Cryptocurrency scams , as in any sector, can take different forms and methods of action. But, in general, they consist of techniques to withdraw money or cryptocurrencies from investors and transfer them into the possession of criminals.
In this context, cryptocurrencies can be the target of the scam or just a front to create a narrative for the scheme. For example, a Ponzi scheme might claim that it is paying high returns to investors through some strategy involving bitcoin , when in fact the company has never even touched the cryptocurrency.
What are the main cryptocurrency scams?
To avoid these types of scams , it is important to know how they are carried out. Check out the main scams involving cryptocurrencies below.
Financial pyramids
Financial pyramids typically provide large profits, which draws investors who are typically not knowledgeable with the financial industry. It is crucial to emphasise that not just cryptocurrency but any field can be used as a story to build a pyramid.
Unreleased Crypto Offering
The strategy consists of launching a crypto asset/meme token, which can be easily created via blockchain networks such as Ethereum , launching it on the market, and promoting the crypto asset through marketing. This way, early investors can make a profit by selling the assets to third parties.
Fake Crypto Wallets
Cryptocurrency wallets are devices created to store digital assets, such as Bitcoin. To store your cryptocurrencies correctly, you need to use secure and reliable wallets.
Notably, there are fake cryptocurrency wallets in the market, designed to trick users into losing their funds. Therefore, it is important to choose wallets that are audited and recommended by professionals.
Fake brokers
Brokers of cryptocurrency are institutions that are in between buyers and sellers. They are supposed to facilitate trading just as other financial institutions operate. However, just like other financial institutions, there will possibly be cryptocurrency brokers who have the intention to scam their clients.
Accordingly, such scams may be masked by alleged hacks or accounting errors. Hence, choosing a safe and yet regulated broker for avoiding potential issues is paramount.
How to avoid cryptocurrency scams?
Here are some tips on how to avoid such scams involving cryptocurrencies:
- Choose regulated companies: the financial market is a highly regulated sector, and this is no different for cryptocurrency companies. Choosing regulated companies can be a great way to avoid fraud. Still, there is a risk of scams by regulated companies, as became clear in the collapse of the FTX brokerage;
- Be wary of high returns: in general, higher returns mean higher risks, which is a fundamental rule of the market. High and guaranteed returns indicate a high probability of fraud or an unsustainable business model;
- Perform self-custody: Self-custody is the procedure of taking possession and control of your cryptocurrencies. To perform this procedure safely, you must have prior technical knowledge.
How to report cryptocurrency scams?
Governmental organisations and financial regulators are in charge of keeping an eye on and penalising dishonest players in the financial sector. In the event that fraud is suspected, alerts or formal complaints can be sent in this manner to the appropriate authorities.
In general, offering high guaranteed returns in variable income markets can already be strong evidence that the company is promoting a scam.
You can report a fraudulent wallet app through app store support. To report fake websites, the process may be more complicated or impossible. However, it is always possible to publish alerts on social media to prevent more people from falling for the scam.
How do you know if a cryptocurrency is real?
Technically, any cryptocurrency or cryptoasset registered on a blockchain network is ‘true’. But this does not mean that the asset in question has any value or minimum liquidity. This is due to the fact that tokens on blockchain networks like Ethereum are incredibly easy to issue.
It is even possible for a person with no technical programming knowledge to create an ERC-20 token on Ethereum in a few minutes. To do this, simply define some parameters, such as quantities of tokens to be created, as well as the deposit address.
After that, it is possible to carry out an ICO and sell the crypto asset, even if it has no real utility. However, it is possible to analyze some factors to see if a token has the minimum liquidity, acceptance or utility.
What is the usefulness or use case of cryptoassets?
Before purchasing a digital asset, it is necessary to understand the function and usefulness of that token, as well as its nature. Some questions that help in this process are:
- Is the asset in question a stablecoin , governance token or decentralized cryptocurrency?
- Does the asset have its own blockchain or is it registered on a public network?;
- What is the advantage of this token compared to existing options on the market?
- What problems does this asset or technology solve?
Answering these questions can help investors make a more rational investment decision. While bad projects are not necessarily crimes, they can be a way for their creators to make quick profits from people who don’t know much about the market.
Still, assets with no clear value can go through exponential bull cycles and remain there for a long time. For example, the cryptocurrency Dogecoin started out as a joke, but today it is a relatively liquid crypto asset with billions in market value.
Check the verification code on Etherscan
It is possible to analyze the code of a crypto asset through platforms such as Etherscan . In it, it is possible to observe whether the code follows the criteria defined in the project documents. This is an indicator that there has been some work done by the development team.
Note which exchanges the token is traded on
An important sign that a crypto asset has some level of liquidity is if it is listed on the main cryptocurrency brokers . This indicates that the investor will be able to have a liquidity bridge to trade the asset without major problems.
However, this is not a guarantee of the project’s suitability, as some exchanges may be paid to list specific crypto assets.