If you’re thinking about getting involved in the crypto world, it’s essential to be aware of the various scams.
Cryptocurrency has become increasingly popular in recent years, as people have begun to realize the potential of this new form of currency. However, as with any new technology, there are always those who seek to take advantage of the uninformed. According to the 2021 Crypto Crime report by blockchain analysis firm Chainalysis, scammers conned victims out of US$14 billion in cryptocurrency in 2021, an increase of 79 percent from US$7.8 billion in 2020. Cryptocurrency scams are becoming increasingly common, and they can be tough to spot.
This report is a grim reminder that crypto scams are becoming more and more prevalent and that we need to be extra vigilant in protecting ourselves against them. So, what are some of the most common crypto scams out there, and how can you protect yourself against them?
Social engineering
Given that NFTs, crypto, blockchain and metaverse are rather new technologies, cybersecurity researchers from Cisco Talos pointed out that they could be prone to social engineering attacks. Social engineering is a type of fraud that involves tricking people into revealing personal or financial information that could benefit the scammer. The scam involves acquiring the trust and confidence of the victim to the scammers’ advantage.
In the crypto world, for example, a scammer might pretend to be a customer service representative from a popular exchange. They will then convince the victim to hand over their login credentials or the private keys of their crypto wallets. Once they have this information, they can hack your wallets and steal your crypto assets. Phishing, baiting and tailgating (unauthorized access to the restricted area, such as the office of a crypto exchange company) are the most common social engineering techniques that can threaten the safety of your crypto assets.
In 2020, social media giant Twitter fell victim to a coordinated social engineering attack where hackers manipulated employees to access Twitter’s internal systems and tools. This allowed them to take over high-profile accounts, like Bill Gates and Elon Musk. The hackers also used that access to launch a Bitcoin scam that generated losses worth 12.58 Bitcoins, which was worth nearly US$120,000 back then.
The incident highlights the importance of being vigilant when using social media and only sharing information with trusted sources. If you’re ever asked to provide personal or financial information, be sure to verify the person or company’s identity before proceeding. You can also protect yourself by not clicking on links from unknown sources and by not responding to unsolicited emails or text messages.
Rug pull
A crypto rug pull is when the team or developers behind a crypto project abruptly decides to exit and takes all the funds with them. This is often done without warning or notice, leaving investors high and dry. Scammers trick people into believing that their tokens are worth something by making empty promises about usage, generating a market appeal for investors to buy them. When the token’s value rises, scammers sell it all at once to make a profit and the new token’s value plummets to zero.
Rug pulls are mostly prevalent in the decentralized finance (DeFi) space, where crypto trading is done without the requirement of a third party. This type of scam can be easily pulled off on decentralized exchanges (DeX), where people can list audit-free tokens.
According to a Chainalysis study, rug pulls accounted for 37% of all crypto scam revenue in 2021, while it was just 1% in 2020. A recent example of a rug pull scam was $SQUID, a cryptocurrency token based on the popular Netflix series Squid Game. The token saw explosive growth in the first few trading days on DeX due to the TV show’s hype. Then, the developers behind the project, who remained anonymous, suddenly rug-pulled and stopped any trading activity, causing the price and value of the token to plummet to zero.
To prevent being caught up in a rug pull, do your research on the team behind the project and make sure they have a good reputation. Also, check if there’s a lock on the liquidity pool. If the liquidity pool is left unlocked, scammers can withdraw all the existing cryptocurrency from it and cash it in, leaving investors and traders with nothing.
Pump and dump
In a pump-and-dump scam, scammers will buy a crypto coin or token and artificially increase its price by convincing others to buy it. Once the price is pumped up, the scammers dump off their coins at a huge profit, causing a dramatic price drop and leaving investors holding the bag of worthless crypto.
In 2021, software developer John McAfee was indicted for illegally pumping and dumping altcoins and ICOs. He utilized his Twitter account to influence his followers by promoting a variety of cryptocurrencies through misleading statements. Later, it was discovered that McAfee had been paid millions of dollars to promote these tokens. He’d praise them, causing their value to rise. Following this, the cryptocurrency promoters and McAfee would cash out their gains, resulting in a plummeting price and stranding other investors.
To avoid being scammed in this way, do your own research on any crypto asset you’re thinking of investing in. Don’t blindly follow the advice of others, and be wary of anyone trying to pump up the price of a particular coin without good reason.
Airdrop scam
An airdrop is a promotional event where a blockchain-based project distributes free coins or tokens to the crypto community. Airdrops are usually conducted to grow the projects’ community and raise awareness about the projects. Users have to complete simple promotional activities, like following the project’s social media accounts and sharing their content, in exchange for free tokens.
Unfortunately, scammers have started to exploit airdrops to defraud people of their crypto. One of the biggest airdrop-related scams took place in 2017, when scammers exploited the popularity of the e-wallet platform OmiseGo’s airdrop campaign to launch fake Twitter accounts and websites. They would fool people into giving out their private keys and acquiring their Ethereum. The scam was discovered after about 300 Ether tokens, which were worth US$56,781, had already been stolen from participants.
Another recent airdrop phishing scam involves the famous NFT project Bored Ape Yacht Club (BAYC). Hackers broke into BAYC’s official Instagram account and posted a fake BAYC website with a fraudulent airdrop to trick users into revealing their passwords.
Besides airdrop phishing scams, dusting scams are also very similar to airdrop scams where the scammers send a small amount of cryptocurrency (known as “dust”) to wallet addresses in order to extract personal details. Then, the scammers will analyze the wallets that convert, buy or sell these tokens to find out the identity of the wallet owners and blackmail them into giving up their private keys.
To protect yourself from this type of scam, only participate in airdrops that are conducted by projects that you trust. Do your own research to make sure that the project is legitimate. In case if you receive unknown tokens, do not interact with them. Also, study the airdrop page very carefully. If something doesn’t seem right, trust your gut—better safe than sorry.
There are crypto scams that come in all shapes and sizes. The best way to protect yourself against them is to stay informed and cautious. Don’t let the fear of being scammed stop you from enjoying all the benefits of crypto. Happy trading!
Also read:
- How Do You Get Crypto Airdrops?
- Top 5 Risks of Staking Cryptocurrencies
- How to Minimize Risks When Investing in Crypto
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