Popular cryptocurrency fraud schemes. How to protect your investment


When business entities start using new digital monetary mechanisms, in particular well-known ones such as cryptocurrency, it does not take long to realize that such transactions involve financial risk, which does not depend on the volatility (volatility) of the market. Fraud is no different on the Internet or on a cryptocurrency exchange. That is why when considering investing in a variety of startups and exchange platforms, one should be aware of the possibility of losing one’s investment in buying cryptocurrency.

When looking for cryptocurrency companies and startups, experts recommend checking whether they are really blockchain-based, because this means that all transaction data is tracked. You should also pay attention to the presence of reliable business plans, companies should indicate their digital currency liquidity and ICO rules, there should be real people behind the company, etc. Therefore, if the startup you are studying does not have some of these characteristics, consider your decision even more carefully. After all, cryptocurrency fraud is not a novelty in 2020/2021, as the market capitalization of cryptocurrencies has exploded recently, but fraudulent schemes have been used since the advent of bitcoin (BTC).

For example, one of the most high-profile recent cryptocurrency frauds was the disappearance of the founders of AfriCrypt, Africa’s largest cryptocurrency exchange with a value of $3.6 billion. The disappearance of the founders of Africa’s largest cryptocurrency exchange, AfriCrypt, amounted to $3.6 billion, allegedly due to a massive hack, which, according to experts and U.S. prosecutors, was artificial and contrived.

AfriCrypt was founded by two brothers Ameer and Raees Cajee from South Africa who embezzled 69,000 bitcoins. At the time of publication, their whereabouts were unknown. According to Bloomberg, the first problems began back in April 2021, when bitcoin prices were at a record high (on April 17-18, bitcoin hit a price record of over $64,000. USD per coin). That’s when Amir Kaji informed investors that the system had been hacked. At the same time, AfriCrypt management asked customers not to report incidents to lawyers and government authorities, as it would “slow down the process of returning funds.

Nevertheless, one of the biggest cryptocurrency frauds in history today remains the 2017 OneCoin fraud scheme, which the U.S. attorney’s office estimated at 4 billion euros.

Ruzha Ignatova called herself a “cryptocurrency,” positioning herself as the developer of a new cryptocurrency, OneCoin, capable of competing with bitcoin and, as a result, attracting billions in investments. However, two years later she disappeared. Between August 2014 and March 2017, 4 billion euros were invested in OneCoin from several dozen countries, including Pakistan, Brazil, Norway, Hong Kong, Canada and Yemen. Investors were even found in the Palestinian territories. And some experts of this case note that the figure may reach 15-16 billion euros.

The aforementioned cases are not uncommon in the history of the crypto market. In particular, there are less visible, but more frequent cases (including email phishing (Internet scams aimed at gaining access to confidential user data – logins and passwords) and social media scams) that happen to careless investors. International experts on cryptocurrency scams note that their number in 2020 compared to the previous year has increased by 40% to 400,000 cases. Moreover, based on the current level of malicious activity, which may indicate potential scams, a further increase of up to 75% is predicted in 2021.

That is why, in order to help potential investors not to fall prey to cryptocurrency scammers, this article describes the most common fraud schemes (scams) with cryptocurrency. This will help to navigate through the usually unregulated and immature features of the cryptocurrency market.

How cryptocurrency fraud schemes work

One of the contributing factors to cryptocurrency investment fraud is the anonymity of what transactions are made as part of a blockchain resolution. Because scammers can convince their victims to send them a certain amount of cryptocurrencies and then disappear without a trace in a cloud of sophisticated code.

There are many types of crypto-fraud, from the so-called rug pull (literally translated as “rug pulling”; the practice of building up the value of a created token at the liquidity limit and then withdrawing funds abruptly, leaving other providers with assets that have lost value), which tends to happen in the vastness of decentralized finance (Defi), to social media and social engineering scams, which take advantage of mass psychology to make investors

Despite the variety of schemes implemented by fraudsters in practice, the purpose of such frauds is primarily the following:

– increasing the value of a particular token and then selling such cryptocurrency to careless investors;

– convincing investors to invest by promising a much larger return;

– gaining access to a wallet to withdraw all available financial resources from it.

As the cryptosystem continues to evolve, the methods used by scammers will likely evolve as well, but their ultimate goal will remain the same – to deprive investors of their hard-earned money.

