The Investor's Guide About Cryptocurrency Scams

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July 9, 2024
8 min

The Investor's Guide About Cryptocurrency Scams

The 2022 collapse of FTX, one of the world's largest cryptocurrency exchanges, sent shockwaves through the digital asset sector. The company's founder, Sam Bankman-Fried, has been accused of perpetrating a major fraud that lost investors billions of dollars. This high-profile case highlights the dangers of the bitcoin ecosystem.

Cryptocurrency, a digital or virtual currency protected by encryption, has grown in popularity in recent years. Cryptocurrencies, which operate on decentralized networks and use blockchain technology, offer an appealing combination of financial freedom and potentially large rewards. However, the same characteristics - decentralization, anonymity, and fast value changes - make cryptocurrencies an appealing target for scammers.

Understanding bitcoin frauds is critical in today's digital era. As cryptocurrency popularity increases, so does the complexity of fraudulent schemes. Crypto investment fraud exploded by 183% in 2022, resulting in losses of more than $2.5 billion. With over half of all crypto scams starting on social media sites, it's evident that everyone interested in or thinking about investing in cryptocurrency needs to be vigilant and educated. Individuals can better defend themselves in an ever-changing digital ecosystem by recognizing common fraud strategies and putting in place strong security measures.

Overview of Cryptocurrency

History of Cryptocurrency

Cryptocurrency was first proposed in the 1980s by American cryptographer David Chaum, who created eCash, a secure electronic cash system. However, it wasn't until 2009 that Satoshi Nakamoto, an unidentified entity, developed Bitcoin, the first decentralized cryptocurrency. Bitcoin's launch was a significant milestone, as it used blockchain technology to enable peer-to-peer transactions without the need for intermediaries. Other cryptocurrencies, including as Litecoin and Namecoin, emerged throughout the early years, each contributing its own set of advances to the digital currency ecosystem. Despite several market collapses and regulatory obstacles, cryptocurrencies have continued to evolve and gain acceptance worldwide.

Growth in the Use of Cryptocurrencies

Since Bitcoin's creation, the cryptocurrency market has grown exponentially. While Bitcoin remains the most well-known and valued cryptocurrency, other digital currencies such as Ethereum, Ripple, and Litecoin have grown in popularity. Ethereum, which launched in 2015, introduced the notion of smart contracts, which expanded the applications of blockchain technology beyond simple transactions. As of 2024, there are approximately 25,000 cryptocurrencies in circulation, with a total market capitalization of trillions of dollars. This rise is being driven by the increased use of cryptocurrencies for a variety of purposes, including decentralized finance (DeFi), non-fungible tokens (NFTs), and payment by major organizations.

Image source: Forbes Advisor

Increased Investment Interest from Individuals and Institutions

Cryptocurrencies have gained popularity among both individual and institutional investors. In recent years, financial institutions, hedge funds, and corporations have shifted more of their portfolios to digital assets. For example, the introduction of Bitcoin exchange-traded funds (ETFs) has simplified institutional investors' access to cryptocurrencies. According to surveys, approximately 40% of institutional investors were exposed to cryptocurrency in 2023, up from 31% in 2021. This increase in institutional investment is fueled by maturing market infrastructure, better regulatory clarity, and the perception of cryptocurrencies as a hedge against inflation and economic uncertainty. As a result, institutional investors' capital inflows have reached record levels, confirming cryptocurrencies' status as a legitimate asset class.

Common Types of Cryptocurrency Scams

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As digital assets have grown in prominence, cryptocurrency scams have become more complex and frequent. Here's a list of some common forms of cryptocurrency scams to be aware of:

Phishing Scams

Phishing scams involve fraudsters impersonating legitimate entities to trick users into revealing sensitive information like private keys or login credentials. In the crypto world, these scams often target exchange users or wallet holders. For example, scammers may send emails that appear to be from a popular exchange, urging users to "verify" their accounts by entering their login details on a fake website. In 2018, users of the Binance exchange lost millions when phishers created a convincing clone of the Binance website to steal login information. To protect yourself, always double-check URLs, avoid clicking on suspicious links, and enable two-factor authentication where possible.

