Beware Of Cryptocurrency Scams - Investopedia

Cryptocurrency scams take many forms. Just as financial criminals will try to steal money from your bank account or put fraudulent charges on your credit card, crypto scammers will do anything to take your crypto. To protect your crypto assets, it helps to know when and how you’re being targeted and what you can do if you suspect that a cryptocurrency or any communications related to it are a scam.

Key Takeaways

• Crypto scams often aim to gain private information, such as security codes, or to trick a person into sending cryptocurrency to a digital wallet that may be compromised.
• Examples of scams are giveaways, hustles involving new romance, phishing, extortion emails, fake company alerts, blackmail, "rug pulls," and may involve fake mining apps or networks.
• Signs of crypto scams include poorly written white papers, excessive marketing pushes, and get-rich-quick claims.
• Regulatory agencies, such as your state's consumer protection office or the Consumer Protection Bureau, are the best places to contact if you suspect you've been the victim of a scam.
• Always do your research to ensure the crypto software wallet, crypto exchange, or app is trustworthy before signing up for it.

Types of Cryptocurrency Scams

Generally speaking, cryptocurrency scams fall into two categories:

1. Initiatives aiming to obtain access to a target’s digital wallet or authentication credentials. This means scammers try to get information that gives them access to a digital wallet or other types of private information, such as security codes. In some cases, it can include access to physical hardware, such as a computer or smartphone.
2. Schemes that involve transferring your cryptocurrency directly to a scammer, prompted by impersonation, fraudulent investment or business opportunities, or other malicious means.

Social Engineering Fraud

For social engineering scams, the perpetrators use psychological manipulation and deceit to gain control of vital information relating to user accounts. Successful scammers condition people to think they are dealing with a trusted entity, such as a government agency, a well-known business, tech support, a community member, a work colleague, or a friend.

Scammers will take as much time as necessary to gain the trust of a potential victim. Then, they may eventually ask the individual to reveal private keys or send money to their digital wallet. When one of these "trusted" entities demands cryptocurrency for any reason, it is a sign that something's amiss.

Frauds Using Romance

Scammers often use dating websites to make unsuspecting individuals believe they are in a real relationship, whether a new or long-term one. Once the individual trusts the scammer, conversations often shift to supposedly lucrative cryptocurrency opportunities and the eventual transfer of either coins or account authentication credentials or helping a loved one in a financial bind with cryptocurrency.

The FBI found that in 2022, over $735.8 million was lost in romance scams, and in 2023, more than $652.5 million was stolen.

Imposter and Giveaway Scams

Changing the sphere of influence, scammers may also try to pose as celebrities, successful businesspeople, or cryptocurrency influencers. To capture the attention of potential targets, many scammers promise to match or multiply the cryptocurrency sent to them in what is known as a "giveaway scam."

Well-crafted messaging from what often looks like an existing social media account can create and spark a sense of validity and urgency. This mythical "once-in-a-lifetime" opportunity can lead people to transfer funds quickly in hopes of receiving an instant return. Often, impersonators claiming to be from a cryptocurrency exchange's support or security teams contact crypto owners to trick them out of funds.

Phishing

Within the cryptocurrency industry, phishing scams target people using crypto software wallets. Specifically, scammers need a crypto wallet's private keys—a string of letters and numbers that act like a password and are required to access cryptocurrency.

Phishing scams are the most common attacks on consumers. According to the FBI, more than 300,000 people fell victim to phishing scams in 2022 and 298,000 in 2023. Collectively, those people turned over $52.1 million to scammers in 2022 and more than $18.7 million in 2023.

Their method follows the playbook of many standard scams: They send an email with links that lead holders to a specially created website and ask them to enter private keys. Once the hackers have this information, they steal the victim's cryptocurrency.

Blackmail and Extortion Schemes

Blackmail is another popular social engineering method scammers use. Blackmailers make the claim to potential victims that they have a record of adult websites or other illicit web pages they claim the user frequents. The blackmailers then threaten to expose the individuals unless they share their private keys or cryptocurrency with them. Such cases represent a criminal extortion attempt and should be reported to a law enforcement agency.

Fraud Involving Investment or Business Opportunities

The adage "if something sounds too good to be true, then it probably is" is one to remember for anyone venturing into investing in general. This is especially true for cryptocurrencies. Countless profit-seeking speculators turn to misleading websites offering "guaranteed returns" or other setups for which investors must invest large sums of money for even larger "guaranteed" returns. Unfortunately, these bogus guarantees often lead to financial disaster when individuals find they can't get their money back.