How to recognize cryptocurrency fraud

The best way to spot potential cryptocurrency fraud schemes is to familiarize yourself with some of the most common cryptocurrency fraud warning signs. These scenarios should raise investors’ doubts if they are asked to invest in cryptocurrency in particular:

– the website lacks security credentials, which are often necessary for secure data transmission. This includes (but is not limited to) having a Secure Sockets Layer (SSL) certificate and reflecting HTTPS instead of HTTP, a dangerous version of the website;

– Receipt of an email offering a reward or any other form of compensation from the company, especially if the email comes from an unknown domain that is different from the company’s official website;

– in social networks or by email receives a link to register or access a cryptocurrency wallet, but this link is different from the official website of the provider;

– Receiving a reward for persuading an investor to persuade his or her friends to invest, buy or otherwise transact with a company or individual promoting a token or a particular blockchain project;

– offer to participate in the first coin offering whose investors are unknown parties with no social media profiles, links or business strategies;

– Please provide your wallet PIN, private keys, and other such confidential information to pay for a specific item or service purchased online.

While these are just some of the many warning signs that can help an investor identify potential fraudulent schemes and methods used by criminals to defraud investors, awareness of them can greatly reduce the likelihood of falling for such fraudulent schemes. That said, the SEC Office of Investor Education and Advocacy recommends that traders and investors carefully check investment opportunities offered by websites that advertise their cryptocurrency services. Some of them may contain so-called “red flags” of fraudulent activity, including promises of high investment returns and low financial risk.

The seven most common cryptocurrency fraud schemes

Forewarned is forearmed, so to help the potential investor to protect themselves, let’s analyze how some of the most common methods of fraud work in practice.

No. 1 – fraud in social networks

Scams in social networks can be realized in different ways. For example, a scammer can try to impersonate a famous, well-known representative of the crypto-financial space or any other personality whose credibility can be justified enough to make them believe that the offer is legitimate. Moreover, they can even enter from such a representative’s real social media profile by hacking it, as happened, for example, last year, when a hacker gained access to the account of several famous people, including Jeff Bezos, Barack Obama and Ilon Musk, and used these accounts to ask their social media friends and pidpieces to send a certain amount of crypto assets in exchange for a large payment.

No. 2 – social engineering scams

The modern possibilities of social media to shape people’s opinions are sometimes underestimated, in particular when it comes to investment fraud. Investors can fall under the influence of investing in pseudo-opportunities that have already been recognized and applied by a relatively large group of people. Actually, that’s how this type of fraud works. In a social engineering scam, the scammer will run multiple social media accounts that will be used to verify a project, an investment idea, an initial coin offering, or a particular crypto-related service in order to get real people to invest their money from it. Most of these accounts are fake, but investors don’t realize the concerted nature of the fraud until it’s too late.

No. 3 – unregulated cryptocurrency exchange scams

The number of cryptocurrencies has been growing steadily since bitcoin (BTC), ethereum (ETH) and other cryptoprojects began to gain popularity. As of August 01, 2021, there were 390 cryptocurrency exchanges listed on CoinMarketCap. The largest cryptocurrency exchanges based on 24-hour volume, according to Statista.com, primarily include: Binance, Tokocrypto, Upbit, ZG.com, Tokencan ta OKEx.

However, along with numerous proven cryptocurrency exchanges that have proven to be legitimate and have received positive reviews as reputable within cryptocurrency trading, there are also cryptocurrency exchanges that have been involved in incidents involving funds theft and alleged system hacking, resulting in multi-million dollar losses for investors. For example, in 2017, one such fake cryptocurrency was discovered by South Korean authorities. BitKRX was created and presented as a cryptocurrency branch of the largest and most legitimate South Korean platform Korea Exchange (KRX). Taking advantage of KRX’s goodwill, BitKRX led investors to believe in the project and lost their financial resources as a result.

Most of the cryptocurrency exchanges that have exploded were those that lacked the regulatory oversight to which most traditional brokerages are subject. As such, investors should be cautious about depositing funds on exchanges not actively controlled by superior jurisdictions, such as the United Kingdom, the United States, Japan, or Australia.

No. 4 – email fraud

While most may not fall for the usual spam that is filtered every day by Gmail and other email services, email scams have become more sophisticated and include cryptocurrency phishing scams, through which the scammer tries to obtain sensitive credentials for investor access to a wallet or cryptocurrency account by directing them to log into their accounts through “imposter” websites.

