The Cryptocurrency caught America’s attention this past year, and “Olympic-level Scammers” also took notice of this phenomenon.
William E. Quigley is a prominent investor who co-founded the WAX Blockchain. He predicts that there will be an unprecedented number of cryptocurrency scams due to the rising popularity of crypto and blockchain technology.
The high-tech nature and sophistication of crypto will make it attractive to sophisticated scammers, Quigley stated during a panel discussion hosted recently by blockchain company Light Node Media. A recent “Squid Game” scam claimed that investors were swindling SQUID cryptocurrency tokens and an immersive online game. After the currency’s price soared, investors claim that the developers vanished and they allegedly cashed out with over $3 million.
Crypto investors are exposed to fraud and scams, no matter how careful they may be. Here are some scams and red flags you should be aware of if crypto is part of your investment portfolio.
Common Scams Involving Cryptocurrency
According to the Federal Trade Commission, nearly 7000 people lost more than $80 million in cryptocurrency scams between October 2020 and March 2021. This is a significant increase over the $7.5 million losses and the 570 cryptocurrency investment scams during the same months just the year before. These are the patterns you should be looking out for in cryptocurrency scams that are on the rise.
It’s more likely to be a scam if a person or establishment that appears to be credible claims they can’t accept any other currencies than Bitcoin. Bitcoin and other altcoins have exploded in popularity and are now a popular asset class. Experts say that credible institutions won’t accept crypto, but they will accept U.S. Dollars through regular means such as wire transfers, debit and credit card payments, cash, and checks.
Anyone asking for Bitcoin payments may be trying to hoard the currency and profit from its rising value. And unlike banks, Blockchain does not have a common know-your customer (KYC) process. This means that anyone can open wallets with no need to provide valid identification, a social security number, an address or contact information. Blockchain is open to all and creates permanent, public records.
However, it’s possible for people to transact more anonymously on blockchain. This makes it easy for someone to scam you and take your money.
Anonymous Or Fake Identities
The absence of KYC protocols for blockchain is a significant question mark for its widespread usage, according to Jonathan Padilla. He was previously the head of Blockchain Strategy at PayPal and also co-founded Snickerdoodle Labs. This California-based blockchain security company uses blockchain to give consumers control over their browsing and cookies.
Padilla explained that “With a decentralized marketplace, there are really no safeguards in order to say who’s a good actor or who’s a bad actor.”
Blockchain can offer transparency in a new way. All transactions on blockchain are publicly available and cannot be modified or removed. This is a promising sign. In June, Colonial Pipeline paid 63.7 Bitcoin to anonymous hackers (amounted to almost $2.3 Million). U.S. Justice Department investigators were then able to track the transactions and seize the ransom amount.
Padilla states that hackers used a hosted wallet for moving the Bitcoin around. This means [law enforcement] was able to find them in five days. There is transparency in blockchain, and with the tools [coders] are creating], you can now use sophisticated software to perform an on-chain analysis of these transactions and track their movements.
It will take time for law enforcement agencies at all levels to become proficient enough in new tools to effectively investigate smaller-scale cryptocurrency scams. It is possible that criminals could use crypto tokens, NFTs and other digital assets to launder money at both small and large scales.
Padilla says, “That’s an extremely real concern.” “For example, you can get money from Columbia and buy an NFT using what was cartel money. It could then be washed in NFT.”
Padilla states that mass-scale money laundering is not common, but that the tools and the framework need to improve quickly.
Padilla states that “the tech is just getting to where it needs be… to be in a position to track where the money is coming from and going.” It hasn’t been there in the past half year, since NFTs and crypto have gained popularity.
Experts recommend sticking with beginner-friendly cryptocurrency exchanges such as Coinbase or Gemini to avoid the risks associated with niche exchanges. For beginners, it’s a good idea to stick with the most popular cryptocurrencies like Bitcoin or Ethereum. They have a better track record of growing in value than any other altcoins.
Digital Collectibles And Games
As we saw with Squid Game, sophisticated coders can now create entire worlds and new games on blockchain, just like the scammers behind it. It’s possible to do this in as little time as it takes for the next Netflix shows to go viral.
It is easy to con excited blockchain novices by convincing them to buy a new type of coin or token. The original scammers can sell their entire holdings and then disappear if enough people push the price up through supply/demand.
