How to Avoid Getting Scammed While Investing in Cryptocurrency
Cryptocurrency, or crypto, is a digital form of currency. Everybody wants to invest in this booming market and make large profits. It has no central issuing authority, making crypto vulnerable to scams. Crypto uses a decentralised control mechanism, generally a blockchain, which publicly records transactions in digital form.
As of May 2021, there are over 10,000 cryptocurrencies in this world — Bitcoin being one of the most popular among them. The other coins are generally termed as Altcoins, meaning alternatives to Bitcoin. The list includes big names such as Litecoin, Peercoin, Namecoin and the famous Dogecoin, among thousands of others altcoins.
However, the crypto market continues to be an unknown territory for many and one must do a thorough research before investing in it, thereby avoiding chances of getting scammed. Lack of sufficient information, steep growth in the value of crypto and people’s eagerness to make a quick buck have allured scammers.
So, if you are an investor, especially a new one, in the crypto market, here are some scams and the lessons you must learn to reduce the chances of getting duped.
Cons posing as celebrities/social media impersonation:
No, we are not kidding, this has happened. In fact, one of the biggest scams related to cryptocurrency was a “giveaway scam” and involved Tesla CEO and SpaceX founder Elon Musk.
Not long ago, the Federal Trade Commission (FTC) reported that investors lost more than USD 2 million in just a span of six months to scammers who impersonated Musk. The fraudsters targeted Bitcoin and other cryptocurrency (read Dogecoin) investors as part of a scam and tweeted from Musk’s account the link to a Bitcoin wallet, asking investors to send money which would “multiply”.
Since, Musk has often mentioned cryptocurrencies and Bitcoin in his tweets, his followers did not think twice before sending money and ended up losing it. The same report also suggested that there has been a 1,000 percent increase in scam cases related to cryptocurrency from October 2020 to March 2021.
Lesson – Always verify deals against authentic sources such as press releases and announcements on websites, even if they have been shared by your favourite celebrity or verified social media accounts.
From online dating portals to video streaming sites such as YouTube, crypto scammers are using every possible medium as bait to trap new investors. Moreover, crypto is still a new area, with people eager to invest, it serves as a perfect place for scammers to target vulnerable users.
According to an FTC report, bogus investment cases since October 2020 have reached an all-time high. A combined loss of more than USD 80 million has been reported by 7,000 people. As all this is so new, investors tend to share their passion and knowledge on several portals, which further creates a base for scammers who tend to share tips in an attempt to persuade investors to spend their money.
The same report even mentioned that online romance is a big part of cryptocurrency scams, wherein users are made to believe that they are in long-distance relationships. Later, the scammers talk them into investing in an upcoming cryptocurrency. About 20 percent of the money that has been lost in online romance scams since October 2020 was spent on cryptocurrency. That is not all, most of these people belong to the age group of 20-49.
Lesson – Diligently research about the company before investing. Crypto community hails #DYOR (do your own research). Therefore, investors big or small must invest time in finding out all about the cryptocurrency, even if the person who you’re dating seems to know it all and the deal sounds promising.
Malware scams and viruses
New malware and viruses have evolved and pose a bigger threat to investors while they use websites for buying cryptocurrencies. Such malware software gain access to a user’s account(s) and take away the remaining balance, leaving the investor with nothing.
Lesson – Use two-factor authentication on all your currency transferring apps and keep a check on what platform you are being taken to for making the transfer. Additionally, watch out if the website is attempting to auto-download attachments. You must also update your antivirus and system firewall.
These are currently the biggest craze in the crypto market. However, before telling you how not to get scammed, let us start with what exactly is Non-Fungible Token (NFT).
NFTs are unique digital widgets that exist on the blockchain. Generally, these are digital art pieces that are sold for a lot of money. These do a back and forth between marketplaces, which serves as a playground for scammers.
Remember the headline ‘Beeple sold NFT art for USD 69 million’? Yes, that is what we are talking about. There are many ways by which people can be cheated while selling or buying NFTs.
Canada-based artist Derek Laufman became the victim of one such scam. The Verge reported an incident where Laufman was made aware of the fact that a fraudster had created a profile using his name on Rarible, a site where one can buy NFTs, and had gone to the extent of getting it verified. Laufman’s art had been digitised and put up on the website for sale without his permission.
Artist impersonation is one of many ways of getting scammed in the NFT world. In such cases, the scammers try to quickly sell famous pieces at a very low cost, before they are reported. Brand impersonation, fake storefronts and deceitful bidding are other ways that scammers steal your money.
Lesson – Always ensure that the account you are buying from is verified. Never provide personal information to anyone or to sites that look even a tad fake. Use tools like MetaMask for security. Pay attention to the URL of the site and how you are being directed to it. If the process of the currency transfer is not like your regular online payment method and the site where the payment has to be done is not what your online banking site looks like, do not continue with the payment.
Altcoin pump and dump
Another famous scam in cryptocurrency that has been scaring investors is the altcoin pump and dump, which is similar to penny stocks and are usually cheap.
A crypto guru or an influencer buys large quantities of a cheap coin, and they start promoting it on their social media. Then, they would go on to ask investors to buy them, resulting in an increase in the value of the coin. Once that is done, the influencer lets go of all their coins with a massive profit.
One name that comes to mind while talking about this is John McAfee (pictured), the creator of the McAfee antivirus. In December 2017, he tweeted that he would talk about one unique altcoin each day, adding that “most of the 2,000 coins are trash or scam”.
The tweet further read, “The few I am connected to, I will tell you. The rest, I have no position in. These coins will change the world. You can support the change. [sic.]”
Beginning tomorrow, I will each day talk about a unique altcoin. Most of the 2,000 coins are trash or scams. I’ve read every white paper. The few I’m connected to I will tell you. The rest I have no position in. These coins will change the world. You can support
— John McAfee (@officialmcafee) December 20, 2017
This is a clear example of an influencer trying to spike the value of a cryptocurrency. McAfee and his bodyguard Jimmy Gale Watson Jr relied on the former’s large following on Twitter and had talked about a coin each day to inflate its value, which were later allegedly sold.
According to BBC, in March 2021, McAfee had been charged with money laundering and conspiracy to commit fraud. Through the pump and dump scheme, the two pocketed a hefty USD 2 million. However, that was not all, they also got USD 11 million from the cryptocurrency start-ups for promoting their coins.
Lesson – Do not fall prey to promotional gimmicks by celebrities and invest your life savings in them. Do your own research and ask around about the coin but don’t fall for a hearsay trend.
Remember DeFi100 and scammers hacking the website? DeFi is short for decentralised finance. It is a platform that is now attempting to give a new take at the conventional trading methods to make it more user friendly and allow more people to take part in it. It allows investors to put their cryptocurrency into companies and earn from it in the form of interest. The virtual money gets locked with the firm and in return, heavy profits are drawn against it.
Scammers love it because they can make a DeFi platform that looks genuine but is far from it. Investors are made to lock their money through contracts. The fraudsters then steal it without giving the owner a chance to recover it.
Lesson – Do not be too eager to earn interests or profits, and research well about the platform before investing your money. If the admin asks for your private keys to fix some issue, that is a red flag and your cue to know that the admin is an impersonator, because nobody will ever ask for your private information.
Therefore, be thorough in your research, trust only authentic sources for information and be aware of misguided and false information on social media. Talk to an expert if you can before investing, or run your plans by a friend who has been dealing with crypto longer than you. These are some easy steps you can take to avoid getting scammed in the world of cryptocurrencies.
(Main Image Credit: Dmitry Demidko/Unsplash; Feature Image Credit: André François McKenzie/ Unsplash)