How to Identify and Avoid Cryptocurrency Scams

how to avoid cryptocurrency scams

It’s quite fascinating how the cryptocurrency market has grown in popularity over the last few years. What started as a mere speculative market of digital assets has grown to become the new paradigm in the finance sector. However, as the value and adoption of cryptocurrencies grow exponentially, scams and Ponzi schemes have also increased almost in equal measure. In fact, according to a recent report, crypto investors lost more than $4 billion in 2019 alone.

Most of the crypto scammers often take advantage of the fact that the market promises high returns to investors. As such, they end up creating dubious crypto-based products or services to lure unsuspecting investors and eventually robbing them of their hard-earned money. The good news is that it’s easy to identify these scams and even avoid them in the first place.
With that in mind, here are three general characteristics of crypto scams that you can use as a litmus test before investing in a product offering:

  • Unrealistic claims

Most crypto-scams often promise extremely high returns to entice unsuspecting investors. They promise you guaranteed monthly or even daily interest rates if you invest a certain amount of money in a crypto-related business opportunity. Let’s be honest here; it can be tempting to invest in such business opportunities with the hope of overnight success. However, it is important to note that no one can guarantee returns unless they sell a product or service to generate revenue. Sure, a scammer may even show you proof of their earnings to win your trust, but these earnings are usually fake and designed to entice you.

  • Lacks an open-source code

Initially, Bitcoin was the only cryptocurrency in the entire market. Several years later, Ethereum was founded as the improved version of the classic Bitcoin. Fast forward, today there over 5,000 cryptocurrencies in the market! While the increase in the number of cryptocurrencies signifies the growth of the crypto-market, not all cryptos are legit.

Ideally, an authentic crypto project should have a white paper and an open-source code so that investors can examine and understand it. It should also have a working product or a use case that makes it valuable. In this case, a working product doesn’t necessarily refer to something tangible; but rather an active user base that contributes to the crypto’s growth either by using it to build Decentralized Apps (DAPPs), smart contracts, or make payments. As such, if a crypto project doesn’t reveal its source code and lacks a working product, it’s likely a scam.

  • Multi-level marketing scheme

Usually, scammers will market to you a crypto project that requires you to recruit other people so that you can earn returns. The more people you recruit, the higher the returns. Like most scams, these projects don’t have a solid business model that generates revenues. Instead, they depend on money brought in by referrals to pay early investors.

Having understood how to identify cryptocurrency scams, let’s look at the most common ways criminals use to launch their fraud schemes and how you can avoid them:

  • Social media

Social media platforms are scammers’ favorite tools since they have a large user base. Usually, a scammer will spam a comment section with messages promising return if you invest your money or refer someone. Some may even message you directly in your private inbox, offering you an opportunity to invest in a crypto project. In extreme cases, scammers may also run social media ads that promise crypto giveaways to investors.

Your best defense against crypto scams run on social media is to do a thorough background check of the person behind a crypto project. Chances are, if their profile is anonymous or doesn’t have much of their personal details, it’s certainly a scam. Also, as mentioned earlier, if an opportunity promises unrealistic returns without a solid business model, you should avoid it.

  • Phishing

Phishing attacks are pretty common in the cybersecurity space. In the crypto context, they are designed to trick you into giving your details to scammers, which they later use to gain access to your crypto-exchange wallet and steal your funds. To obtain your details, scammers masquerade as a trusted crypto exchange or a P2P marketplace and send you an email or instant message with a malicious link. Once you open the link, malware is installed in your device, revealing your details to the scammers. The best way to protect yourself against phishing is to avoid opening messages or email links from suspicious senders. Also, ensure every website you visit is SSL-secured to ascertain its legitimacy and ensure that any details you share are protected.

  • Pump and dump schemes

The pump and dump scheme is a tried-and-tested scam tactic used in the financial markets. These schemes have grown in popularity in the crypto market in the last few years, resulting in losses. Essentially, pump and schemes work by artificially inflating a crypto-asset through coordinated bulk buying and over-hyped marketing. Once the price hits a certain point, the perpetrators sell off their holding to collect profits which causes the asset’s price to plummet. As a result, investors who had bought into the hype end up making losses as prices decline further.

The worst is that is anyone can fall victim to pump and schemes, including experienced investors. As such, be sure to do your due diligence before investing in a crypto token or project. Look into things like the project’s roadmap, its feasibility, and the history of the team behind the project. Don’t be pressured into investing in a project simply because its price is in a rally.

Don’t fall victim to a cryptocurrency scam

Cryptocurrency scams are constantly evolving as the market grows. However, scams shouldn’t stop you from investing in cryptocurrencies. The best way to protect yourself from these safe scams is to look out for common fraud characteristics as identified above. Most importantly, it pays to invest time in learning how cryptocurrencies work and what moves the market.

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