What Are Crypto Scams?
Scam is a type of fraud, the purpose of which is to force the victim to trust the attacker and transfer money to him. Cryptocurrency scams means the same thing, with the only difference being that the scammers are targeting digital assets. Digital assets created to steal investor funds are often referred to as cryptoscams.
Unlike the “traditional” types of fraud associated, for example, with bank transfers, Bitcoin scams have a narrow specificity and are aimed at deceiving investors. Let's describe in more detail what a scam is like, what it means for crypto investors and how it works in simple words.
Scam involves investing in a fraudulent project or direct transfer of cryptocurrency to an attacker's wallet. Accordingly, scamming means to deceive the user by stealing his money. Сybercriminals who scam are called scammers.
With the advent of cryptocurrencies, the scam began to develop more actively, since it became more difficult to find fraudsters due to the specifics of the blockchain: transactions are easy to track, but identifying the owner of the wallet is much more difficult than the owner of bank accounts. Attackers come up with new, more sophisticated ways to steal money.
Recently, the concept of scam has become more general: the term "scam" can be called a synonym for "bankruptcy". A failed project is called not only fraudulent projects, but also those startups that have ceased to fulfill their obligations or are in a “coma state”. Startup default is not always fraudulent.
HYIP (High Yield Investment Program) is a project with high returns for investors, in most cases sooner or later becomes a scam. HYIP is an industry. The profitability of projects can be 30-50% per year or more. But all HYIPs are financial pyramids built on the payment of profitability to old participants by attracting new ones. And no one hides this, because, although HYIPs are in some way a scam, this industry is developing. Everyone can create their own HYIP project and its price is relatively low – within 5000 USD on a turnkey basis.
Cryptocurrency startups are platforms based on blockchain technology. They are developed for months and years, tested and listed on cryptocurrency exchanges. Each startup has its own idea and the developers are trying to bring it to life.
HYIPs are projects that sooner or later will be 100% scammed. Cryptocurrency startups that have passed the ICO can both get off the ground and become leaders in the segment.
Cryptocurrency scams can be divided into several groups:
Targeted scams. Projects that were developed in order to get quick easy cash. They have a primitive conception, site development is negligible, interface is simple. Developers know in advance that the idea of the project will never be realized.
Fraudulent scams. Developers focus on the marketing campaign and affiliate program, misleading investors. Prosecuted by regulators and relevant authorities for violating the law.
Scam HYIPs. They position themselves as a cryptocurrency, but they are a pyramid scheme. They warn the investor in advance about the risks, therefore they are rarely held accountable. Often restarted after the previous project has scrambled.
Unintentional scams. Initially, the developers were preparing a cryptocurrency project in order to implement the idea and launch a platform that would bring economic benefits. But “something went wrong” and the startup went bankrupt.
What Are Causes of Cryptocurrency Scams?
The reasons for the termination of payments can be varied: it may be a mistake made by one of the team members or traders associated somehow with the project. Even a promising project can come off. The two most common reasons are:
A hacker attack, after which money disappeared from the company's accounts, administration accounts were hacked, privacy and the mechanism of operation were broken, etc. As a rule, the developers of a cryptocurrency startup are responsible for protecting their wallet, the same applies to exchanges. But the complexity of the code depends on funding – small startups have a relatively small budget, so vulnerabilities are more common and easier to crack. Large startups most often compensate their investors for at least part of the losses.
It's easier for small startups to squirm.
Problems with partners, banks, sponsors. A startup develops as long as it has financial support. If a startup has not yet been launched and does not generate income, then it can only receive money from business angels, attract funds from private investors, or increase the price of tokens at the time of the presale, if the project has reached this stage. If some of the tokens have already been redeemed in the pre-sale, but the business angel has stopped funding, the project is on the verge of closing.
Other reasons include:
Most startups fail to compete or their idea is not viable. At the dawn of the popularity of BTC and ETH, many developers tried to copy these two radically different ideas. But they lost the competition.
Failed idea and lack of further support from the developers.
Panic among investors
Amid general collapse in quotations, speculative capital temporarily exits the market. Those cryptocurrencies to which investors did not return after the market recovery are deleted from the listing of exchanges and analytical portals.
Error in budgeting
The funds raised are not enough for the full development of a startup and its marketing promotion. Investors gradually turn away from the project, the price of the token falls, developers stop working on the project.
A scam can be not only a startup going offline, but also a depreciation of the project’s cryptocurrency with the subsequent stop of its development. The scam may have natural causes – hacks or the inability to compete with other startups. The exception is cryptocurrency HYIPs that do not fall under the definition of fraud.
