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Cryptocurrency scams

Cryptocurrency scams survival guide

5 (100%) 12 votes

The growth of the cryptocurrency markets and communities has had many consequences, both positive and negative with cryptocurrency scams being the primary negative.

One example is the increased attention the scene is receiving from government authorities internationally, with regards to regulatory control & enforcement. This is more than apparent in the U.S., where the actions the Securities Exchange Council (SEC) have taken have led to some crypto companies and ICOs taking the decision to shut down operations entirely for fear of persecution.

Increased attention in the growing crypto phenomenon drew additional attention from other groups, like a domino effect. Some of these are groups are collectively wealthy enough to have a significant impact on the way that various crypto economies work at a fundamental level.

This was represented by the meteoric over-valuation which Bitcoin and altcoins enjoyed last December resulting from the mass investment of short-term and non-enthusiast traders. It was more recently represented in the harsh correction we’ve seen more recently as a consequence.

The drops caused by the correction in the market have been reinforced on many occasions. This is due in part to the actions of one party, whose attention was drawn to cryptocurrencies since last December: scammers.

How to spot a scammer

Scammers come in all shapes and sizes. Whilst they are always attempting new tricks: their underlying strategies most often stay true to a set of tried and tested methodologies.

Pyramid / Ponzi Scheme:

A classic tried and tested approach popularized by infamous fraudsters like Bernard “Bernie” Madoff. Each investor is placed within a pyramidic hierarchy, with their placement being defined by the number of additional investors they have signed up (often in combination with the volume of the product/service they have sold). As such, the leaders of the fraudulent organization sit at the top of this hierarchy and receive a share of all sales made – whilst the genuine investors are left with false-promises such as future value increases. Victims are often encouraged to maintain their investment by recruiting members of their family and friends.

Exit Scam:

First, the fraudster would fabricate a new company (such as an exchange, or ICO). This is before attempting to create a compelling website design and marketing strategy. They would then attempt to get as many people to invest by using a wide range of ethically questionable tactics. Once enough money is deemed to have been invested, the company shuts down all operations and withdraws the entirety of investments before dropping off the grid entirely.

Pump and Dump:

‘P&D’ is a fraudulent practice which made its name in the traditional stock markets. It started around the 90s era of the internet, and this is due to the huge increase in accessibility the internet offered to both professionals and enthusiasts. One of these was being able to cheaply broadcast information (a practice previously marred by high publication and logistical fees). Pump and dump involve the artificial over-inflation of a security or asset through means of distributing misrepresentational marketing information, such as false announcements and press releases. This is before the instigator takes advantage of the opportunity, to sell off a large volume of their portfolio at the temporarily high rate.


You may be familiar with this term, as it has been widely used since its coinage from the mainstream to the fringes of the internet. Deceptive communications are delivered to targets in the guise of official messages from recognizable corporations – composed through a misappropriated concoction of private marketing assets. Targets are encouraged to click a link in the email which would lead to an imposter copy of one of these well-known websites, before being asked to divulge their private security credentials. The FBI recently sent a warning to consumers that this type of scam was occurring more frequently to those that dabble in the cryptocurrency market.

Social Media:

Mainstream media coverage have shifted their attention to user privacy concerns. Shortly before this, however, the biggest social media scandal that everybody was talking was the bans implemented by many of the leading platforms. From Facebook to Twitter, and finally Google; a domino effect occurred, where each of these sites claimed their actions were to prevent fraudulent products and services from being advertised to their users.

Lessons learned from cryptocurrency scams

Whilst the fraudster stays the same, the disguises they wear are ever changing. It’s valuable to develop an understanding of how different archetypal scammer methodologies have been implemented in real life.

Solutions for unreliable exchanges

Since blockchain’s inception, over $1 billion has been stolen from exchanges by hackers because of fundamental security flaws. The exchange which suffered the biggest hack ever is Coincheck, which lost the equivalent of $580 million earlier this year.

If we were to rank exchange hacks by significance, then a close second on the list would have the remote infiltration of Mt. Gox in 2014. The amount taken was smaller than the Coincheck incident (a considerable $473 million), however Mt. Gox has a much higher trading volume for Bitcoin (BTC) transactions than Coincheck. In fact, over 70% of all Bitcoin traded anywhere was done through the exchange.

Consequently, it affected the confidence and trust of a much larger population of investors in crypto than just those affected directly. Like all emerging technologies, blockchain solutions are all bound to have some small unexploited flaw in their system – and these are currently being taken advantage of on a regular basis.

One way you can determine whether an organization is legitimate or not is to check whether they have been audited or not. Unlike traditional fiat finance exchanges, cryptocurrencies must be evaluated by specialist smart contract auditors. Auditing is needed in early stages to determine things like smart contract functionality. If a weakness is exposed in smart contract code, a major bug can infiltrate the ecosystem and potentially steal millions of dollars.

Another solution is software tools, which are currently being developed by various independent developers and companies. Their purpose is to detect and report the presence of vulnerabilities so that they can promptly be addressed and fixed.

