6 Types of Cryptocurrency Scams to Watch Out For

Learn how to identify and avoid popular scams to keep your data and assets safe.

4 min read
Key Takeaways
  • Cryptocurrency scams are prevalent in the crypto ecosystem due to the open, decentralized nature of cryptocurrencies combined with their increasing value. 
  • Common crypto scams to be on the lookout for include phishing, fake social media giveaways, pyramid schemes, Ponzi schemes, fake mobile apps, and exit cryptocurrency scams in DeFi. 
  • A rule of thumb that can protect you from a majority of the scams out there is: If it seems too good to be true, it’s a scam. 

The decentralized nature of cryptocurrencies combined with their increasing value makes them particularly appealing to criminals and fraudsters who can utilize advancements in technology to steal your crypto. 

The fact that blockchain technology and digital assets allow for self-custody only increases security risks for the average person. This is because individuals are not likely to implement the same security measures as large financial institutions. 

It's crucial for every crypto investor to know what types of crypto scams exist, how to spot them, and how they can protect themselves from the loss of funds to crypto scammers. 

Here’s a closer look at some of the most common scams and how you can protect yourself from falling victim to their schemes.  

1. Phishing

Phishing is a common criminal practice used to obtain sensitive information such as login credentials, security passwords. In the world of crypto, phishing is used to access private keys and seed phrases. 

The practice typically involves a crypto scammer. What is a crypto scammer? In this case, it’s someone who is impersonating a person or company to gain the trust of their intended victim in order to extract personal data. This can occur over the telephone, via email, through fake websites, and increasingly through messaging apps like WhatsApp or Telegram. 

Phishing attempts can come in a variety of forms, such as a fake email from your bank saying your login information has been compromised.  These emails often contain links that will direct you to a site that mimics the bank's website in an effort to trick you into entering your login information. Once your info has been entered, the attacker has full access to your account and your funds. 

The rise in popularity of chat platforms like Telegram and Discord among crypto projects has made them especially attractive to crypto scammers. Crypto scammers lurk in chat rooms waiting for unsuspecting users to ask for help from an admin. Then they send users private messages pretending to be part of the project in order to gain the trust of the inquirer in the hopes that they can coax crypto or a private key out of them.  

Anyone that has access to the private key or seed words has complete access to the funds held in that crypto wallet, which is why you should never reveal them to anyone, including legitimate companies. A seed phrase is not required to troubleshoot issues with a wallet, so anyone asking for it should automatically be considered a crypto scammer

You should never be asked for your username or password during any exchange on a crypto platform. The best course of action, if you receive unsolicited communications or suspicious emails warning of a compromised account, is to not engage. Instead, go directly to the website in question without clicking any links in the unsolicited email.

To help avoid falling victim to a phishing cryptocurrency scam, verify the URL of the website you are visiting to ensure that it is the correct one, bookmark your frequently visited domains, and contact a business directly when you have doubts about a message you’ve supposedly received from them.  

And remember, never reveal your seed phrase or private key to anyone.

2. Social Media Giveaway Scams

Everyone loves free money, and scammers take full advantage of this fact. It has become commonplace to see popular crypto companies like Ripple or high-level influencers like Vitalik Buterin doing a giveaway on YouTube or Twitter where they encourage people to send them crypto and promise to send back some multiple of that amount. For example, if you send them one BTC, they promise to send you back 5 BTC. What a great deal, right? 

One rule of thumb for how to avoid cryptocurrency scams is this: if it sounds too good to be true, that’s because it is. Especially when it comes to financial matters. 

As time progresses, these scams have increased in complexity and have enlisted the help of others to post reply comments validating their legitimacy and encouraging others to take part in the bonanza. It's pretty safe to assume that aside from legitimate airdrops that offer members of a community a small number of tokens to generate token velocity, anyone saying that you can get free money is a scammer trying to steal your funds. 

And for the legitimate giveaways conducted by platforms and exchanges, just remember, they will never ask you to send any of your funds first in order to receive the prize.   

3. Ponzi Schemes

Ponzi schemes are another well-known type of crypto scam. They often take the form of a promising investment opportunity with guaranteed profits, typically disguised as a portfolio management service that has a “secret formula” to its success. 

In reality, new money that comes in is used to pay the returns promised to those who got in earlier, and it's only a matter of time before the whole house of cards comes toppling down. As soon as new members stop joining, the returns to older users stop being paid and the scheme then unravels. 

