What Should I Do When I Encounter a Crypto Scam?

The growth and financial opportunities present in the cryptocurrency market make it attractive to enthusiasts. This growth has also seen a surge in cryptocurrency scams, mainly targeting newbies and naive investors. Reports from the Federal Trade Commission (FTC) and Better Business Bureau (BBB) on crypto-related frauds have significantly increased in recent years, with victims reporting losses of millions of dollars.

As many individuals embrace digital currencies, mainly because they want to make quick profits, it is crucial to understand the risks and red flags of potential crypto scams to protect one’s funds. Let us explore how to recognize crypto scams and what to do when encountering one.

How to Recognize Crypto Scams

If you can recognize crypto scams, you will be able to protect your investments in cryptocurrency. Various crypto scams are lurking within the space, exploiting the industry’s lack of adequate regulation and anonymity.

Therefore, it is essential to understand how these schemes work, as that is the first step in protecting oneself from falling prey to these fraudulent activities. Common crypto scams permeating the industry include Ponzi schemes, fake ICOs, phishing scams, and pump-and-dump schemes.

Ponzi Schemes Disguised as Investment Schemes

This scheme promises high returns on investment but operates by paying funds to earlier investors using the capital of the newer investors. The scammers try to make the investment program appear legitimate by paying a few early investors to attract others to invest.

The scammers could also pose as investment managers and request a startup or upfront fee in cryptocurrency for registration. The scammers steal this fee, and no investments are made.

If you can not identify a product or service the investment scheme offers, it is likely a Ponzi scheme. For example, Bitconnect ran an investment platform, promising investors a 120% annual return on investment, but it eventually shut down, vanishing with investors’ funds.

Dubious Crypto Exchanges and Trading Platforms

Crypto users have lost tons of money storing their assets with dubious crypto exchange platforms like FTX and QuadrigaCX. In 2022, FTX was exposed for misappropriating over $8 billion of users’ funds.

Sam Bankman-Fried, the CEO of the crypto exchange at the time, championed using false statements to defend the company’s reserves. Hence, while users deposited BTC, USDT, and other cryptocurrencies on the exchange, their assets were utilized as collateral for Alameda Research’s loans without customers noticing.

However, in November 2022, Sam Bankman-Fried’s illegal activities were brought to the limelight. Users made simultaneous withdrawal calls, which the exchange could not satisfy, and eventually went bankrupt. As a result, traders lost their assets.

Just like FTX, QuadrigaCX was another dubious Canadian crypto exchange founded by Gerald William Cotten. In 2019, Gerald was declared dead. Unfortunately for traders who utilized the exchange, it was claimed that only Gerald had access to the cold wallets wherere most of the exchange’s funds were stored. Hence, users’ funds were inaccessible.

Notably, though, Chainalysis, a blockchain and crypto tracking firm, discovered that the money deposited to the trading platform was either never used to buy cryptocurrencies or had gone missing. To date, what QuadrigaCX used the fiat currencies deposited on the platform in exchange for cryptocurrency remains unknown.

Fake ICOs

These fraudulent initial coin offerings lure investors with promises of magnificent projects, only to abscond with investors’ funds much later. A fake ICO looks legitimate but lacks any technology or infrastructure supporting the project.

A fake ICO deceives investors into believing it is a legitimate project, but the project is without value. After the project launch, the scammers cart away proceeds from the ICO launch. For example, LoopX hauled away about $4.5 million of investors’s funds after launching a series of promising ICOs.

Phishing Scams

This involves using fake emails or websites to trick users into revealing sensitive information like private keys or login credentials. Phishing emails may take the form of legitimate crypto companies or even use their logos to deceive investors.

These emails may redirect the unsuspecting victim to a cloned website, and will be requested to input sensitive information such as passwords, usernames, and private keys. Once the scammers have this information, they can access such accounts and authorize moving funds.

Pump and Dump schemes

In this kind of scheme, the price or value of a cryptocurrency is artificially inflated through hype and then suddenly sold off, causing the value to plummet, leaving other unsuspecting investors at a significant loss.

The biggest pump and dump scheme in history happened with the Squid Game token modeled after the popular Squid Game show. The token pumped up to 14,300,000% in a single week as a result of coordinated buying, only to crash to zero within seconds. The platform was designed to prevent selling, so people could only buy the tokens, which was responsible for the tremendous increase in the price within days. In the end, the scammers made away with about $12 million.

Notably, a token’s smart contract can be designed to prevent investors from selling. This smart contract design enables the deployer to extort investors.

Red Flags

It is vital to take note of certain red flags to look out for when trying to identify a potential scam in the cryptocurrency space. A few of such are extremely high ROIs, opaque projects or unknown founders, and the use of FOMO.

Unrealistic Promises of High Returns

This should raise immediate doubts about the authenticity of such projects, as legitimate investments usually don’t guarantee exorbitant profits.

Absence of Regulation or Transparency within a Project or Platform

In most cases, this can indicate heightened risk. Hence, be alert and wary of entities in the crypto space that operate secretively or non-transparently, as it may be a way for them to conceal fraudulent activities.

Pressure to Act Quickly (FOMO)

Another warning sign to look out for when trying to identify a potential scam is when you are being pressured to make impulsive decisions. The crypto term for this is the fear of missing out (FOMO).