The most common type of crypto investing fraud is convincing an investor to transfer cryptocurrency to a new exchange or platform, claiming it has very high returns. Once the investor transfers crypto to the platform, the scammers continue to build trust by publishing false high returns on the platform, allowing them to withdraw and use funds, and encouraging more investment. Once the investor reaches a certain point, the scammer locks the account and asks for taxes or fees. Once those are paid, they take the cryptocurrency and shut down the platform. In 2023, a reported $3.9 billion was lost to crypto investing fraud.

Sometimes, fraud may not be obvious until you conduct your due diligence or think critically about an opportunity. Many investors fell victim to FTX, a popular cryptocurrency exchange founded by Sam Bankman-Fried, also known as SBF. SBF was found guilty of wire fraud, conspiracy to commit wire fraud, conspiracy to commit securities fraud, conspiracy to commit money laundering, and conspiracy to commit commodities fraud. He and his staff at FTX used billions of customer funds to live a lavish lifestyle and defraud investors.

New Crypto-Based Opportunities: ICOs and NFTs

Crypto-based investments, such as initial coin offerings (ICOs) and non-fungible tokens (NFTs), provide even more avenues for scammers to access your money. Remember that although crypto-based investments or business opportunities may sound lucrative, they don’t always reflect reality.

For example, some scammers create fake websites for ICOs and instruct users to deposit cryptocurrency into a compromised digital wallet. In other instances, the ICO itself may be at fault. Founders could distribute unregulated tokens or mislead investors about their products through false advertising.

Rug Pulls

A so-called rug pull occurs when project members raise capital or crypto to fund a project and then suddenly remove all the liquidity—and they themselves disappear and become unreachable. Scammers abandon the project, and investors lose all they have contributed.

Cloud Mining

Platforms market to retail buyers and investors to get them to contribute upfront capital to secure an ongoing stream of mining power and rewards. These platforms don't own the hash rate they claim to and don't deliver the rewards after receiving your down payment. While cloud mining isn't always a scam, to keep your money, you must conduct rigorous due diligence on the platform before investing.

How to Spot Cryptocurrency Scams

Cryptocurrency scams are easy to spot when you know what to look for. Legitimate cryptocurrencies have readily available disclosures with detailed information about the blockchain and associated tokens.

Read the White Paper

Cryptocurrencies go through a development process. Before this process, there is generally a document published, called a white paper, for the public to read. If it's a legitimate white paper, it clearly describes the protocols and blockchain, outlines the formulas, and explains how the entire network functions. Fake cryptocurrencies don't produce thoroughly written and researched white papers. The fakes are poorly written, with figures that don't add up.

If the whitepaper reads like a pitchbook and outlines how the funds will be used in a project, it is likely a scam or an ICO that should be registered with the Securities and Exchange Commission. If it isn't registered, it's best to ignore it and move on.

For comparison, read the white papers of well-known cryptocurrencies, such as Ethereum and Bitcoin.

Identify Team Members

White papers should always spotlight the members and developers behind the cryptocurrency. There are cases in which an open-source crypto project might not have named developers, which is typical for open-source projects. Still, you can view most coding, comments, and discussions on GitHub or GitLab. Some projects use forums and applications, like Discord or Slack, for discussion. If you can't find any of these elements, and the white paper is rife with errors, stand down—it's likely a scam.

Beware of "Free" Items

Many cryptocurrency scams offer free coins or promise to “drop” coins into your wallet. Remind yourself that nothing is ever free, especially money and cryptocurrencies.

Scrutinize the Marketing

Legitimate blockchains and cryptocurrency projects tend to have humble beginnings and don't have the money to advertise and market themselves. Additionally, they won't post on social media pumping themselves up as the next best crypto—they'll talk about the legitimate issues they are trying to solve.

Most valid cryptocurrency developers do not market the project's coin. Instead, they post documentation that outlines the cryptocurrency's purpose. If it appears to lack a purpose, it's likely (but not always) a scam. It might be a cryptocurrency just to be a cryptocurrency, similar to Dogecoin, which has no official purpose and was advertised as such.

