5 Cryptocurrency Scams: Red Flags and How To Avoid Them
Cryptocurrencies are an attractive field for both beginner and seasoned investors. However, as a beginner, you’re much more vulnerable to all sorts of scams – which are fairly common in the cryptocurrency niche. The emphasis on anonymity and privacy made crypto a true breeding ground for massive Ponzi schemes, face ICOs, and just individual scammers lurking around on P2P exchanges. That’s why beginner investors should be very careful about who they are dealing with and spend as much time researching the company or project they plan to give their money to.
Today, we look at the top 5 most common scams you’ll encounter in the cryptocurrency business. By no means should this information turn you away from investing in cryptocurrencies – we’re just here to raise awareness and minimize the risk of you losing money. Without further ado, let’s take a look at them:
1. Common exchange scams
You can’t go too far as a crypto investor without having to deal with exchanges. Exchanges sell, buy, and sometimes allow users to trade cryptocurrency among each other. However, due to the increased popularity of the niche in the past year, more and more new exchange websites have been popping up on the web. Very few of them can be trusted 100% – in fact, no one in the financial world can.
There’s been this one episode in Bitcoin history called the Mt. Gox scandal, in which an exchange that dealt with 70% of the Bitcoins in circulation suspended all trades in one night. Later, it was found out that the people behind the exchange stole over 800.000 Bitcoins, of which only 200.000 have been returned to their owners.
The moral is to be very careful with any exchange you are dealing with. Generally, it’s better to opt for a bigger and more reputable exchange, even if their fees are higher, and their verification process is a nightmare. The most trusty exchanges right now include Coinbase, Bittrex, and Cryptopia.
You can also come across P2P exchanges, which are nothing but computers programmed to connect traders from all over the world. Although the P2P exchange itself cannot be held guilty of anything that happens to your money, there are a lot of scammer accounts lurking on these websites. As the identity verification is next to none, you don’t know anything about the person you’re dealing with, so it’s better to keep substantial transactions on a more trusty platform.
2. Shady software wallets
When you start investing in cryptocurrencies, you will need a place to store them. You can choose between software wallets, hardware ones, and paper ones. Software wallets are the quickest and easiest to use – and they’re usually free as well. Sounds good, right? It can be a bit too good to be true sometimes.
Many software wallet companies actually keep a database of all the private keys of the people that use the wallet. In other words, they can either take a look at that data themselves, or fall prey to a malicious third party that would steal all the Bitcoins from their website. What can you do? Simple – opt for a desktop client software wallet instead. It will put more pressure on your computer, but at least you will be the only person to have access to the private keys. If you’re serious about cryptocurrencies though, it’s probably best to opt for a hardware wallet, such as Trezor or Ledger Nano S.
3. Fake ICOs
ICOs, or Initial Coin Offerings, are the Kickstarters of the cryptocurrency world. They’re basically someone announcing a new cryptocurrency and giving away initial coin offerings for the backers. However, most often than not, these ICOs are nothing but fraud schemes trying to sell you hot air in a pretty package. There are, of course, some projects that turn out to be successful, but you should never treat ICOs as more than a gamble.
There’s a couple things you can do to ensure that the ICO you’re thinking of investing in is not a scam. First, you should research the developer/team behind it. If any of them has a background that traces back to cryptocurrencies, that’s a good start. If you’re knowledgeable about the blockchain technology, you could also check if the project makes sense by going through the white print. Lastly, beware of ICOs that are very aggressively advertised in the media – a good project doesn’t require nasty pop-ups and directed email campaigns to attract backers.
4. Ponzi schemes/Financial Pyramids
Ponzi schemes or Financial Pyramids are companies that try to sell their first clients imaginary fast profits based on the investments made by later clients. As opposed to other niches, cryptocurrencies are still very vulnerable to such schemes, as there is a significant lack of information, especially among new investors. Ponzi schemes are very common among cloud mining companies, so you should always do rigorous research before signing such a contract. Oh, and never fall for a company that claims it can mine Ripple – they’re just exploiting the lack of knowledge of beginner investors.
5. Social media/Email scams
Getting into cryptocurrencies means you’ll have to sign up for a whole lot of new services. Forums, news and media outlets, exchanges, wallets, and more – which means you should be extra careful with whatever ends up in your inbox. Some of these websites might give your email address to more or less authorized third parties, and you might end up getting some potentially dangerous mail. One good example of this are the fake myEtherWallet emails, that try to convince people to give away their private keys by saying that a hard fork is approaching. You can also come across fake social media profiles that try to impersonate popular exchanges or wallets, that can send out similar messages. Beware!
These are the top 5 most common scams cryptocurrency investors have to avoid. Again, no one in this business can be trusted 100%, and you should know that going in. However, you can significantly minimize the risk of being scammed by backing up your choices with lots of research.