is somewhat less well known in the West, in part because it occurred while there wasn’t much attention being paid to cryptocurrency, and somewhat because it was a project focused in Asia. It’s estimated that almost $3 billion was stolen through the PlusToken Ponzi scheme.
There was a famous phishing scam in 2017-18 which imitated the popular web based Ethereum wallet “myetherwallet.com”. There were many implementations of this scam, with domain names such as myetherwaliet.com (“wallet” misspelled) and myethierwallet.com (“ether” misspelled). Some scammers even went as far as getting sponsored Google ads so that when users would search for “My Ether Wallet” in Google, the phishing sites would be the first sites to appear.
Not all cryptocurrency is a scam, but unfortunately the industry does attract many scammers. Scammers prefer to scam online because they can hide their identity and avoid getting caught. Since cryptocurrency is internet money, it’s only natural that it attracts many of these scammers. Be especially wary of any cryptocurrency that guarantees profit or claims to be an improvement over Bitcoin without discussing their own various trade-offs.
There is a wide spectrum of ICO scams. Some ICO sales are conducted by honest people with good intentions. Other ICO projects, however, are launched by people with good intentions but are advertised as “Bitcoin 2.0” or “Blockchain 2.0”. These types of projects are considered scams by some people, since they imply that they are better cryptocurrencies than the alternatives without mentioning the require trade-offs (such as network security).
At the far end of the spectrum, some ICOs are launched with no intention of a product being delivered. The single goal of these projects is to make the founders money.
Regardless of which part of the scam spectrum an ICO falls on, here are some of the common traits of ICO scams:
As with traditional currencies, if a scammer steals your cryptocurrency then you should let your local authorities know what happened. With your help, they may be able to track down the scammer, or at least prevent others from being scammed in a similar manner.
Depending on the nature of the scam, you may need to protect yourself from further losses. Be sure to consider all possibilities:
If you decide to take risks with your cryptocurrency by investing in the types of projects discussed in this article, you should at least consider starting small. That way, if you do end up investing in a scam you won’t be losing too much of your money, and can learn a valuable lesson from the experience.