It shouldn’t be discounted, however, that exchange hacks (much like Pump and Dump) are often inside jobs, so be aware that there may not ever be total protection from these inevitable hacks.

The false promise of ‘Promised Returns’

A common characteristic with pyramid schemes (and fraud in general) is what is considered a promised return. This is when a company promises that: in ‘X’ amount of time, you will receive ‘X’ percentage.

There is no such thing as definite, especially in the investing world: and every investment is a risk. This sentiment is echoed by the SEC as well. In 2017, we saw the first major case of fraud in crypto being instigated by the Securities and Exchange Commission in the USA.

Plexcoin promised investors more than 13x return in a month, before being stopped the SEC’s Cyber Unit in December 2017. The company escaped with approximately $15 million during the ICO phase until the SEC executed an emergency asset freeze against several of the company’s key personnel.

Bitconnect also had some run-ins with the law, and one example infamously occurred in 2017. The company promised investors a 1% daily return on all investments, as well as a 40 percent total return per month. The site had said it created its own “trading bot and volatility software” that would allow it to follow through on these promises.

Promised returns will most likely continue to fool investors in future funding cycles so it’s good to remember that there is no such thing as a sure thing.

How governments are tackling ‘Pump and Dump’

In January 2018, a ring of 8 people was arrested for involvement in penny stocks. A joint statement from the FBI and U.S. government stated that the members of the ring were found to be artificially manipulating the stocks prices within several public issuers. They were charged with defrauding investors out of over $40 million worth of money in total.

The U.S. derivatives regulator also warned investors in February about pump and dump groups that are spreading bogus information and the Commodities, Futures and Trading Commission testified in front of the U.S. Congress. This was regarding the severity of groups relaying bad information with the intent of manipulating market prices. The CFTC is a major force within crypto, having authorized at least 2 exchanges in 2018 alone.

How scammers inadvertently banned cryptocurrency from social media

When last year’s market highs led to cryptocurrencies being introduced to the mainstream limelight, it subsequently led to countless individuals being introduced to the concept who had previously little to no awareness. As such, there were many lost sheep in the crypto world with few shepherds to successfully guide them.

The number of wide-eyed potential investors meant that there was a huge influx of new money into the crypto markets. Because of the relative lack of regulation at the time, this created a huge opportunity for scammers of various types to trick unsuspecting individuals of their money.

Why advertise on social media sites? The answer is simple. Social media is an example of a disruptive technological innovation which achieved popularity with a significant cross-section of the population. It is also space which has great potential for the targeting and persuasion of specific users and demographics – as noted by the recent Cambridge Analytical scandal.

With the continued headlines caused by prominent scams such as the highly meme-ified Bitconnect debacle (see below: exit scams), it figures that sites such as Facebook and Twitter would seek to use this opportunity for their own ends. To both, virtue signal a supposed dedication to user safety (deflecting their other negative attention), and to further their goal as a company with vested interests in centralized economies (see blockchain based rivals such as SocialX).

Exit Scams

An exit scam essentially incorporates all types of businesses in crypto: from exchanges, through to marketplaces and ICOs. Any product or service which can be sold for money can be faked. And whilst not all these investment frauds involve fake businesses, many of them involve some level of conspiracy.

This makes it easier to identify such a scam prior to investment, by closely studying the backgrounds of company’s executive teams. It is important that you can thoroughly research the company itself and cross-reference announcements and marketing materials for discrepancies.

Bitconnect is a well-known incident and has become somewhat representative of the overall situation. That is the proliferation of con-artists into the cryptocurrency arena. The Bitconnect scandal is another example of a pyramid/Ponzi scheme – where the value is inflated through the subsequent growth of investment, and fictitious overpromising & marketing.

The Exit Scam is the final logical conclusion to almost any scam. Bitconnect provided an announcement that it was shutting down its closed lending and exchange services in January 2018, before its proprietary coin ended up being worthless. The founders are shady and untraceable – and are long gone with the fiat investments made by their victims.

What does the future hold for cryptocurrency scams?

Scamming within cryptocurrency is a serious and recurrent problem, however, it’s vastly overshadowed by the successes achieved by honest blockchain development teams. Furthermore, despite the general anxieties held towards the impending doom of government regulations, there is a silver lining. If implemented correctly it should help deter these wrongdoers and perhaps result in legislative action against those who remain.

But it’s important to keep an eye out for the over-extension of government powers towards an absolute regulation of the crypt-sector. This is for a couple of reasons.

Firstly, the SEC has been attributing traditional fiat trading protocol in their legislative action against decentralized blockchain based cryptocurrencies, with no regard for the significant differences between them.

Secondly, look at the actions taken by China and Vietnam’s governments to see how over-regulation and banning can lead to entrepreneurs relocating to more liberal locations.

Furthermore, one New York-based law firm has developed a cryptocurrency litigation tracker to keep tabs on all the current cryptocurrency related litigations ongoing in the U.S. with some of them being tied to cryptocurrency scams.

As cryptocurrency keeps gaining notoriety in the mainstream, scams aren’t likely to go away.

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