Common Crypto Scams and How To Protect Yourself in the Digital Age

Cryptocurrency is hugely popular. The promise of being part of a cutting-edge technology and potentially reaping significant benefits has drawn even tech-averse customers. Unfortunately, along with the rapid rise in interest in crypto has come an increase in related scams and fraud. According to the FBI, losses related to crypto fraud surged by 45% year-over-year to $5.6 billion in 2023, based on 69,000 complaints from the public that year.

Potential crypto enthusiasts eager to explore the space but hesitant because of the risks of scams should take heart: there are many ways to protect oneself in the digital age. This guide will share some of the most common cryptocurrency scams to raise awareness. Readers should leave with a better understanding of how to participate in the crypto space safely.

Key Takeaways

• The rise of cryptocurrency has made it an attractive target for fraudsters.
• Scams range from phishing attacks to fake ICOs to rug pulls, and each type requires a different approach to avoid.
• Protecting your crypto assets involves vigilance, education, and using security best practices.
• Even experienced crypto enthusiasts can fall victim to scams without proper precautions.

Understanding the Crypto Scam Landscape

There is no single type of cryptocurrency-related scam. Rather, this umbrella term may refer to everything from small-scale personal thefts of tokens or wallet access, all the way up to massive hacks that could take down entire exchanges. 

As digital currencies have grown more mainstream—and more valuable—the incentive for bad actors to take advantage of unsuspecting investors has also risen. Add to this the fact that a hallmark of the cryptocurrency industry is its anonymity and decentralized nature, and these scams become all the more appealing to criminals.

Common Crypto Scams You Need To Know About

Phishing Attacks

What Is It?: A phishing attack is one in which scammers impersonate a trusted entity—a popular crypto exchange or platform, say, or even an individual—in an effort to steal sensitive information like private keys or account login information.

How It Works: Commonly, phishing attacks begin with a fraudster sending a message to potential victims (perhaps via a fake email address or on social media). The recipients, unaware of the risk of a phishing attack, open the message to find a link to a website that looks like a familiar one—say, of a cryptocurrency exchange they commonly use.

They may then click on that link and input account login details or other sensitive information, only to find that it doesn’t work correctly. In actuality, they have provided the attacker with their sensitive information by voluntarily sharing it via the fake website.

How to Protect Yourself: Crypto investors should always be on the lookout for suspicious-looking links and URLs—if a link purports to be from a company you trust, double-check that the link matches those used by the official company. Phishing attacks often also include spelling, grammar, or other proofreading mistakes. 

Tip

Enabling two-factor authentication for real and trusted websites with login details will help to protect users.

Ponzi Schemes and High-Yield Investment Programs (HYIPs)

What Is It?: Ponzi schemes have plagued investors before the advent of cryptocurrencies. These fraudulent ploys promise high returns but pay investors with the investments of others involved in the scheme. 

A high-yield investment program (HYIP) is a specific type of Ponzi scheme in the crypto space. These scams promise massive returns and passive income over a short time. They often make use of paid social media promoters and may initially appear to be legitimate, although they eventually collapse as unsustainable structures.

Famous Examples: BitPetite and PlusToken are two examples of HYIPs that drew large numbers of investors. In the case of BitPetite, the project lacked fundamental structure and, eventually, the developers shut down the website and disappeared along with investor funds. PlusToken drew in investors before those investors discovered they could not withdraw funds.

How to Protect Yourself: Despite the massive returns of many legitimate cryptocurrencies, potential investors should always be wary of opportunities that seem too good to be true. It’s essential to do due diligence and thoroughly research any new product before investing.

Fake ICOs (Initial Coin Offerings)

What Is It?: Initial coin offerings (ICOs) are a common feature of the cryptocurrency world, like initial public offerings for publicly traded equities, ICOs help to raise essential funds for a crypto project through the sale of tokens. Unfortunately, ICO scammers may create a fake project to steal funds from investors, under the guise of a legitimate ICO. In these cases, the promised tokens typically never materialize.

Warning Signs: Many of the same red flags for HYIPs apply to ICOs as well. Suppose a token project lacks a rigorous, thorough whitepaper. In that case, if it appears too good to be true, or if the materials surrounding the project or its team seem suspicious, it’s best to leave it alone and avoid investing.

How to Protect Yourself: ICOs can be a great investment opportunity, but it’s essential to research them thoroughly before participating. Consider only identifying potential ICOs for investment through a trusted platform or a third-party reviewer.

