NEW DELHI (CoinChapter.com) — All cryptocurrency projects are “Crypto scams.”

Everyone has heard, said, or read this line at least once, especially after the pandemic got hold of economies worldwide, and investors turned their attention to cryptos.

Suddenly, everyone and their uncles had an account on Binance, WazirX, Bybit, and other cryptocurrency exchanges, buying Dogecoin, Shiba Inu, this coin, that coin, etc.

Most of these “investors” saw cryptocurrencies as a way to make huge profits in a short time. As a result, users made uninformed decisions, making them soft targets for scammers and hackers.

However, it would be unwise to label cryptos a scam based on incidents occurring due to investor negligence and lack of knowledge.

Even traditional financial markets suffer losses due to scams. For example, American consumers lost more than $5.8 billion to fraud in 2021, per a U.S. Federal Trade Commission report. The report also noted that more than 2.8 million people had filed fraud reports. 

The trend continues in 2022 as well, with investors losing over $1.5 billion in the first quarter.

However, crypto scams saw investors suffer more losses in the same timeframe. Analytics firm Chainalysis reported that scammers got away with $14 billion in 2021. But, wait a minute, doesn’t that mean crypto losses were more than double the losses in the traditional financial markets?

*sigh* Yes, it does mean that. But it is important to remember that traditional finance has been here for centuries. It evolved from barter trade to leather pieces, metal coins, and currency notes. Crypto remains a nascent industry comparatively, born in 2009.

The sector still has a long way to go regarding security standards, checkpoints, regulations, etc.

A Few Common Cryptocurrency Scams

Losses in the cryptocurrency markets stem from two major causes- hacks and scams. Unfortunately, investors, both veterans and newbies, can do little to safeguard themselves from hacks. However, users can avoid losses due to scams by keeping themselves informed and updated.

For example, information like “don’t log into your crypto wallets on a public network, as it increases the risk of man-in-the-middle attack” might help even a slightly informed investor. For those who do not know of this technique, the man in the middle is a very descriptive name.

When a user logs into their wallet, they send packets of data containing their login credentials to the wallet’s page. A malicious user can intercept these Wi-Fi signals on trusted networks if they are nearby.

Crypto investors can use a VPN to protect themselves from a man-in-the-middle attack. However, knowing how the attack occurs can help investors avoid falling victim to it. In addition, users can avoid using their crypto wallets on public networks if they cannot use VPNs.

Some common crypto scams and how users can identify them are listed below

1. Rug Pull Scam

Rug pull scams involve scammers driving up the hype around a project, NFT, or crypto token to attract investors. The scam starts when cryptocurrency exchanges list a seemingly legitimate blockchain project’s token.

Investors purchase the scam project’s tokens in hopes of a price boost, and once sufficient users have invested in the project, scammers disappear with the funds. Unfortunately, since the coding of most of such projects prevents users from selling their invested cryptos, investors are essentially left with a valueless investment. 

The easiest way to identify such schemes is to look for projects offering “Guaranteed Returns” because, like the unicorns, dragons, and a non-swearing Kohli, such projects are myths.

A recent example of a rug pull scam is the Squid coin scam, in which users invested in a cryptocurrency named after the popular Netflix series Squid Games.

Squid coin scammers walked away with nearly $3 million of investors’ money. Although a relatively new genre of scams, Rug pulls accounted for nearly 37% of all scam revenue in 2021.

2. Social Engineering Crypto Scams

Another common scam in the crypto market is social media giveaways. Scammers often ask for wallet details, promising extravagant giveaways like $10,000 worth of Bitcoin (BTC) or Ethereum (ETH) to users.

A scam version asks users to share a fixed amount of BTC or other cryptocurrencies, promising 10x or 50x returns on the investment. Additionally, scammers might create fake celebrity accounts promoting these scams, trying to give credibility to their posts.

Recently, scammers took control of the British army’s Twitter and Youtube accounts to promote an NFT scam.

Social media-based scams are particularly difficult to spot since they usually create a lot of hype. With hacked and fake accounts, scammers make their illusion seem real. A word of advice for this kind of scam- if it looks too good to be true, it probably is.

Scammers also use dating websites to lure unsuspecting targets into traps. Additionally, phishing scams are also very common in the crypto sector. Similar to traditional phishing attacks, a malicious email redirects users to a fake website that requires them to enter private information.

“Cryptocurrencies and blockchains share characteristics with traditional finance but are inherently different. Falling victim to a scam does not mean someone is unintelligent. It can happen to anyone who is less familiar with the ecosystem.”

Guilhem Chaumont, CEO of Flowdesk said

An investor might miss out on one or two opportunities in life if they play it safe, but it would also help them protect their savings from scams.

3. Ransomware and Ponzi Crypto Scams

Ransomware is software or a virus that allows a malicious user to block access to a computer system until the victim pays the ransomware owner a sum. For example, scammers use ransomware to strongarm firms into paying massive sums to regain control of their systems.

In simpler words, you are kidnapping the company’s computer systems and holding them at ransom. Scammers achieve this by exploiting vulnerabilities in a company’s IT security.

It falls in the category of crypto scams because the ransom demanded is often in the form of cryptocurrencies.

Losses due to ransomware attacks declined in 2021 but were still capped at $602 million, making it a significant player on the list of common crypto scams. 

Meanwhile, crypto Ponzi schemes work almost similarly to traditional market Ponzi schemes. In a Ponzi scheme, older investors get rewards from the proceeds from new ones. The scheme runs in circles, with no legitimate investments, targeting new investors for money.

Existing investors earn rewards for bringing new investors into the fold, with scammers promising high returns as they invest the money in different projects. Obviously, the rewards never come (*cough* achche din *cough*)

What Experts Say

People involved in the cryptocurrency markets have only one piece of advice for investors- Knowledge is power. 

Kelly Ann Collins, CEO at Vult Labs, said cryptos attract people because the sector is new and exciting. However, she adds that knowledge is key to defeating crypto or traditional finance scammers.

“If it seems too good to be true, it is probably too good. Reading whitepapers thoroughly is also something every investor should do. Phishing scams are big in crypto, just like anything else. Investors should also take measures to protect assets.”

Kelly Ann Collins, CEO at Vult Labs, told CoinChapter

Cybersecurity expert Nick Donarski also noted that Rug pulls in the DeFi sector are increasing. However, he advised investors to take an additional five minutes to analyze and vet a project thoroughly before investing in it. 

Donarski further reiterated the age-old wisdom of having different and secure passwords for different websites. Moreover, he suggested not interacting with suspicious emails, websites, and text messages.

Every advancement is likely to have detractors.

Many interesting projects are currently exploring the limits of cryptocurrencies and blockchain as a technology. However, people’s involvement in the sector remains sparse due to malicious users. As people’s crypto IQ increases, scammers might also up their game. 

But, knowledge will keep investments safe for new and old investors alike.