How Do Scam Projects Make Money on the Crypto Market?
The project, which is aimed at long-term existence, has three earning channels: income in the form of a commission from the direct operation of the cryptocurrency platform, attracting investors who will buy back tokens with a limited issue, growth of quotes due to the interest of investors in the project. Those who are pre-targeted for a scam to embezzle investors' money have more options.
The most common crypto scams schemes include:
Earnings on cryptocurrency HYIPs. The developer is required to:
Consider the scope of the project. Come up with a legend – the main idea.
Register a domain, rent a VPS server, create a website, connect wallets. Data security and anonymity are important. Check project performance. Launch a marketing campaign. A budget option is to promote hype through specialized sites that indicate whether the project pays or not. An expensive option is promotion through blogs, social networks using SEO, SMM tools, publication on analytical portals, and the media.
Investors buy the monetary unit of the project, and due to investments of the following investors, the profitability of the previous ones is formed. A part is left to the developer. The higher the yield, the faster the scam will come. The more active the marketing campaign, the more investors are attracted to the project and the longer it will stay afloat.
What Is Cryptocurrency Fraud?
What is crypto fraud? One scenario of a cryptocurrency fraud can be the following. The developer prepares the simplest blank: he buys a ready-made script, uses code templates to create a platform, fastens public free wallets, creates an ideal interface from a visual point of view.The task is to get maximum credit: to draw the most beautiful, convincing picture, the shell of a startup, filling it with budget content. Investors buy a project token in the hope that its price will rise and receive the promised percentage of profit. But the developers turn off the site, withdraw client money into other coins or fiat and disappear.
Another cryptocurrency fraud scenario can look like this.The start is similar: a project is being developed, tokens are being issued, investors are being attracted. Further, a hack is simulated, the developer reports: “Unfortunately, hackers found a vulnerability, cracked the code and withdrew money from the platform both in BTC/ETH and in platform coins. Now we cannot return to you your BTC/ETH, with which you paid for the purchase of our tokens”. In fact, the hack was carried out by the developers themselves, who withdrew money and exchanged it for fiat on large exchanges. Different types of crypto wallets and transactions are anonymous, it is difficult to prove the involvement of developers.
Hard and soft exit scam
In both cases, the coins are brought to the exchange and are listed. In the first case (hard scam), the developers disappear with the investors' money in an unknown direction.
In the second (soft scam), coins are sold at the peak of the price.
Most often, such scams occur at the moment of popularity of a particular trend in the technological development of cryptocurrencies. In 2017, it was an ICO – up to 70% of the projects that appeared then became a scam. In mid-2020, the DeFi trend appeared – decentralized finance and yield farming. In general, a soft scam looks like this: investors issue loans and form liquidity pools for DEX (decentralized) platforms. And for this they receive interest by analogy with bank deposits. The desire to get a fixed percentage veiled as DeFi technology has attracted a new wave of investors. And, accordingly, scammers.
Pump & Dump
The involvement of developers in this scheme is not mentioned anywhere, but they are quite capable of launching a pump wave. It works like this. A token is released to the market that has a "junk" value – less than a cent. In messengers, on forums, a topic is created about the imminent cryptocurrency pump, indicating the date and time. In the last few minutes/seconds before the start, the name of the token is reported. Developers are left to sell their tokens at the peak of demand.
If the developers assume a scam in advance, then when it happens depends on their greed. Someone almost does not invest money and closes the project at the stage of primary development. Someone actively promotes the project in the listing, sparing no money, after which they wind up the project under various pretexts at the peak of the token value.
How To Recognize Cryptocurrency Scams?
When the project administration begins to realize that a scam is just around the corner, they stop allocating funds for the development and support of the official website, which leads to frequent technical problems, failures, etc.
There are typical signs of crypto scams.
"Silence" on the part of technical support when users contact it via email or through other means.
A sharp increase in profitability and rates without any reason. Such a scheme is deployed prior to the scam in order to motivate clients to invest even more funds, and accordingly hit the jackpot before closing the project.
Difficulties with withdrawing funds:
Refusal to withdraw under various pretexts: an error in filling out an application, additional verification is needed, etc.
Delays in withdrawal compared to previous periods.
Ignoring the request: "Application in Process".
Users are answered that the application was completed, although the money did not come.
A lot of advertising. Advertising banners and videos can be seen even if a person has visited third-party sites or simply decided to watch a movie online. This does not always mean that the scam is close. Sometimes a wave of advertising content is really created in order to resist and break away from the competition. However, it also happens that advertising "noise" is created in order to attract new customers, and, accordingly, funds, which means that before closing the project, the administration will be able to fulfill the "maximum plan" for profit.
