There are plenty of scams and fraudulent claims that you need to be aware of when dealing with cryptocurrency, even if digital asset ownership is a new and exciting prospect for changing the way the world works. Familiarize yourself with these common scams so you can avoid falling into a trap that might cost you your bitcoins.
1. Shady Cryptocurrency Exchanges
There are hundreds of companies across the globe vying to be the next bit cryptocurrency exchange. This wild west free-for-all approach leaves lots of room for cryptocurrency scams to open what seems like a legitimate exchange before running off with everything that has been deposited after a set period. We’ve seen this with Mt. Gox, BiteBTC, CoinExchange.io and more.
The Mt. Gox scam is the most famous of all cryptocurrency scams. In February 2014, the exchange suspended trading after 850,000 bitcoins were stolen. 200,000 BTC were returned to some people, but the bulk of the stolen bitcoins were never recovered. High-profile examples like this one are why you should only do business with established exchanges that have a proven history of legitimacy.
2. Bitcoin Multipliers
Ponzi and pyramid schemes are alive and well in the world of cryptocurrency. Thes scammers often target people who are active in cryptocurrency communities like Bitcointalk.org and the bitcoin-focused subreddits. They will offer to double your cryptocurrency in a set amount of hours using a so-called BTC Multiplier.
One famous example of this is OneCoin, a cryptocurrency Ponzi scheme that was busted in India last year. The OneCoin scam sees representatives selling educational materials they plagiarize from numerous sources, alongside tokens that they use to mine OneCoins. You cannot exchange OneCoins into any other currency, effectively making them a useless money sink.
The Ponzi scheme has been banned in numerous countries and the company’s office in Bulgaria was raided in January 2018 to shut the servers down for good.
3. Pump and Dump Schemes
Most investors know that penny stocks are usually pump and dump scams, but that can be true of certain cryptocurrencies, too. Pump and dump cryptocurrency scams are a lot harder to identify than Ponzi and pyramid schemes because they usually occur behind closed doors and with a group that attempts to keep their activity quiet.
These pump and dump scams usually target low-value altcoins where a small rise in volume can significantly boost the currency’s value for a few minutes. Groups of hundreds of thousands of strangers all purchase the same cryptocurrency at once to drive up the value. Then a few minutes later the members sell while the value is sky-high in an attempt to rake in the profits. Here’s a simple yet effective example for Genesis Vision (GVT):
These secretive groups operate through encrypted services like Signal to coordinate their efforts behind closed doors, but it’s no secret they exist. They advertise their cryptocurrency scams on social networks like Twitter, Facebook, and Instagram to bolster interest in the target altcoin for that week. Organizers of these pump and dump scams set a target price at a specific point in time, and then group members engage in a free-for-all selling frenzy to see who can get the most profit from the pump.
Avoid these cryptocurrency scams because they work in such a way to guarantee the people at the bottom lose the most.
Initial coin offerings have become the hottest new way to raise funding in Silicon Valley, but a study conducted in 2017 found that 80% of them were scams.
ICOs work a bit like crowdfunding a project; only investors are buying tokens that should function much like the stock as a store of value in the company or idea they present. Problems arise when groups set up an idea with no intention of following through once they delivered initial funds.
- Go over every detail of the ICO with a fine-tooth comb before investing
- Be wary of phishing attacks riding on popular ICO announcements
- Do a background check on every listed member of the team
- Reverse image search the ICOs website, scammers are lazy and re-use assets
- Do not invest if the whitepaper lacks a detailed explanation of project goals
5. Selling Fake Currencies
Another popular way that scammers take advantage of the cryptocurrency craze is by selling fake tokens for a cryptocurrency that doesn’t exist. In August 2017, London police shut down a call center located in the heart of London that was cold-calling individuals and asking them to invest in a fake cryptocurrency that didn’t exist.
Scammers use the popularity of cryptocurrency as a topic combined with the general public’s lack of knowledge to make it seem like a prime investment opportunity. Much like the penny stocks that high-pressure salesmen sold over the phone, these frauds get unwitting victims to invest thousands in a worthless or non-existent cryptocurrency.
You can avoid this scam by never investing in an unknown cryptocurrency that you haven’t researched yourself. Anyone calling you about cryptocurrency is probably a scam you should avoid.
One other similar scam is fakely selling real currencies, aka Twitter scambots, of which you can see a prime example in this thread from Elon Musk’s feed:
My friends am admiration work hard technology innovate. Please send bit coin I am excellent work hard technology study differential equation
— Weihan Zhang (@liangweihan4) July 8, 2018
I want to know who is running the Etherium scambots! Mad skillz …
— Elon Musk (@elonmusk) July 8, 2018
There are hundreds of ways scammers can operate in the legal grey areas of the cryptocurrency craze. Thus, they can and will make a quick buck. If you educate yourself about the methods they use, you’ll be more likely to spot the obvious scams. Not all ICOs and cryptocurrencies have scams or are fraudulent in some nature. However, trading and investing in this new technology requires more diligence than traditional investing.
Finally, a good tip for beginners who have an interest in cryptocurrency? This is to stick with the well-known currencies like Bitcoin, Ethereum, and Litecoin. These early cryptocurrencies have been around for nearly a decade in some cases. Moreover, Bitcoin itself operates like the gold-standard for most other cryptocurrencies available.
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