Cryptocurrency scams explained – NerdWallet

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Although cryptocurrency can be an attractive investment, it is more vulnerable to scams than any other payment method. According to a report by the Federal Trade Commission, more than $1 billion has been reported stolen through cryptocurrency scams between January 2021 and June 2022.

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Crypto scams are a type of investment fraud that can take many forms, from phishing scams to pulling the rug. Since the blockchain technology of crypto is not regulated by a central authority such as a bank, bad actors can easily take advantage of optimistic investors.

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Crypto transactions are also pseudonymous (users interact via coded addresses, not legal names) and irreversible, so it is unlikely that you will be able to recover any money you 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 scams?

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Cryptocurrencies are particularly attractive to scammers for three main reasons: the lack of centralized authority, the ability to make immutable transactions and virtually anonymity.

Decentralized: Since crypto assets and applications are part of a decentralized financial (DeFi) system, intended to be used without the oversight of a bank or government, there is no central authority to intercept transactions or flag something as suspicious. .

Irrevocable: Due to the way blockchain works, once you send a crypto transaction, there is no way to retrieve your funds.

Pseudonym: Crypto users interact via wallet addresses, not legal names, so it is difficult to track specific users, especially if they are trying to remain hidden.

Although cryptocurrencies may be more prone to scams than other assets, “there were a lot of scams happening before cryptocurrencies even existed,” says Sol Nassi, founder of cryptocurrency gifting service Giftabit.

“With crypto, both the risk and the reward are supercharged,” says Nasci. “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:

get out of scams

Exit scams occur when developers of new crypto projects deceive investors by promising large returns, but pocketing funds or abandoning projects before investors can profit.

Initial coin offering (or ICO) scams, also known as “pump and dump” schemes, occur when developers promise that their new coin or crypto platform will generate huge returns, then all at once. Selling tokens will disappear from investors’ funds.

The rug bridge, which gets its name from the expression “pull out the rug”, involves a developer attracting investors to a new cryptocurrency project, usually in DeFi, then exiting before the project is built, investors. leaves you with useless currency. These scams can sometimes involve a variant of a Ponzi scheme, where investors profit by recruiting other users with false financial promises.

Celebrity ads often fit into this category as well: Developers will pay famous actors or Internet celebrities to promote a coin or platform to attract investors, then pull the rug. These can also be phishing scams when scammers use fake images, videos or websites to claim that public figures have backed their scheme.

phishing scams

Phishing scams are nothing new, but it is hard to trace and reverse transactions with crypto. These can look like an offer of employment or a request for help, usually through random contact by email, phone, or social media.

Offers and requests may link to a professional-looking website or detail an “unacceptable” investment opportunity. Scammers may ask for direct crypto transfer and stop communicating once payment is received, while others may request you to share the private key used to secure your crypto wallet so that they can access your account. to reach and empty it.

Scammers may try to create fake versions of popular crypto exchanges or online wallets under similar domain names so that investors can log in with their credentials.

How can you avoid cryptocurrency scams?

Cryptocurrency scams are common and can involve sophisticated tactics, but it is possible to prevent them from affecting you. Using common sense measures and proven safety protections can go a long way. Here are some useful methods:

Keep Your Wallet Safe: To keep your crypto secure you need some kind of storage, such as a wallet. If a firm asks you to share your private key to participate in an investment opportunity, it is almost certainly a scam. Security backup methods such as using a seed phrase, a set of code words that can unlock your wallet like a master password, can provide additional security.

Ignore Cold Calls: If you are contacted out of the blue about a cryptocurrency investment opportunity, it is likely to be a scam. Never give out your personal information or transfer money to anyone you do not know.

Ask yourself if this is too good to be true: Cryptocurrency scams often promise high returns from 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 to invest quickly, it is likely to be fraud. Some scammers even offer bonuses or discounts to persuade you to invest immediately. Take your time and do your research before investing any money.

Avoid Social Media Promotions: Scammers often use social media to advertise fraudulent cryptocurrency investment opportunities. Some even use images of celebrities – often without their consent – and high-profile people “endorsing” their company and legitimizing their investments.

Read the white paper: Developers issue documents called white papers that explain the technology they are working on and the purpose of the coin or project. These are usually published online and are readily available.

“If you don’t know anything about the backers, or if the project doesn’t address the need in any way, it’s not a good idea to invest,” Naci says.

What to do if you have been cheated

Being a victim of a cryptocurrency scam can be devastating, but it is important to act quickly if you have made a payment or shared personal details. You need to contact your bank as soon as possible if you have:

Paid by debit or credit card.

Paid through bank transfer.

Personal information shared.

Scammers often re-target victims of cryptocurrency scams or sell their details. If you think you have been caught in a scam, make sure to change your security details and password especially for online banking.

how to report scammers

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

Some scams come out of US jurisdiction, so law enforcement may not be able to enforce consequences, but it is still helpful to report them. You can report a crypto scam by:

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