A sharp pump followed by a decline in quotes.
The investor sees it ex post. But at least he can warn others that it is too late to invest in this scam. One of the tricks of the scam project developers is that the site remains running for some time. It continues to accept payments, the support service is still answering questions from those who are ready to invest. Potential investors do not yet know that the project does not pay out money. If you get caught in a scam, the probability of a refund is almost zero. But by warning others, you will help them avoid the developer trap. And maybe next time someone will also warn you.
Decrease in publications, feedback from investors, violation of the roadmap deadlines. Decline in site traffic, social networks, a drop in the number of subscribers.
These signs are suitable for determining the scam of an already launched startup, whose token quotes chart is displayed by analytical portals and experts and whose tokens can be bought on standard cryptocurrency exchanges or DEX exchanges.
How To Recognize a Potential Scam at the Initial Investment Stage?
High yield already at an early stage of development. The startup has nothing to generate profit from, the profitability on staking is insignificant. This means that the startup will pay money at the expense of new investors.
Lack of communication with the team. Some developers take photos of strangers from social networks. The contacts listed on the website are incorrect.
Lack of detailed information about the project in WhitePaper. Compare WhitePaper of top cryptocurrencies or startups with a history of 3 years or more with WhitePaper of an investment startup.
Standard script templates. To analyze the code, you will need the help of a programmer.
Lack of a working prototype model. If developers start attracting investors' money just a few months after the first steps, this is a scam. It makes sense to invest in projects that have passed at least alpha testing.
For a deep analysis, you need the help of a specialist. For example, you can compare a startup concept with competitors and evaluate the possibility of implementing an idea. Perhaps, there is an idea that cannot be realized in the near future. Via a calculator, you can go deep into the calculations: how will the emission be carried out, how will the tokens be distributed, is inflation/deflation and economic calculations taken into account? Most often, scam projects do not go deep into such calculations.
What Is Cryptocurrency Exchange Scam
Investors are not immune from the scam of the exchange platform itself. Cryptocurrency exchanges are not regulated and, due to relative decentralization, quite easily bypass local legislation. Sometimes the owners of the exchange have a desire to use the accumulated liquidity pool. And then any tricks are used: from burglaries to staging death. Moreover, it is not known whether there was really a hack with the subsequent theft of cryptocurrencies, or whether it was imitated by the owners themselves. The task is complicated by the fact that the owners withdraw money through mixer wallets, this can be done in any country and it is almost impossible to trace the chain of transactions.
Recently, a new trend has appeared among cryptocurrency platforms – DEX or decentralized exchanges. Their advantage is complete decentralization and minimum of tools. There are no personal accounts, no verification. Risks are reduced due to the fact that DEX does not involve the storage of cryptocurrency, its servers do not store user data – hacking is excluded. More precisely, it is possible to hack the DEX, but it does not make sense. DEX exchanges are just a platform for the exchange of coins.
How to minimize the risks of cryptocurrency exchange scam:
Pay attention to the possibilities of DEX-exchanges.
Diversify risks. Work through accounts of several exchanges.
Work through hot and cold wallets – do not store money on the exchange.
Try to avoid local venues. Give preference to the best crypto exchanges – large platforms that are not interested in scamming their business.
Still, despite all these steps, there is no absolute insurance: no one is immune. Incorporate scam risks into your trading strategy.
How Not to Become a Victim of a Cryptocurrency Scam
Crypto scams are not a pleasant phenomenon, but it is quite expected. During the mining boom, it was naive to assume that there would be no people who would want to hit their “jackpot” on this wave. Scam ICO is a rarity, however, it does occur.
Knowing what a cryptojacking or cryptocurrency scam is, you can protect yourself from it. But for this, the user must be careful. When you get to the project site, you need to look at the interface of the page, the quality of the resource, and the quality of the content. In addition, you need to read user reviews, study the ratings and seek help from analytical companies such as NextAdvisor. The necessary “home comfort” and the proper level of security can only be provided by proven platforms and proven crypto exchanges.
How to define a scam project at the initial stage and the stage of existence has already been said above. To this can be added:
If you don’t want to take risks, forget about investing in startups that have just appeared in the ratings. Their quotes reflect the degree of investor interest. And in most cases, it falls very quickly.
Invest in leaders of one segment or another only if the project has been in the TOP for several months. Segments mean “Best DeFi project”, “Best capitalization project based on the BSC network”, etc.
Invest in "mastodons". Although their volatility may be less than the volatility of new startups, there is no chance of a scam either. Commonly, the general movement of the market is still approximately the same for all coins.