Ponzi Schemes and Pyramid Schemes

Ponzi and pyramid scams in cryptocurrencies sometimes offer huge returns with minimal risk, using funds from new investors to repay previous investors. These schemes may be disguised as breakthrough blockchain ventures or high-yield investment programs. One of the more prominent cases is OneCoin, which cheated investors out of billions of dollars before collapsing in 2017. The plan promised enormous returns and employed a multi-level marketing system to attract new investors, but the underlying coin was completely fake. To avoid falling prey to such schemes, be careful of promises of guaranteed high profits and conduct extensive research on any investment option.

Fake ICOs (Initial Coin Offerings)

Initial Coin Offerings (ICOs) allow new projects to raise funds by selling their crypto tokens for bitcoin or ether. Scammers take advantage of this premise by launching phony ICOs with no intention of delivering an authentic product. They frequently employ attractive websites, phony whitepapers, and aggressive marketing to entice investors. The Pincoin and iFan ICOs of 2018 are good examples, with organizers disappearing after receiving $660 million from thousands of investors. Vague technical specifications, unreasonable claims, and a lack of credible team information are all warning signs of a fake ICO.

Pump and Dump Schemes

Pump and dump schemes involve increasing the price of a cryptocurrency (usually a lesser-known altcoin) through coordinated buying and false positive claims, followed by a massive sell-off. These schemes commonly use social media platforms and messaging apps to coordinate their activities. Following a series of instances involving minor cryptocurrencies, the US Commodity Futures Trading Commission issued a warning regarding these scams in 2018. The consequences can be disastrous for unaware investors who acquire at high prices only to watch their worth drop. To protect yourself, be wary of unexpected price increases in lesser-known coins and avoid investing based on social media attention.

Malware and Ransomware

Malware designed to steal cryptocurrency can infect a user's device and get access to digital wallets or exchange accounts. Ransomware attacks, in which hackers encrypt a victim's data and demand payment in cryptocurrency to decrypt it, are also becoming more widespread. In 2017, the WannaCry ransomware attack encrypted over 200,000 devices in 150 countries and demanded Bitcoin payments for decryption. To reduce these dangers, keep your software up to date, use trusted antivirus software, and keep large amounts of cryptocurrency in offline "cold" wallets.

Fake Exchanges and Wallets

Scammers can construct fake cryptocurrency exchanges or wallet services to steal consumers' cash. In order to attract consumers, these fraudulent platforms may advertise tempting advantages such as minimal fees or high returns. Pure Bit, a South Korean exchange, collapsed in 2018 with $2.8 million in investor cash after only two months of operation. To avoid such scams, only use well-established exchanges with a strong reputation, and always thoroughly study a platform before putting cash. Look for security measures such as two-factor authentication and cold storage of customer funds.

Real-World Examples

  • Squid Game Token Rug Pull (2021): Scammers created a cryptocurrency based on the popular Netflix show "Squid Game." After the token's value skyrocketed, the creators cashed out and disappeared, leaving investors with worthless tokens.
  • BitConnect Ponzi Scheme (2021): The SEC charged BitConnect's founder in 2021 for running a $2 billion fraud scheme that promised high returns through a "trading bot"
  • Hack (2022): In January 2022, hackers breached's security systems and stole approximately $30 million in cryptocurrency from user accounts.
  • Wormhole Bridge Hack (2022): In February 2022, hackers exploited a vulnerability in the Wormhole bridge, stealing $320 million worth of cryptocurrency.
  • FTX Collapse (2022): The high-profile collapse of cryptocurrency exchange FTX in November 2022 revealed a massive fraud orchestrated by founder Sam Bankman-Fried. Investors lost billions of dollars as FTX misappropriated customer funds.

Impacts of Cryptocurrency Scams

Financial Losses

The financial cost of bitcoin frauds has risen significantly in recent years. According to the FBI's Internet Crime Report, investment fraud utilizing cryptocurrencies resulted in $3.9 billion in damages in 2023, up 53% from $2.57 billion in 2022. This increase in losses reflects the skill and ubiquity of cryptocurrency-related scams.

