Right now, there’s more than $1.2 trillion invested in cryptocurrencies. At the peak of the market last November that figure climbed to nearly $3 trillion.
That’s a lot of money in a thinly regulated asset class – making crypto a very juicy target indeed for every species of scammer, fraudster, and opportunist.
The Federal Trade Commission (FTC) said this month that U.S. residents have lost more than $1 billion to crypto scams since the start of 2021. The median reported loss is $2,600.
If you fall victim to a crypto scam, there’s usually not much you can do about it. Crypto scammers mostly operate anonymously and tend to vanish once they’ve got your money.
Plus, the transactions on most crypto networks are irreversible – Bitcoin being the most notable example. Once your money is gone, it’s gone.
So crypto investors need a set of guidelines to help you spot these traps and prevent the loss of your valuable crypto.
If you watch out for these nine red flags, you’ll be able to dodge all the bad actors who want to take your crypto…
How Scammers Come After Your Hard-Earned Crypto
- Promises that are too good to be trueAny marketing expert will tell you that greed is a powerful motivator. And what investor doesn’t want huge returns? Fraudsters are well aware of this, which is why you’ll often see ads or posts on social media sites promises of crazy high rates of return – 40%, 50% or even 1,000%. Sometimes they’ll level up and even promise “guaranteed returns.” The infamous BitConnect scam promised returns of 1% per day. That would turn a $1,000 investment into $50 million in just three years. Remember, if it sounds too good to be true, it probably is.
- “Candy from strangers”Ever get a message from a total stranger on Twitter, Telegram, Discord, or even LinkedIn who wants to help you out with a great crypto investing opportunity? Watch out. The strategy usually involves befriending the victim with small talk, then luring them to a website that offers the kind of unrealistic returns I talked about in item No. 1. If you transfer your crypto into one of these sites, it’s a most always a one-way trip. Suddenly you find you can’t withdraw your funds, and “customer support” just offers excuses. Then the site disappears altogether – and your money with it.
- Projects born yesterdayBe very careful about investing in a crypto in the first couple of days after it launches, particularly coins clearly intended to exploit something that’s trending. Often these tokens are secretly programmed to prevent the investor from selling. That causes the price to spike, luring in more victims until the scammers execute a “rugpull.” A classic example of this was last year’s Squid Game Token (SQUID). Based on the Netflix show of the same name, SQUID rocketed from pennies to $2,861.80 in less than a week. Then came the rugpull: The website and social media accounts vanished along with an estimated $2 million worth of investors’ money. According to crypto research firm Chainalysis, rugpulls cost investors $2.8 billion and made up 37% of all crypto scams in 2021.
- Binance Smart ChainBinance is the largest crypto exchange in the world and is a sprawling operation. Among its projects is the Binance Smart Chain, a blockchain network designed for running smart contracts just as the Ethereum network does. Launched in 2020, BSC soared in popularity last year as crypto developers fled the Ethereum network’s high gas fees. It’s unclear exactly why, but since its launch BSC has attracted more than its share of scam projects. Many of the biggest scams have been built on BSC, including SQUID, MeerKat Finance ($30 million lost), Turtledex ($2.5 million lost), and Compounder Finance ($11 million lost). In January an audit by crypto security firm PeckShield revealed more than 50 potential scam tokens.
- Free money from celebritiesIn this scam, a faked celebrity account offers to send you a certain amount of crypto in exchange for a much smaller amount of crypto. After the victim sends their crypto, they get zilch in return. Their crypto is gone – safely in the hands of the scammer. Usually the faked accounts are people with a lot of name recognition in the crypto community, such as Elon Musk or Ethereum co-founder Vitalik Buterin. The “send crypto to get free crypto” scam is less common now than it was a few years ago, but it’s still out there.
- Show me your (white) papersA token’s white paper is the “blueprint” for the project. It describes the technology behind the token, the purpose of the project, and more. It’s intended for prospective investors. A major signal that a token could be a scam is a white paper full of poor grammar and confusing explanations. Even more troubling is when the white paper has simply been copied – that shows the project isn’t original and likely only exists to scam people. A few scammers are too lazy to even bother cut-and-pasting – they provide no white paper. That’s the biggest red flag of all.
- Don’t be a romantic foolDating apps are a well-known haven for scammers, and crypto scams have increased rapidly over the past few years. The FTC says the money lost to crypto romance scams in 2021 was 25 times the amount lost in 2019. It even has a special name: “pig slaughtering.” After weeks or even months of chatting and flirting to build trust (the “fattening up” phase), these scammers steer their prey toward fraudulent crypto investing sites. When the money lands in the scammer’s wallet, the scammer disappears, devasting the victim both financially and psychologically. According to the FTC, U.S. citizens have lost $185 million to crypto romance scams since January 2021. The median loss was $10,000.
- Check the teamInvestors should always look at the team behind any crypto project they’re thinking of putting money into. A quality project will have developers with strong backgrounds and established reputations. But projects with anonymous team members identified only by nicknames or social media handles are a red flag. Some crypto project websites may list no team members at all. That’s even worse. (Other bad signs related to the team are unusually small teams (less than five people), low team engagement on social media, and little to no activity in the project’s public code repository (changes listed on a site like GitHub).
- Beware of social media “influencers”The “influencers” on social media – those with hundreds of thousands or millions of followers can draw a lot of attention to a crypto. Fraudulent projects seek out influencers and celebrities to generate interest and drive up prices ahead of the inevitable dump. Often these influencers are paid. In some cases they may not realize they’re promoting a scam, but that’s not really an excuse. One of the biggest cases involved celebrities Kim Kardashian, Floyd Mayweather, and NBA star Paul Pierce. They all pushed a token called EthereumMax (EMAX), helping to drive the price up 10x. EMAX has since plummeted 99% from that May 2021 high.
What to Do If You’ve Been Scammed
For the reasons I went over earlier, it’s unlikely you will recover your money if you fall victim to a crypto scam. That said, the government does want people to report it. Use these links:
- The FTC: ReportFraud.ftc.gov
- The Commodity Futures Trading Commission (CFTC) at CFTC.gov/complaint
- The U.S. Securities and Exchange Commission (SEC) at sec.gov/tcr
- If the fraud involves extortion or blackmail, you can also go to the FBI.
Follow me on Twitter @DavidGZeiler.