One of the most high-profile Ponzi schemes in the crypto ecosystem was with the crypto lender Celsius, who promised high returns for crypto deposits. Instead of delivering on their promise of high returns, Celcius used the newly deposited funds to pay off early users until they ultimately declared bankruptcy with a total debt of $2.8 billion. 

4. Pyramid Schemes

While pyramid schemes and Ponzi schemes vary slightly in how they operate, both scams rely on a participant bringing in new members who will pay into the system with the promise of fantastic returns. 

Pyramid schemes involve more work from those involved as each participant is incentivized to recruit new participants who then operate below them in the pyramid and funnel earnings up the chain. The result of a successful pyramid is a massive structure that grows exponentially until the source of new users dries up. 

The main giveaway for a pyramid scheme is that it promises revenue for recruiting new members. This cryptocurrency scam is dependent on recruiters paying into the system to get a cut of profits. The biggest benefactors are the original organizers and those near the top of the pyramid as they receive a portion of every contribution made into the system by those below them. 

As the pyramid grows, older members see their revenue stream increase as the distribution costs flow up to the higher levels, but the exponential nature of the model guarantees that it won’t be sustainable for long. 

Well-known pyramid schemes that at one point operated in the crypto ecosystem include Bitconnect, PlusToken and OneCoin.

5. Fake Mobile Apps

One method crypto scammers employ in an attempt to take advantage of inexperienced users or people in a hurry is the release of a fake app that is really designed to steal user information or funds. 

While these apps often look legit at first glance and seem to function properly, they are ultimately designed to steal your cryptocurrencies when you least expect it. These perpetrators will often mimic legitimate companies and spoof their apps in an attempt to pull a fast one on users. 

Usually, these apps will provide a crypto address that's used to either fund the wallet or receive payments, when in reality the address is owned by the scammer who is protected by anonymity. There are no clawbacks in crypto, so once funds are sent, that action can’t be undone. 

To help protect against these types of crypto scams, you should only download apps from a project’s official website or from a link provided by a trusted source. For apps listed on the Apple Store or Google Play Store, it's important to check the publishers’ credentials and do a little research on their past releases. 

6. Scams in DeFi

The emergence of decentralized finance (DeFi) reshaped the landscape of the cryptocurrency ecosystem and opened a whole new realm of possibilities for projects looking to gain exposure – including fake projects and exit scams. 

The speed and ease at which new projects are able to launch can make it a challenge to do your own research, which is what many scammers rely on as they try to steal your money. Often they will promise outsized returns and other attractive incentives to make them stand out from more legitimate projects, and these projects inevitably attract some users who are focused on how much they can make. 

To help navigate the tricky world of DeFi and avoid the cryptocurrency scams that do exist, here are some questions to ask and things to look out for as you evaluate the legitimacy of a project. 

  • What is the purpose of the project? - As crypto enters the era of quality over quantity – where projects need to have a legitimate purpose to survive – it's important to ask if a project is bringing anything new to the table or only rehashing old tricks. Even if it’s a legitimate project, simply copying another platform is unlikely to attract the user base the project needs to survive long term. 
  • Development activity - The open-source nature of cryptocurrencies allows you to check in on the development progress of a project via GitHub. If you go to a project's GitHub repository but don’t see any development that aligns with the things the project is promising, that’s a good sign it's an exit scam. 
  • Smart contract audits - Having the code for a smart contract vetted by a smart contract audit is something that any legitimate project will do in order to ensure its long-term success and protect user funds. Due to the costs involved, fake projects will often avoid this step. But that doesn’t mean that just because a code has been audited that it is free from bugs. Always be aware of the risks of depositing your funds into a smart contract.
  • Anonymous founders - while anonymous founders were all the rage in the early days of crypto, as the asset class moves towards more regulation and legitimacy, project founders are increasingly making themselves known. Those that remain anonymous appear as though they have something to hide, and should be treated with caution. One of the only reasons that a project’s team wants to remain anonymous is because they plan on eventually exit scamming the project. 
  • Token distribution - A common way some crypto scammers make their money is by launching a project where they control a large amount of the circulating supply. They will then proceed to pump up the price of the token through various means, and once its price reaches their desired level, they will dump their tokens on the market, earning a nice payday while destroying the value in the project’s market cap. For this reason, it's important to research the token distribution, any potential lockups, and how the tokens were initially sold to the public. 

Overall, when investing in cryptocurrencies it's important to do your own thorough research, verify any unsolicited messages received from a project, and never reveal your private key, seed phrase, or other sensitive information to anyone. 

And remember, if it seems too good to be true, it is. Keeping this in mind will protect you from a majority of the crypto scams

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