Cryptocurrency Scams Explained – NerdWallet

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Thought cryptocurrency may be an attractive investment, it is more susceptible to fraud than any other payment method. Over $1 billion has been reported stolen through crypto fraud between January 2021 and June 2022, according to a report by the Federal Trade Commission.

Crypto scams are a type of investment scam that can take many forms, from phishing scams to carpet pullsSince crypto’s blockchain technology is not regulated by a central authority like a bank, bad actors can easily take advantage of hopeful investors.

Crypto transactions are also pseudonymous (users interact through coded addresses, not legal names) and irreversible, so it’s unlikely you’ll be able to recover money lost to a scammer. Here are the most common crypto scams, how to avoid them, and what to do if you’ve been scammed.

Why is crypto prone to fraud?

Cryptocurrency is particularly attractive to fraudsters for three main reasons: lack of centralized authority, irreversible transactions, and the ability to be nearly anonymous.

  • Decentralized: Since cryptoassets and applications are part of a decentralized financial (DeFi) system, meant to be used without oversight from a bank or government, there is no central authority to stop a transaction or flag something if it looks suspicious.

  • Irreversible: Because of the way blockchain works, there is no way to get your money back once you’ve sent a crypto transaction.

  • Nickname: Crypto users interact through wallet addresses, not legal names, so tracking specific users is difficult, especially if they are trying to stay hidden.

Although crypto may be more prone to fraud than other assets, “a lot of the scams that are happening happened before crypto existed,” says Sol Nasisi, founder of cryptocurrency gifting service GiftaBit.

“With crypto, both the risks and rewards are supercharged,” says Nasisi. “And as with any new technology, there will be bad actors who take advantage of it.”

What are the different types of cryptocurrency scams?

There are many different scam techniques in the crypto space. Here are some of the most common:

End fraud

Exit fraud occurs when developers of new crypto projects defraud investors by promising large returns, but pocket the funds or abandon the projects before the investors can profit.

  • Initial Coin Offering (or ICO) scams, also known as “pump and dump” schemes, happen when developers promise that their new coin or crypto platform will generate huge returns, then disappear with investors’ funds by selling off all tokens at once.

  • The carpet pulls, which get their name from the phrase “pull the rug out”, involve a developer attracting investors to a new cryptocurrency project, usually in DeFi, then pulling out before the project is built, leaving investors with worthless currency. These scams can sometimes include a version of a Ponzi scheme where investors profit by recruiting other users with false financial promises.

  • celebrity endorsements Often also fits into this category: Developers pay famous actors or internet personalities to promote a coin or platform to attract investors and then pull the curtain. These can also be phishing scams, when scammers use fake photos, videos or websites to claim that public figures have endorsed their scheme.

Phishing scam

Phishing scams are nothing new, but transactions are harder to track and reverse with crypto. These may look like offers of employment or requests for help, usually through casual contact via email, phone or social media.

Offers and solicitations may link to a professional-looking website or list a “don’t miss” investment opportunity. Scammers may ask for a direct crypto transfer and stop communicating once payment is received, while others may ask you to share the private keys used to secure your crypto wallet so they can access your account and empty it.

Fraudsters may also try to create fake versions of popular crypto exchanges or online wallets under similar domain names to trick investors into logging in with their credentials.

How can you avoid cryptocurrency scams?

Cryptocurrency scams are common and may involve sophisticated tactics, but it is possible to prevent them from affecting you. Using common sense precautions and documented security safeguards can go a long way. Here are a few useful methods:

  • Protect your wallet: You need some form of storage, such as a wallet, to keep your crypto safe. If a company asks you to share your private keys to participate in an investment opportunity, it is almost certainly a scam. Using backup methods like a seed settinga set of passwords that can unlock your wallet as a master password can provide additional protection.

  • Ignore cold calls: If you’re contacted out of the blue about a cryptocurrency investment opportunity, it’s likely a scam. Never give away your personal information or transfer money to someone you don’t know.

  • Ask yourself if it’s too good to be true: Cryptocurrency scams often promise high returns on your initial investment that are too good to be true. Any company that offers get-rich-quick investment opportunities is likely to be fraudulent.

Crypto is a high risk investment and no asset can reliably guarantee high returns.

  • Take your time: If a company tries to pressure you into investing quickly, it is likely to be fraudulent. Some scammers even offer bonuses or discounts to persuade you to invest right away. Take your time and do your research before investing money.

  • Avoid hype on social media: Scammers often use social media to advertise fraudulent cryptocurrency investment opportunities. Some also use images of celebrities – often without their consent – and high-profile people to “endorse” their business and make their investment appear legitimate.

  • Read the white paper: Developers publish documents called white papers that explain the technology they are working on and the purpose of the coin or project. These are generally published online and easily accessible.

“If you don’t know anything about the people behind it, or if the project doesn’t solve any kind of need, it’s not a good idea to invest,” says Nasisi.

What to do if you have been scammed

Falling victim to a cryptocurrency scam can be devastating, but it’s important to act quickly if you’ve made a payment or shared personal information. You must contact your bank as soon as possible if you have:

  • Made a payment with a debit or credit card.

  • Made a payment via bank transfer.

  • Shared personal information.

Scammers often target victims of cryptocurrency scams or sell their details. Be sure to change your security details and passwords, especially for online banking, if you think you’ve been caught in a scam.

How to report scammers

Whether you’ve fallen for a cryptocurrency scam or just seen one online, reporting them is important as it helps officials investigate fraudulent companies and prevent them from targeting other people.

Some scams fall outside of US jurisdiction, so law enforcement may not be able to enforce the consequences, but it’s still useful to report them. You can report a crypto scam to:

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