Rug Pulls/Crypto Exit Scam

What Is It?: When someone “pulls the rug out” from someone else, they suddenly remove support, leaving the victim in a compromised position. In crypto, a “rug pull” is very similar—it occurs when the developers of a project suddenly pull out liquidity or assets after a launch, leaving hapless investors with suddenly worthless tokens. These scams are also known as crypto exit scams.

How It Happens: Developers often effectuate a rug pull by heavily promoting a new coin or token project, often on social media and even through hired crypto influencers. They often use liquidity pools, reserves of cryptocurrencies that can be traded without a centralized market or exchange.

How to Protect Yourself: Before investing in a crypto project, it’s essential to verify the legitimacy of that token. Take time to research the team involved, get to know the liquidity of the token, and, ideally, examine the code to see if it holds up.

Pump and Dump Schemes

What Is It?: Crypto investors often experience a sense of fear of missing out, or FOMO, in which they worry that they’ve missed an opportunity to invest in a highly profitable token. Scammers capitalize on this psychological element of the space by working to artificially inflate the price of a token through hype. When the price has been boosted, these scammers then sell large quantities of tokens to investors who suspect the price will continue to rise, leaving those investors with losses.

How It Works: Scammers engaging in pump and dump schemes often work together to heavily promote a token, often on social media. The goal is to build up investor interest and a sense that the price of the token will continue to rise. They often also use coordinated trading efforts to sell off large quantities of tokens simultaneously.

How to Protect Yourself: Investors should follow the indicators of a token’s price, not their emotions, and always do thorough research.

How To Protect Yourself From Crypto Scams

Use Trusted Platforms

One of the best ways to protect yourself from crypto scams is to use a reputable exchange like Coinbase or Binance. These and similar platforms offer strong security protocols and other benefits. Within your account, it’s helpful to use two-factor authentication and other security features, where available.

Be Skeptical of Unsolicited Offers

Easy money is often too good to be true, in the crypto space, just as in other investments. Beware of unsolicited messages or emails that promise significant returns for little or no work. Always double-check the legitimacy of an offer before engaging, even before clicking on a link from an email.

Keep Your Private Keys Secure

Private keys and recovery phrases are essential tools for cryptocurrency investors to access their holdings and are frequent targets of scammers. Be sure to keep your secure information safe—consider storing data offline if possible, and never share it. Hardware wallets and similar products can help to keep this information safe from theft.

Stay Informed

New types of cryptocurrency scams are emerging all the time. To be best prepared to avoid them and maintain security over your holdings, stay up-to-date on these threats by following trusted forums, news sites, and educational resources. The California government’s Department of Financial Protection & Innovation, for example, maintains a list of crypto scams that is regularly updated to include new threats. By subscribing to alerts from a reputable crypto security platform, you can stay informed without having to actively check for updates.

Verify ICOs and Tokens

Thoroughly research any token, ICO, or DeFi project before making an investment. Resources like CoinGecko and CoinMarketCap are helpful ways to track crypto prices and verify many token details.

How Can I Tell if a Cryptocurrency Exchange Is Legitimate?

Beware of offers that seem too good to be true, and always do thorough research. Legitimate exchanges will always have robust information available on websites and social media and will typically have reviews and other information posted by third parties.

What Should I Do if I Fall Victim to a Crypto Scam?

If you fall victim to a scam, report it to the FBI Internet Crime Complaint Center (IC3). If the scam is related to an exchange or other platform, notify the appropriate team with that exchange. You may also wish to inform a tax professional, as there may be tax implications for victims of crypto scams.

Are There Any Specific Red Flags When Looking at New Cryptocurrency Projects?

Legitimate cryptocurrency projects should have thorough and compelling whitepapers, documentation of development teams, and other information supporting their success before launch. Be cautious around any project that seems to be short on this information. You should also keep an eye out for signs that developers may be trying to artificially hype a token before launch in order to try to build up its price.

The Bottom Line

The best defense against cryptocurrency scams is vigilance. Investors who stay informed and maintain best practices for securing their tokens stand the greatest chance of avoiding scams. Remember that these attacks are always changing, and you’ll need to stay up-to-date on the latest methods fraudsters use to protect your investments.

Still, while scams do exist and are a legitimate threat, many resources and strategies—often for free—are available to protect investors in the crypto space and minimize risk.

One way crypto investors can work together to protect the industry is by sharing resources like this one, which aims to educate those new to the cryptocurrency world about the risks to be as safe and secure in their investment practices as possible.