Cryptocurrencies are a relatively new investment market. Therefore, many have still in the process of accepting the stability of the cryptocurrency sector. A staunch supporters of classic trading commodities such as Peter Schiff and some noteworthy investment moguls such as Warren Buffet have criticized DeFi.
Furthermore, the knowledge about the inner workings of blockchains and cryptocurrencies is limited among investors. Therefore, the incident of financial scams is quite prevalent in the cryptocurrency markets. This article will introduce the reader to all types of cryptocurrency scams and how to avoid them.
What is a Cryptocurrency Scam?
Every trading market offers 50-50 chances of making a profit or getting losses. If a person invests in cryptocurrencies and ends up amassing losses, it does not mean that he/she has been scammed.
Scams are planned financial traps where retail investors are lured in to lose their trading positions and sustain major losses from the marketplace. During the decades-old stocks and commodity trading history, financial scams have been part of every new technology in the world.
The scammers plan to set up a trap for the unsuspecting victims. These traps are guaranteed to lose the hard-earned money of the targets and help scammers steal from others. The scammers use tactics like psychological manipulation and take advantage of the lack of information among the victims.
In this manner, they can lure people with fake promises of earning passive income in a short amount of time. The people who are affected by the market speculation end up purchasing these cryptocurrencies without doing any research and sustaining massive losses.
Types of Cryptocurrency Scams
Cryptocurrency scammers and white-collar criminals are not like common thieves. They often come up with elaborate scamming techniques that can sometimes fool even the most trained and experienced people.
Therefore, it is important for a person who is taking an interest in cryptocurrency trading to beware of the most common types of cryptocurrency scams mentioned as under:
Business Opportunity Scam
These scams are carried out by threat actors who have considerable knowledge of the financial markets. They try to target people by sending them email invitations for investment opportunities.
They might also ask cryptocurrency investors to finance their businesses by investing their crypto reserves for a stake in the company or with the promise of making profits. The most elaborate type of business opportunity scams in cryptocurrencies can be IDOs or ICOs.
If the investors are not careful they might end up putting their cryptocurrencies savings into a startup that is not reliable or just a front to steal money from investors.
Imposter Scams are one of the most common ways for investors to take advantage of social media sites and other online communities. In this type of scam, threat actors can advertise their scams using fake endorsements from celebrities and known personalities in the sector.
These scammers can make fake accounts that impersonate the real identification of a celebrity. Meanwhile, the influencer might not have any idea if scammers have hijacked their identities for tricking people into investing their money in shit coins or fake investment options.
In the age of social media, anyone can create a fake persona however investors can also just as easily check if the claims made by scammers are true or fabricated.
Blackmail and Extortion
There are some cases, where hackers can sign in to the personal accounts of people or institutions. In such cases, hackers can use invasive software such as Trojan horses or other malware to steal the personal and sensitive information of the clients of an enterprise.
In most cases, these viruses can be spread by emails that any employee of a company can open and click on a malicious link that will download the virus on the entire network. The same virus can be used to target individuals.
Hackers then use the stolen information to bargain for cryptocurrencies as extortion money. Incidents like Colonial Pipelines and the hack attack on Los Angeles Hospital are some examples of this type of scam.
Social Media Promotion Scam
Social media is a source of information but what it provides may not always be authentic. However, most people are unable to comprehend the difference between authentic and fake information. Furthermore, hackers also have the ability and liberty to launch bots on social media sites.
These bots act like real human accounts and they can promote a scam coin by spreading the information using hashtags. Eventually, other people with negligible knowledge of trading are going to join the trend.
The spread of such scam tokens on social media is difficult to contain since most sites do not care about monitoring such events as long as they increase user engagement. Investors should refrain from depending on speculative forces in the market and make sure that they make their trading decisions on market research and analysis.
Free Giveaway Scams
Free Giveaways is a relatively new cryptocurrency scam that is very similar to the impersonation scam. In this method, threat actors can assume the personality of a social media influencer and invite people to send them cryptocurrencies with the promise of returning them with the double the amount.