Scammers mainly use the tactic of urgency to prevent victims from conducting thorough research or seeking advice about certain investment projects proposed to them, ultimately leading to hasty and regrettable investments.

Although it is essential to be acquainted with various ways of recognizing potential crypto scams to avoid them, one may not always successfully prevent them altogether. If you do come across a crypto scam, what should you do?

What Can You Do If You Meet a Crypto Scam?

Facing a crypto scam can be a stressful experience, yet it’s vital to promptly take action to minimize potential losses and protect yourself from further harm. If you notice any of the signs of crypto scams outlined above, here are some things you can do:

• Stay Calm and Assess: When you encounter a scam, especially a crypto scam, do your best to avoid making impulsive decisions fueled by panic. Take a moment to analyze the situation by gathering information and then assess the situation calmly based on your information.
• Cease Communication: End all forms of communication with the scammer immediately. Do not interact further or provide any additional personal or financial information.
• Report the Scam: Take proactive steps to report the scam to the appropriate authorities. This may include contacting law enforcement agencies or regulatory bodies or utilizing cryptocurrency watchdog websites. Report any suspicious activity to relevant authorities such as the Federal Trade Commission (FTC), the Commodity Futures Trading Commission (CFTC), and the Securities and Exchange Commission (SEC).
• Protect Your Assets: Secure your accounts and funds by changing passwords, enabling two-factor authentication, and monitoring your accounts for unauthorized activity.

Why Report a Crypto Scam?

When you report crypto scams, you contribute to raising awareness about fraudulent cryptocurrency activities in the industry. Your report can help prevent others from falling victim to similar scam tactics, safeguarding their investments and finances.

Reporting scams also enables law enforcement agencies and regulatory bodies to act swiftly against perpetrators.

Although there is no guarantee that you will recover lost funds, reporting will help prevent further harm to individuals and help the government become aware of the tactics the scammers use and how to stop them.

How to Identify if a Token is a Scam

Here are some ways to identify if a token is a scam.

Check the Source Code on the Blockchain Explorer

You can check the source code of a token on the Blockchain Explorer to see if it is verified. Verified source codes are public, and users can see the activities of the developers. For example, a token with a verified source code can provide insights into the legitimacy of the token, such as the presence of security features like audits. Users can also identify any suspicious or hidden functionalities within the code.

If you check the source code of a token on a blockchain explorer such as Etherscan, for example, and it is unverified, then you should be wary. Of course, this does not mean all tokens with unverified source codes are scams. However, investing in tokens with verified source codes is better than not.

Check Third-Party Analysis Tools

With these tools, you can perform analysis on a token.

• Tokensniffer: You can perform a smell test on a token with this tool. A smell test automatically audits a token by scoring it out of 100. The lower the score, the less credible the token is. Tokensniffer also provides information about swap analysis, contract analysis, holder analysis, and liquidity analysis. Here is an example of what the tool looks like.

Source: tokensniffer.com

• Dextools: Dextools also provide insights into a token. You can find liquidity information, transaction details, project reliability score, and a brief token description. Here is an example of what you can find using Dextools.

Source: dextools.io

• Honeypot Detector: Honeypot scams take various forms. Typically, the scammer aims to lure you into depositing funds directly into a scam website, stealing directly from your wallet, or creating a fake token or smart contract.

You can check if a token is a honeypot scam by verifying on the honeypot detector website. Here is an example of what you can expect from the website.

Check Wallets for Whales

Whales hold a large amount of cryptocurrency in their wallets. Their actions to buy or sell a token can significantly affect the price. A rug pull scam may be brewing if a wallet holds over 20% of a token.

You can know if a whale holds more tokens than necessary using blockchain explorers. Explorers like Etherscan, Polygonscan, and Bscscan let you view token details such as wallet addresses and their amounts.

Whitepaper Plagiarism

Check if the project’s whitepaper has been plagiarized from other projects. Scammers usually do not have time to formulate a unique whitepaper because scam projects have no intrinsic value.

Preventing Future Scams

Indeed, being a victim of a crypto scam can be a distressing experience. However, there are necessary steps you can take to reduce the risk of falling victim to fraudulent activities in the crypto space:

• Educate Yourself: Stay informed about common scams and understand how blockchain technology works to get familiar with potential risks.
• Use Trusted Platforms: Stick to reputable exchanges and wallets with a proven security and reliability track record. Always verify URLs and ensure website security before performing any transaction on them.
• Be Cautious: Be wary of unsolicited offers and opportunities that seem too good to be true. Always double-check before sharing personal information or investing in any cryptocurrency-related business.
• Verify Tokens: Do not invest in a token you are unsure of. Only buy the token if you are educated about it and know what it is. Useful information about a token can be found on Tokensniffer.com. Connecting your wallet to sign transactions and grant permissions to fraudulent tokens can drain your wallet and lead to loss of funds.

Conclusion

Until the crypto space becomes better regulated to ensure safety, you must stay vigilant and informed to protect yourself from crypto scams. By following the steps outlined above and taking certain preventive measures to avoid falling victim to scams, you can confidently protect your investments and navigate the crypto space.