Individual cases can be disastrous. For example, one California resident lost $165,286.55 after being tricked into using a fake trading platform by someone they met online. In another case, a victim invested and lost over $200,000 on a platform known as, believing they had earned large earnings before finding it was all fake. These cases demonstrate the significant financial risks that individuals face when falling victim to cryptocurrency frauds.

Psychological Effects

The consequences of bitcoin frauds go far beyond monetary losses, frequently inflicting serious psychological pain on victims. Many people endure severe depression, anxiety, and even post-traumatic stress disorder (PTSD). The guilt and embarrassment of falling for a scam can lead to social isolation and an unwillingness to seek assistance.

Dr. Patricia Harney, a psychologist who herself fell victim to a scam, reveals the ongoing worry she experiences even a year later: "Even talking about this right now, I feel a little apprehensive. I'm only aware of my heart rate getting triggered." This personal account demonstrates the long-term emotional impact that these scams may have on individuals.

In severe circumstances, the psychological consequences can be devastating. Dennis Jones, an 82-year-old retiree, committed suicide after losing all of his funds in a "pig butchering" fraud. His family's terrible experience demonstrates the devastating emotional impact these scams can have on victims and their loved ones.

Market Trust and Regulation

The spread of bitcoin scams has weakened faith in the whole crypto sector. As more people fall prey to fraudulent scams, potential investors become wary about participating in real bitcoin ventures. This lack of trust may hinder the development and adoption of blockchain technologies and digital assets.

Regulatory authorities play an important role in preventing scams and restoring market trust. The United States Treasury Department recently announced intentions to improve its anti-money laundering regulations and invest in analyst and regulator training to combat rising cryptocurrency concerns. These measures include addressing "pig butchering scams" and increasing access to beneficial ownership information to assist officials in "untangling opaque corporate structures and holding criminals accountable."

Recent regulatory initiatives have demonstrated some promise. For example, the Securities and Exchange Commission (SEC) filed 46 enforcement cases against bitcoin market participants in 2023, a 53% increase from 2022. The monetary penalty for these actions were $281.4 million. However, the continuously shifting nature of cryptocurrency frauds continues to provide a challenge to regulators, emphasizing the importance of ongoing monitoring and adaptive tactics for protecting investors and maintaining market integrity.

How to Protect Yourself from Cryptocurrency Scams

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Education and Awareness

Staying knowledgeable about common bitcoin scams is critical for avoiding potential fraud. The bitcoin ecosystem is continuously changing, and scammers are growing more skilled. Knowing the latest scamming strategies will help you identify and avoid them. Here are some useful resources to learn about cryptocurrency safety:

Secure Practices

To protect your cryptocurrency, choose trusted exchanges and wallets. Choose well-known and trusted platforms such as Coinbase,, and Binance, which have strong security measures in place. Furthermore, using two-factor authentication (2FA) adds an added degree of security to your accounts. For example, the app offers 2FA with time-based one-time passwords (TOTP), which create a unique code every 30 seconds.

Keeping your private keys secure is critical. Do not save them online or share them with anyone. Consider using hardware wallets, which store private keys offline and offer increased security. Ledger and Trezor are two hardware wallets that come highly recommended.

Recognizing Red Flags

Identifying potential bitcoin frauds necessitates alertness and critical thinking. Here are some frequent warning indicators to look out for.

  • Fake Websites: Fraudulent crypto trading platforms can look very similar to legitimate sites, often using polished designs and jargon to lure victims into sharing personal and financial information.
  • Celebrity Endorsements: Scammers often use photos of celebrities in promotional materials to falsely imply endorsements. Always verify such claims independently.
  • Unsolicited Contact: Be cautious of unsolicited phone calls, emails, or social media messages promoting investment opportunities, especially if they ask for personal information or money.
  • Guaranteed High Returns: Promises of guaranteed high returns with little to no risk are a major red flag. All investments carry some level of risk, and no one can guarantee constant profits.
  • Pressure to Act Quickly: Scammers often create a sense of urgency, pressuring you to make hasty decisions without proper research.
  • Lack of Transparency: Legitimate projects provide clear information about their team, technology, and goals. If this information is vague or hard to find, it’s a warning sign.
  • Requests for Remote Access: If someone asks you to download an app that gives them access to your computer, it’s likely a scam. This tactic is often used to steal sensitive information.
  • Too Good to Be True Offers: Offers that seem too good to be true, such as unrealistically high returns or very low prices, are often scams.
  • Paying More to Get Less: Being asked to provide more money before you can make withdrawals is a common scam tactic.
  • Disappearing Act: If you can’t reach anyone when you try to withdraw money, it’s a strong indicator of a scam.