There is no guarantee or legal contract between the sender and receiver for exchanging such cryptocurrencies. However, people who are unable to distinguish between real and fake users end up falling for this trick. Therefore, they can suffer from losses and hackers disappear after they have received cryptocurrencies from their victims.
In some cases, airdrops can be seen as this type of scam if they are proposed by an unreliable enterprise with no record or goodwill in the marketplace.
Fake Trading Apps
There are fake trading applications that are either standalone scams or they impersonate other brands. When a person goes to the application store, they might see a new trading app that looks like the companies they have heard about.
However, the author of the said app might not be as reliable or original. Therefore, investors must make sure that they check the issuer of the application before downloading and make sure it is not a scam or trap that can end up getting their money wasted.
Loader or Load-ups
Loader or Load-up scams are other types of dangerous scam. In this type of scam, the scammers convince their victims to share the login credentials using psychological methods. Sometimes, there might be emails or messages from random accounts that will ask the users to share their account credentials for borrowing.
These scammers can also promise the users to give them greater returns in exchange for renting out their accounts. In some cases, they might tell a sad story about losing their accounts and ask for the personal credentials of other users as a way to help them out.
The fact of the matter is that investors should never share their personal information like private keys or passwords with anyone under any circumstances.
Social Engineering Scams/ Pump and Dump
Social engineering is one of the oldest methods for hunting for the login information of a crypto trader account. Most cryptocurrency wallets give private key combos and seed phrases to the investors with the promise that they should never share it with anyone and store it in a secure place that is out of anyone’s reach.
Therefore, scammers who are not great with hacking may target an individual to gain access to the private key or other login credentials for a digital wallet. When these scammers have got what they want they will use the private information to steal the cryptocurrency reserves as soon as possible and vanish into thin air.
Phishing is a type of email hacking technique. Phishing messages are often used by hackers to act like authentic companies or individuals. These scammers would act like they are representing a legitimate business or government agency.
They can ask for personal information from the user or even coerce them to reveal their personal information related to their cryptocurrency trading accounts and wallet reserves. Investors must use effective anti-virus monitoring services.
In case of a suspicious email, a person should reach out to the relevant company or government institution and ask them about the contents of the scam emails.
Employment scams are also present in the DeFi strata. Many people are looking for a job and there are scammers out there who make fake job promises to these desperate people in exchange for money or cryptocurrencies.
There are some cases, where the threat actors compel the victims to visit their malicious website that could steal their passwords and other personal information.
In most cases, these scams would ask people to pay for training to start a new job in exchange for collateral or warranty reserve to be submitted by them. However, as soon as the victims send this money the scammers vanish.
An exit scam is an online fraud business model where scammers ask for payment from the users. However, they do not manufacture any real products or grant any real services to the users.
These scammers can contact the victims via online services or even social media sites. They are going to convince the masses to give away their payment information or send the payment in advance which they will steal without delivering the ordered product or services.
Rug pulls are cryptocurrency scams where the issuer of a coin or token gets away with the cryptocurrency reserves of their investors without any trace. Take, for example, a cryptocurrency custodial services provider that keeps the private key under its possession.
The business owner has access to the funds of the investors at all times and he can move them anywhere. Therefore, the investors have no control over their funds and they are always at risk of getting scammed out of their total portfolio or savings.
What is a Crypto Rug Pull?
A rug pull is a type of cryptocurrency scam where the developers abandon the cryptocurrency project despite the vested interest of millions of investors. They can be compared with the pump and dump schemes where the malicious actors create speculation around a cryptocurrency and inflate its prices artificially in the marketplace.
It means that the cryptocurrency investors who have bought the hyped-up cryptocurrency at high prices are going to end up with massive losses.
The scammers can convert the entire token reserve into another DeFi coin and disappear as the major token holders of the market. There are some cases, where the token issuers can run away with the money by transferring the custodial funds into separate account wallets.
