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Ask CryptoVantage: How Do I Avoid Getting Scammed in Crypto?

The cryptocurrency industry is filled with opportunities and the chance for life-changing returns if you’re a savvy investor. Unfortunately, it’s also filled with far too many scams, rug pulls, and stories of investors losing everything. Scams can take many forms and because transactions are final, if you fall victim, there is often very little you can do to recover your crypto.

The first step is identifying that you’re probably more at risk than you realize. Believing you aren’t susceptible is the first sign you’re probably susceptible to a number of these scams. Nobody wants to admit that they’ve been the victim of a scam. A lot of people think that they’re too smart to fall victim and that they could spot one coming from a mile away. The reality is that as technology has advanced, so too have scammers. New methods emerge to prey upon a hypergrowth industry with millions of new users annually.

Nothing beats doing your own research. Using tools to assess the quality of a cryptocurrency, along with its market cap and how sustainable it is can save investors a lot of heartache. Websites like CoinMarketCap and CoinGecko can help visualize the distribution of holders and vesting periods. These websites are some of the best defensive tools for investors but certain red flags are easy to spot that can help avoid falling for a scam. Here are a few of the more common scams that you can identify and how to protect yourself against them.

There are plenty of crypto scammers out there.

Exchange Scams

Centralized exchanges are a major target for hacks and there is no shortage of successful heists on exchanges. Many exchanges today have insurance for such an occurrence. They’re also becoming more regulated to help prevent nefarious actors from scamming investors. Using an exchange’s custodial wallet always carries more risk than holding your crypto. What happens when the exchange, and not hackers are the ones doing the scamming? There are many ways in which exchanges can scam their users. These include embezzlement, Ponzi schemes, and wash trading.

QuadrigaCX is one of the most well known exchange scams. The exchange’s founder Gerald Cotton took a trip in December 2018 where he reportedly fell ill and died. At the time of his death, he was the only person who had access to the exchange’s cold wallet storage. This caused the users’ crypto to be inaccessible except to the late founder. It turned out to be a ponzi scheme. There is still a lot of mystery surrounding the authenticity of Cotton’s death.

Cryptocurrency exchanges can be a great on-ramp for many people entering into the space. Many provide good educational tools for new users as well as becoming more regulated with more user protections. Still, the best way to avoid falling victim to an exchange scam and losing your crypto is to take sovereignty over your crypto. Cryptocurrencies were designed to eliminate the need for trust in the system. Exchanges using custodial wallets reintroduce this layer of trust. Storing crypto in a wallet you hold the keys to is a safer option.

New decentralized exchanges and decentralized finance apps can also be home to many types of scam, so they should also be approached with caution. If something seems too good to be true, it often is.

Phishing Scams

Nigerian prince emails and social security phone calls are classic phishing scams that people know of. The purpose is to obtain sensitive information about someone which can be used to access finances and other information. The cryptocurrency industry is no different.The main targets are recovery phrases, though private keys are also targeted. These scams can be found on messaging apps, emails, and many other forms of communication online.

The easiest and single most effective way to protect yourself is to never share private key or recovery phrase with anyone. No official exchange or party will ever ask you for this information and giving it away is like handing over your wallet.

The second security measure you can take is to ensure you have 2FA security installed on all your accounts. Make sure the 2FA is using an official 2FA app like Google Authenticator and not through SMS. Using SMS for this is vulnerable to a SIM swap scam.

Scammers have developed methods through website design to mirror crypto exchange log-in pages. These pages will look and operate almost identically to the normal log-in page of a crypto exchange and will ask users to log in with their ID and passwords. The website’s address will look very similar but use a different top-level domain (TLD) name. (.com, .io, .eu) than the legitimate exchange they’re imitating. These can be very effective if you’re not paying attention.

Buying Coins Because of Celebrities or YouTube Influencers

It’s important to remember that the majority of influencers aren’t financial advisors. They very clearly outline this at the start of their videos and promotions. Their primary objective is to attract views and interactions to their channels which they can then turn into advertising revenue. You should be cautious of buying an asset just because someone famous is backing it.

This is not to say that all YouTubers and celebrities are trying to scam you. Many YouTube channels give excellent overviews of coins and exchanges. These should be used as an educational resource but never taken as gospel.

Read the whitepaper, check on CoinMarketCap, and the tokenomics behind the asset. Check if the promoter holds the coin themselves or if they’re only being paid to mention it. Always do your own research.

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Iain Taylor

About the Author

Iain Taylor

Iain Taylor grew up in Northern Ireland, and is currently living in Halifax, NS. He has quadruple citizenship status, and has been involved in cryptocurrency since the end of 2020. He completed a study in Bitcoin, Blockchain Technology, and Cryptocurrencies at Dalhousie in 2021, and has been writing on the industry since September 2021.

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