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We are an independent, advertising-supported comparison service. Our goal is to help you make smarter financial decisions by providing you with interactive tools and financial calculators, publishing original and objective content, by enabling you to conduct research and compare information for free – so that you can make financial decisions with confidence.
Our articles, interactive tools, and hypothetical examples contain information to help you conduct research but are not intended to serve as investment advice, and we cannot guarantee that this information is applicable or accurate to your personal circumstances. Any estimates based on past performance do not a guarantee future performance, and prior to making any investment you should discuss your specific investment needs or seek advice from a qualified professional.
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Despite the recent declines in cryptocurrency prices, digital currencies are still incredibly popular. Many still see cryptocurrency as a “get rich quick” scheme, where they can put a few dollars in and take out 10 or 100 times their money, ideally as soon as possible. But that mentality and a lot of misunderstanding around how cryptocurrency works has led to scammers trying to rip off the unwary.
In fact, nearly 33 percent of respondents said they had fallen victim to a crypto scam, according to a 2021 survey by CryptoVantage, a crypto news source. So those looking to trade digital currencies should be careful – even with those who seem to be giving them freebies!
Here are three types of cryptocurrency scams to watch out for – and how to protect yourself.
Crypto scams can take several forms, and it’s important to know how they operate so that you can recognize them when you see them. Dion Guillaume, global head of public relations and communication at Gate.io, a cryptocurrency trading platform, classifies the most popular crypto scams into three major categories: Ponzi schemes, pump-and-dumps, and rugpulls. Here’s how they work:
A Ponzi scheme, also known as a pyramid scheme, is a classic scam. In this setup, you’re rewarded for bringing in more people to the cryptocurrency. Any money brought into the scheme is used as payouts for people higher up in the pyramid. When no more victims can be found, the scheme typically collapses.
Guillaume says these kinds of scams are easy to detect and it’s based on how you’re paid: “If a protocol promises you higher returns for bringing in more people, then it’s a textbook Ponzi.”
The evocative naming of this kind of scam reflects how it works and what to expect.
“In pump-and-dumps, malicious groups artificially pump up the value of a token, attracting more investors, before selling off their tokens [dumping] and pocketing a profit,” says Guillaume.
This scam relies on hyping a coin and getting more people to buy into it. As the price rises, insiders sell out of the coin, dumping it on the public and traders are left with worthless coins. Guillaume says to watch out for coins that shoot higher in price in a very short period.
A “rug pull” is a crypto scam where the founders of a cryptocurrency basically just disappear one day and take all their tokens – your money – with them. A well-publicized rug pull happened in late 2021 with the cryptocurrency Squid, and the founders walked off with millions in cash.
A rug pull can be more difficult to predict, because generally you have to trust a coin’s creator, and it may not be obvious that it’s a scam until the creator just walks away.
But one telltale sign may be a crypto coin that restricts your ability to sell it whenever you want. If you can’t get liquidity for a coin, it’s among the worst possible signs.
Those first three scams are directly related to investing in cryptocurrency, but others – such as the luridly named “pig butchering” scam – try to prey on those who haven’t even begun to invest in cryptocurrency yet. They’re riding the coattails of popular interest in cryptocurrency, though.
This scam “fattens a potential victim with flashy fake direct messages, cars, houses, and photoshopped bank profiles with hundreds of thousands of dollars, hoping someone will give in and send money,” says Joshua Pardhe, a student at Arizona State University and cybersecurity researcher.
These kinds of videos are floating all over social media, with scammers flashing thick wads of cash and expensive cars.
“After the victim is captured and money is transferred, the scammer disappears and never communicates again,” says Pardhe.
Another type of scam involves the use of airdropping tokens to supporters of a cryptocurrency. An airdrop basically places tokens in your crypto wallet, and a crypto project’s creators may do so to help grow a grassroots network of supporters, says Alan Eschweiler, the chief operating officer at Stacked Invest, a crypto investing platform.
But when you accept the airdrop, you can expose your crypto investments to a scammer.
“An entity will airdrop you a token that appears to have value, and when you go to exchange that airdrop for another more well-known token, you give a protocol more permissions than you realize,” Eschweiler explains. Then the hacker gains access to the rest of your wallet, he says.
You may not be able to see how a given cryptocurrency operates, and that should be enough to make you think twice about investing your hard-earned money in it. But here are some other signs of a scam. If you see them, you should pay extra careful attention to that crypto.
These signs should tip off anyone that they’re looking at a fraud.
If you’re looking to invest in a specific cryptocurrency, experts recommend a number of steps that you can take to avoid the scams. In fact, many of these steps require only a modest time investment to prevent you from losing your entire investment to a scammer.
These are some of the fundamental steps to protect you and your money from the crypto scammers.
While you may not be able to avoid the cleverest scams, it’s important to not let your greed get ahead of your ability to think clearly. So, it can make sense to follow the most basic rule of avoiding scams: “If it’s too good to be true, it probably is.” But even taking other common-sense precautions can help you avoid some of the worst aspects of the crypto world.
Editorial Disclaimer: All investors are advised to conduct their own independent research into investment strategies before making an investment decision. In addition, investors are advised that past investment product performance is no guarantee of future price appreciation.
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