They can even convert a massive amount of cryptocurrency reserves into other big market cap currencies like Bitcoin and Ethereum. Meanwhile, massive selling pressure for the underlying currency can drive its prices to the ground near zero.
The liquidity and the value of the token vanish and the investors who bought into the hype are left with worthless tokens in their portfolios.
How do Rug Pulls Take Place?
By breaking down every stage of a Rug Pull event, investors can develop the ability to detect the issues and fix them. In most cases, Rug Pulls can occur within a Liquidity Pool. An LP is a decentralized reserve of cryptocurrencies that allows a cryptocurrency enterprise to maintain a healthy level of cash flow and demand for its investors.
In other words, it is a market maker for DEX platforms that maintain the sell and purchase orders and decide the prices of cryptocurrencies in the DEX based on the demand and supply dynamics.
The investors who have put their cryptocurrencies in the smart contract of an LP earn rewards. On the other hand, the LP services provider can earn in the form of transaction fees. Any DeFi project can register a new token on an LP depending on its users and demand in the marketplace.
There are also meme coins in the market that offer little practical use to investors. Therefore, some crypto coins are registered on LPs based on their speculative popularity alone.
The perpetrator of a Rug Pull would proceed by buying a major stake in a new and relatively unknown cryptocurrency. Once they have acquired a considerable portion of its circulatory supply, they will register it in several decentralized LPs.
The next stage is to create hype around the said cryptocurrency so that more investors start to buy it and it would drive up the price to multiple ATHs. When the speculators sense that the hyped-up prices have reached their peak, they go to the LPs and start to swap the cryptocurrency for other more reliable currencies.
Retail investors might not sense the changes right away. The scammers can take care to split their massive reserves into smaller portions and spread them across many DEX platforms. The scammers can still carry out the dumping swaps within an hour.
They can take their time to send their swapped currencies to a multitude of wallet addresses. They might also use washing techniques to remove all traces of the scammed currencies.
As soon as the supply increases in LPs, the price of the Rug Pulled currency drops to zero. Thus, the LPs and the investors end up amassing massive losses.
How to Spot a Cryptocurrency Rug Pull?
There are several ways for an investor to detect the telltale signs of a Rup Pull in the making. Here are some important signs that investors can use to prevent investing their money in a currency that could be a trap for them:
Abnormally high-yield rewards are one of the biggest signs of a Rug pull. A DeFi token that has a long-term plan cannot offer unbelievably high yield returns for its investors. Only scam projects who have the goal to increase as many staking positions as possible could offer unnaturally high yields.
These scam tokens have no intention of issuing any yield and their singular goal is to hype up the prices as much as possible and dump the currency eventually. Some fake projects may offer as high as 100% APY which investors must avoid at all costs.
Anonymous creators mean that the origin and the intentions of the DeFi project are unknown. The investors are kept in dark about the transparency and the security of a cryptocurrency project which is a red flag for the investors.
Ideally, a DeFi project should be open-sourced and permissioned network to make sure that all the activity relating to the project is at the disposal of all its users.
On the other hand, investors must also check for the background and qualifications of the devs behind these DeFi projects.
Inorganic price explosions for a cryptocurrency are a visible sign of impending Rug Pull. If the price rise of a cryptocurrency is solely based on market speculation, it means that it can be dumbed at any moment.
A legit cryptocurrency should offer real utility for its users rather than depending on a phenomenon like FOMO.
Lack of Liquidity Lockup
Reliable LPs ensure that the amount of the cryptocurrency stakes is locked in for a given period. It means that any malicious actors cannot empty a massive amount of a DeFi token without warning. Furthermore, the LP has more stability in comparison to its counterparts.
Rug pulls are scary financial scams and they can result in the loss of an entire portfolio or can wipe out a major portion of the investor value. Therefore, the investors need to learn about their Modus Operandi and take all the necessary precautions to avoid them at all costs.
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