Reporting Scams

If you feel you have been the victim of a cryptocurrency scam, you must report it right away. Reporting helps to prevent future fraud and assists law enforcement in combating cybercrime. You can report bitcoin frauds to a number of organizations:

  • FBI Internet Crime Complaint Center (IC3): Submit a report with transaction details and any other relevant information.
  • Federal Trade Commission (FTC): Use the platform to file a complaint.
  • Commodity Futures Trading Commission (CFTC): Report suspicious activity through their complaint portal.
  • Canadian Anti-Fraud Centre (CAFC): Report the scam online through their Fraud Reporting System or call their toll-free line at 1-888-495-8501. The CAFC collects information on fraud and identity theft affecting Canadians.
  • Local Police: Contact your local police service to report the crime, especially if you've experienced financial loss.
  • Provincial Securities Regulators: Report suspicious cryptocurrency investment schemes to your provincial securities regulator. For example, in Ontario, you can report to the Ontario Securities Commission (OSC).
  • Competition Bureau of Canada: If you believe you've been misled by false or deceptive cryptocurrency marketing, report it to the Competition Bureau.
  • Royal Canadian Mounted Police (RCMP): For large-scale or cross-border cryptocurrency fraud, you may need to contact the RCMP.
  • Financial Transactions and Reports Analysis Centre of Canada (FINTRAC): While individuals can't report directly to FINTRAC, this agency monitors suspicious financial transactions, including those involving cryptocurrencies.

The Future of Cryptocurrency Security

Technological Advances

Emerging technologies are set to significantly improve cryptocurrency security. One possible technique is to combine machine learning (ML) with blockchain consensus algorithms. Anomaly detection, predictive modeling, and adaptive decision-making are examples of machine learning approaches that can improve security by identifying unexpected patterns and behaviors that may suggest possible risks. Furthermore, advances in smart contract auditing, including as automated tools and manual code reviews, are crucial for detecting and correcting vulnerabilities before they are exploited. Blockchain technology improves security measures by offering a decentralized and transparent ledger that is resistant to modification and fraud. Innovations such as zero-knowledge proofs and decentralized storage improve privacy and security by protecting sensitive information while maintaining the blockchain's integrity.

Regulatory Evolution

The regulatory landscape for cryptocurrencies is rapidly moving, with significant changes anticipated in the near future. In 2024, the Securities and Exchange Commission (SEC) approved seven spot Bitcoin exchange-traded funds (ETFs), indicating a shift toward clearer regulatory frameworks in the United States. Similarly, the European Union's Markets in Crypto Assets Regulation (MiCA) is being phased in, with the goal of providing a comprehensive legal framework for the cryptocurrency business. These legal developments are expected to have a significant impact on the cryptocurrency business, enhancing transparency, protecting investors, and encouraging greater institutional participation. However, the difficulty remains to strike a balance between regulation and innovation, ensuring that regulatory measures do not hinder the crypto market's growth and potential.

Community and Collaboration

Community vigilance and coordination among tech companies and regulatory authorities are critical to improving cryptocurrency security. Because blockchain technology is decentralized, each participant plays an important role in ensuring its integrity. Collaboration between industry participants and authorities can assist educate consumers and investors about the potential risks and benefits of cryptocurrencies, while also encouraging industry standardization and best practices. For example, Blockchain Australia and CryptoUK are striving to improve the public policy environment for cryptocurrency networks by encouraging collaboration among industry stakeholders and regulators. Such coordinated efforts are critical for building strong security standards, preventing fraud, and meeting regulatory requirements. Working collaboratively, the industry can establish a more secure and reliable environment for all participants, resulting in long-term growth and acceptance of digital assets.

Additional Resources