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What Are the Top 3 Most Common Crypto Scams?

By Evan Jones12/07/2022

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Hacks in the cryptocurrency sector make headlines all too frequently. Whether a bridge that has been exploited or a protocol loophole has been found, these hacks affect all sorts of users and are often worth millions.

Unlike hacks, crypto scams tend to affect individual users and are often a case of security mismanagement or poor due diligence. Between phishing, rug pulls, and Ponzi schemes, there are a variety of scams you can run into when participating in crypto.

We’ll discuss those three types of scams and some warning signs that can help you avoid getting scammed.

Cryptocurrency Scams Are Similar to Traditional Ones

None of the types of scams discussed below are new types of scams, they’re all tried and true methods that have existed for decades.

The only real difference is that when getting scammed with crypto there is even less you can do to recover any losses than if you got scammed for your credit card information. That’s why it’s so important to be aware of the common scams that exist and avoid anything that sounds too good to be true, as it usually is.

Phishing Scams

Much like in real life, perhaps the most common scam is a phishing scam. In your day to day life this is often received in the form of a random text message asking you to click a link, or a phone call saying you owe money or are owed money. There are so many different ways that scammers will phish for your personal information. 

With crypto, the most common phishing scams are blanket emails sent out that say that your cryptocurrency wallet needs to be verified. This can be for MetaMask, Trust Wallet, Coinbase Wallet, or any software wallet that is commonly used. The emails look official and appear to be from the real company, but they aren’t. If you follow the instructions given by the email, you end up providing them with the key information they need to recover your wallet on their end and take all your funds.

No cryptocurrency wallet provider will ever email you looking for information to verify an account, or funds, or whatever else they try to make it seem is amiss in order to gain your trust. There’s a good chance that you have or will receive emails regarding wallets that you don’t even have, which is a clear warning sign right there that it’s a phishing attempt. If you do receive an email, just ignore it, and report it to the relevant party.

Alternatively, you may ask a question on a forum or discord, and subsequently receive a message from someone saying they can help, but that they need your recovery phrase or private keys to do so. Once again, no one will ever need that information to help you and giving that information away is the same as giving away your credit card details.

Rug Pulls

Rug pulls are a fairly frequent occurrence in crypto as well. There are a few ways in which they happen, but the end result is that the developers run away with investors’ funds. The problem with rug pulls is that they can be hard to see coming and then they happen suddenly. 

One of the more common rug pulls that occurs is with NFT drops. A new project will promise X, Y, and Z for their NFT concept, and investors will look to get on board early, buying in on all the options as they come up. For example, if a new blockchain based game is being developed, the developers will often pre-sell the land, space, vehicles, or whatever before the game is even running. Investors who think it is a good concept will pay in crypto for various NFTs for the game, and then months later, the developers disappear and the investor is stuck with useless NFTs for a game that doesn’t exist. 

Whether the developers planned it from the start or simply saw an opportunity to cash out without actually doing a lot of work isn’t always clear. This is why it can be hard to see these sorts of scams coming. Before jumping in on an investment in NFTs, or a new crypto protocol, be sure to do your due diligence. Look into the company behind the project, look at the whitepaper, roadmap, and development activity. If they don’t have a whitepaper, that’s an easy one to avoid investing in. If there’s little to no actual development happening, that’s another warning sign. Just be sure that when investing in new projects that you’re both comfortable with the team behind the project and the possibility that you may end up holding the bag in the end.

Ponzi Schemes

Ponzi schemes are perhaps a little easier to identify than a rug pull, as they’re often deals that are too good to be true. This could be an asset that seems to be giving an unsustainable rate of return, a platform like an exchange offering you their own token with too many benefits, or a new token launch that has yet to come to market. 

Now, the caveat to this is that when new exchanges and platforms launch, they need to incentivize new users to migrate to their platform with some sort of high rate of return for early adopters. The problem of a scheme arises if these platforms keep raising these rates or never plan to decrease them. 

For example, when Crypto.com Exchange first launched, you could get up to 20% APR by staking their Cronos (CRO) token to the exchange, in addition to trading discounts and access to other benefits. Had this number never changed and benefits stayed the same even as more and more users migrate, that is unsustainable and a sign of the Ponzi scheme. However, as more and more users create accounts with Crypto.com, the company has decreased rates and benefits across all aspects of the platform. If it were a Ponzi scheme, they wouldn’t have done this, as it obviously will drive some users away to seek other opportunities.

In contrast, FTX Exchange, which is being described by many as a Ponzi scheme, never changed the benefits provided by its FTX Token (FTT), even as more and more users were onboarded. Had users noted this lack of change, or even just looked at the overall distribution of FTT (as FTX and Alameda held most of the supply), they’d have quickly been able to see some warning signs. 

One of the best ways to identify a Ponzi is by looking at token distribution using a block explorer (the publicly accessible accounting of a blockchain). If it’s disproportionately skewed towards a few investors or the core team, it allows for both price manipulation and Ponzi opportunities.

Closing Thoughts: Be Vigilant

While there are a ton of scams in crypto, the key to avoiding them is due diligence and personal security of information.

Always research things before investing, check out the economic viability of the offer you see, and certainly don’t give away recovery or private key information to anyone. If it sounds too good to be true, it is.

Article tags

cryptocurrency
feature
scams
Evan Jones

Author

Evan entered the crypto scene in 2017, attracted to the many disruptive possibilities that blockchain could have on current world systems. He has a keen interest in decentralized services, payment processing, and viable NFT use cases such as event ticketing. He spends his days writing with his dog Kobe under his feet, if not on his lap.

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