You might see cryptocurrency updates about blockchain developments or new security measures taken, but you should be wary of updates like "millions raised" or communications that appear to be more about money than about advances in the technology behind the crypto.

Legitimate businesses exist that use blockchain technology to provide services. They might have tokens used within their blockchains to pay transaction fees, but the advertising and marketing should appear professional-looking. Scammers also spend on celebrity endorsements and appearances and have all the information readily available on their websites. Legitimate businesses won't ask everyone to buy their crypto; they will advertise their blockchain-based services.

Where there is a lot of hype, there is usually something to be cautious of.

How to Avoid Scams

There are several actions you can take to steer clear of being scammed. Never click on links, dial a phone number, contact someone who reaches out about financial issues, or send them money. Also:

• Ignore requests to give out your private cryptocurrency keys. Those keys control your crypto and wallet access, and no one needs them for a legitimate cryptocurrency transaction.
• Shun enterprises that promise you'll make lots of money.
• Don't engage with investment managers who contact you and say they can grow your money quickly.
• Be wary of "celebrities" contacting you. A real celebrity won't reach out to you about buying cryptocurrency.
• Meet in person any romantic interests you are connected with on an online dating website or app. Don't give them money.
• Ignore text messages and emails from well-known or new companies saying your account is frozen or that they are worried about it and can help you "unfreeze" it.
• Contact a regulatory agency if you receive an email, text, or social media message claiming to be from a government, law enforcement agency, bank, financial institution, or utility company stating that your accounts or assets are frozen. Don't answer the initial correspondence through their means of communication. Instead, get details on how to connect from an agency's official website.
• Ignore job listings for cash-to-crypto converter or crypto miner openings.
• Scrutinize claims about explicit material a scammer may say they have about you that they threaten to post unless you send cryptocurrency. This is blackmail. Report it.
• Don't accept "free" money or crypto.

Your state might have a webpage that lists currency cryptocurrency scams. For example, the State of California's Department of Financial Protection and Innovation has a fantastic list of complaints it has received that can raise your awareness. You can find your state's consumer protection offices by visiting USA.gov's state consumer protection office search page.

How to Report Scams

Several organizations can help you if you’re a victim of a cryptocurrency scam or suspect one. Use their online complaint forms to seek help:

• FTC fraud report
• Commodity Futures Trading Commission complaints and tips
• Securities and Exchange Commission fraud reporting
• FBI Internet Crime Complaint Center complaint

You can also directly contact the crypto exchange you use. Find out if they offer fraud prevention or have other measures to protect your crypto assets and money.

How Do You Spot a Crypto Scammer?

Legitimate businesses will not correspond with you via social networks or text messages. They also will not ask you for your private keys to help you with an action. The best way to spot a crypto scammer is to be wary of any communications sent your way and conduct research on every project to learn about the team behind it. If someone is attempting to scam you, it is likely they have tried it with others. Search for the cryptocurrency using the word "scam" and see what you find. Visit official consumer protection sites like the FTC, FBI, and SEC. The State of California's Department of Financial Protection and Innovation has an excellent compilation of scam attempts with descriptions.

What Are the Fake Crypto Platforms?

There have been many, but most fake crypto platforms only exist for a short period. Once the scammers get what they are after, they take the crypto, delete the website, and set another up for the next victims.

How Many Scams Are There in Crypto?

According to the FBI, there were over 69,000 complaints regarding cryptocurrency in 2023. This figure is only the number of reported scams in the U.S.—the blockchain analysis firm Chainalysis reported that scams brought in at least $4.6 billion worldwide in 2023.

The Bottom Line

For many people, the mad rush into cryptocurrencies has evoked a sense of the Wild West or Gold Rush eras, when it was believed there were limitless possibilities for enrichment. Yet, anyone who's studied these periods knows that many, if not most, speculators lost it all while trying to strike it rich.

As the crypto ecosystem gains scale and complexity, it will undoubtedly remain a focal point for scammers. Crypto scams generally fall into two categories: socially engineered initiatives to obtain account or security information, and efforts to persuade a target to send cryptocurrency to a compromised digital wallet. By understanding the common ways that scammers try to steal your information (and ultimately your money), you can know how to spot a crypto-related scam early and prevent it from happening to you.

The comments, opinions, and analyses expressed on Investopedia are for informational purposes online. Read our warranty and liability disclaimer for more info. As of the date this article was written, the author does not own cryptocurrency.