Blockchain is not like bank accounts that hold federally regulated currencies. There’s no FDIC insurance or fraud protection. If your money is stolen from blockchain, you can only get it back if the recipient pays you directly. It’s extremely unlikely that this will happen on a decentralized exchange. Even though mainstream crypto-exchanges have better security against fraud than less-known ones, investors still don’t have a guarantee that they will be able to recover stolen crypto.
Cryptocurrency Investment Scams
There are always new forms of Cryptocurrency being created. When new coins hit the Blockchain, it is called an initial coin offering (ICO). There are many scams in ICOs. An individual or company may claim that they have an opportunity to invest in crypto. This new type of crypto promises 1,000% returns. You may be compelled to deposit a lot of coins in a digital wallet that has been compromised. Or, they might “pump and dump” the coin by buying it up and then selling it when it explodes.
There are many dating apps where crypto scams thrive. The FTC estimates that about 20% of the money that was lost in romance scams from the period of October 2020 to March 2021 was sent via various cryptocurrencies. These scams involve digital or long-distance relationships where one party convinces the other to give or buy crypto. It’s a way of scamming people out of their money.
Although this scam is old-fashioned, crypto has some new implications. Bad actors send emails to lure recipients into clicking on links and entering their personal information, including cryptocurrency wallet key information. Unlike usernames and passwords, you will only have one private key for your blockchain wallets. This is a part of blockchain’s decentralized design. It ensures that no one entity can control your information. However, it presents a problem if you ever need your key to be changed.
How Cryptocurrency Investors Can Protect Their Cryptocurrencies
Even the most experienced and passionate cryptocurrency experts are aware of the evolving risks that crypto presents. Some people have survived scams, like the blockchain investor and entrepreneur Ian Balina who claimed he lost $2.5million after his private wallet’s key information was stolen by someone who had hacked his Evernote account.
Balina’s story highlights fraud and loss when dealing with volatile assets, even for investors who are successful.
Financial experts recommend that passive investors keep crypto holdings under 5% of their portfolios. They also advise not to invest in crypto at any cost, such as saving for an emergency or paying off high interest debt. Here are some best practices for protecting your investment in crypto if you’re ready to
Red Flags in Cryptocurrency
- In emails, social media posts and any communications, common typographical errors and obvious misspellings
- Promises to multiply your income
- Contractual obligations that bind you to holding crypto, but not allowing you to sell it
- Fake celebrities or influencers
- Psychological manipulation such as blackmail and extortion
- Large social media crypto schemes
- Promises of money for free
- There are no details at all about where your money is going
Know When To Use A Crypto Wallet
Your digital wallets should be protected just like your physical wallet. You should practice good digital security habits similar to how you would handle large amounts of cash.
Experts believe that small-scale investors who have a few hundred dollars in crypto can keep it on Coinbase or another mainstream exchange. Click here, if you would like to start crypto trading. If you have thousands of dollars of crypto, it is probably a better idea to include a wallet for extra safekeeping.
There are two types of crypto wallets. They are often called “hot wallets” or “cold storage”. Many people prefer to call them “hosted” or “unhosted”.
Hot wallets can be hosted online. Although they are usually secure, but they are more prone to attacking than cold storage, this is the reason, why people store their crypto offline on a secure hardware. Cold storage is as safe as a USB-drive. Although it’s safer, you can lose your money forever if you forget your password, or lose your device.
Hot wallets are not FDIC-insured as cash in the bank. It is important to ensure that your crypto wallet or platform has strong security measures. These measures should include
- Two-factor authentication
- A portion of your holdings can be stored in its own cold storage
- Private insurance policies for theft and hacking (separate FDIC insurance)
Keep Track Of Your Wallet Keys
Mac Gardner, a Florida-based certified personal financial planner and the founder of FinLit Technology, states that you only have one key to access your wallet. You could lose your crypto investment if you forget your key or somebody has stolen it…
You must have full control over who has access to your wallet key”, says Gardner. “Each code is a combination of a process and a number of characters. Because of the virtual space, it’s highly personalized. If it is not personalized, anyone could just go in there and grab your stuff.
These links will allow you to report any suspicious activity or fraud involving cryptocurrency to the bureaus:
● FTC: ReportFraud.ftc.gov
● The Commodity Futures Trading Commission: CFTC.gov/complaint
● The U.S. Securities and Exchange Commission at sec.gov/tcr
● You can also contact the FBI if the fraud involves extortion and blackmail.
If you suspect that fraud is taking place, you should report it to the crypto exchange that you are using to complete the crypto exchange.