No. 5 – fraud with ICO – Initial Coin Offering

Fraudulent ICO schemes intend to collect money from a group of investors in the form of valuable tokens, such as bitcoin (BTC) or ethereum (ETH), to then disappear along with the money. Although most of these schemes were implemented during the “golden days” of bitcoin, namely in 2017-2018, they can still be used quite actively by scammers these days. For example, a scammer may approach a potential investor with an offer related to the launch of a particular token or blockchain project that needs funding at the development stage. In exchange, the investor would receive a certain number of project tokens at a very low price with the promise that these tokens would grow in value once the project is launched. However, the criminals who promote such projects eventually disappear with all the invested resource.

No. 6 – crypto investment funds

In the traditional financial sector the activity of investment managers should be legally regulated. For example, in the United States, every fund manager must be regulated by The United States Securities and Exchange Commission (SEC), which helps ensure financial security by keeping fraudulent managers in fear of the law. However, as practice shows, the cryptocurrency market does not adhere to these rules because, unlike fiat currencies, cryptocurrencies cannot be tracked by financial regulators. As a consequence, many investors have lost significant money investing in money managers who promise double-digit returns. BitConnect was a good example. At its peak, the company was valued at more than $2.6 billion. IT WAS WORTH $2.6 BILLION. Investors were promised 40% monthly profitability. This meant that the first investors who invested $1,000 expected to be millionaires in three years, but the company closed in 2018 and investors were left deceived.

No. 7 – fraud in cloud mining (in terms of supporting the work of the bitcoin network or other cryptocurrency for remuneration in the form of tokens)

Bitcoin mining requires expensive equipment. For example, the cheapest new Bitmain mining machine costs more than $250. FOR EXAMPLE, THE CHEAPEST NEW BITMAIN MINING MACHINE COSTS $250. More advanced miners sell for over $10,000. US DOLLARS. Since most can’t afford such machines, it is common practice to bring in cloud mining companies. Investors pay such companies a so-called subscription fee in exchange for bitcoins. While there are actual cloud mining companies, many of them are illegal. A good example was Hashflare, which shut down in 2018 and customers lost millions of dollars.

How to avoid cryptocurrency fraud?

Knowing and understanding how the most common crypto scams work and what methods criminals use most often to steal money from investors is the first step to avoid them.

However, there are other precautions that investors can take to further protect themselves from becoming a victim of such activity, namely:

– Avoid communicating with unknown persons on social media who may advertise a particular project without first verifying their identity and whether they are who they say they are;

– block and mark as spam emails from unknown email addresses that request confidential wallet information or provide the opportunity to access your crypto account using an unverified link;

– Do your own due diligence on any proposed project or project in which you wish to participate (existing or new). First of all, it is worthwhile to examine the following questions:

– who are members of the development team;

– who supports the project (institutional involvement);

– What kind of developer experience;

– Consider participating in initial exchange offerings (IEOs), which are projects promoted through formal and regulated exchanges;

– Keep your wallet information secure (private keys) and do not share such information with anyone, as this may make it easier for outsiders to access available financial resources;

– invest only the money you can afford to spend. Even if you are trading or investing in legitimate projects, keep in mind that the cryptocurrency system is still relatively immature and the level of volatility is very high. This means that an investor could lose a significant amount of his or her money if he or she does not use proper financial risk management procedures to protect his or her investment from a sharp drop.

Article Summary

Thus, the cryptocurrency system is still quite young and largely unregulated. This opens up opportunities for criminal attempts to defraud investors through various schemes and methods aimed at gaining access to wallets or pulling in their hard-earned money by promising attractive but unrealistic profits. Nevertheless, this does not make cryptocurrency a less attractive investment tool, but it should encourage investors to learn more about how such fraudulent schemes work and how they can be proactively avoided.

If you are looking for a safe and reliable way to trade cryptocurrencies, but are not ready to choose a reliable cryptocurrency exchange and purse to store coins, you can start with Contract For Difference (CFD), because it is the most profitable tool on exchanges, allowing you to earn quickly with a minimum of free money and not encumbering participants with property rights. The overwhelming quantity of exchange agreements is concluded according to the CFD scheme. Therefore, trading cryptocurrencies via CFD with a fully regulated broker such as Capital.com offers numerous opportunities to speculate on price fluctuations in cryptocurrencies. Choose the cryptocurrency you want to trade, track its price in real time and determine the best levels to participate in the trade.