How to Identify and Avoid Cryptocurrency Scams

How to Identify and Avoid Cryptocurrency Scams
Apr 21, 2023 1
How to Identify and Avoid Cryptocurrency Scams

Crypto scams come in all shapes and sizes, from phishing emails to rug pull projects; the crypto industry is familiar with costly swindles. As time passes, scammers become more sophisticated. Nowadays, there are too many scams to keep count.

However, this article will share the foundational principles to help steer clear of the most common crypto scams.

The Duck Test

If it walks like a duck and quacks like a duck, then it just may be a duck. The same goes for crypto scams. Your hard-earned capital is at stake whenever you hit that ‘approve contract’ button or pull the trigger on that new small-cap coin.

In this regard, it is better to be safe and walk away rather than risk it if you sense a scam. Other opportunities will come, but you could lose your crypto forever.

Therefore, if just one of the other principles in this article is true, it is best to avoid whatever you are considering doing at all costs.

Pump and Dumps

A pump and dump scheme is a form of rug pull worth a special mention due to the frequency with which they occur. The crypto community is highly connected and highly digitised. 

There are popular influencers in the space who can single-handedly cause the price of a coin to rise billions in market cap from one tweet. Recently, Elon Musk was accused of running a pump-and-dump scheme. Nonetheless, he denies it and has requested a judge to dismiss the case from court. 

In a recent statement, Musk's lawyer said: "There is nothing unlawful about tweeting words of support for, or funny pictures about, a legitimate cryptocurrency that continues to hold a market cap of nearly $10 billion.”

While Elons lawsuit relates to Dogecoin, most pump-and-dump schemes relate to low market cap, low-volume coins that can more easily be manipulated in price. That said, not all low market cap coins are pump and dumps, with there being a lot of promising coins under a penny in crypto.

The first stage of a pump-and-dump is an abnormally large amount of social media activity for a coin. For example, if a crypto you have never heard of pops up on Twitter or in Telegram channels multiple times in one day, it may be a marketing effort to create hype and drive up the crypto's price before the founders and influencers dump their tokens.

Another sign is if a prominent influencer promotes a low trading volume coin. Low volume is a sign there are few buyers and sellers, so if a group of sellers enter the market quickly, it can push up the price with little effort. 

Influencers who buy a low-volume cryptocurrency and promote it on social media could quickly make a massive profit.

So if you are looking to buy cryptos that big influencers are promoting, ensure they have a high trading volume, and consider the clues we mentioned for rug pulls too.

However, if you are looking for low-cap coins with more room for growth, aim to find them from smaller micro-influencers, as they do not have the audience to pump price artificially. 

If Someone Contacts You

Maybe they work at Binance or Metamask, or it is an online lover who suddenly turned the conversation to Bitcoin; social engineering can be the hardest scam to spot, but you must always remain vigilant. 

Your private keys are for your eyes only; never share them with anyone, no matter who asks. Moreover, if you are contacted by someone claiming to be from an exchange or another service you use, before discussing any detail with them, confirm this by contacting the company (through an address not given by the person contacting you).

Besides trying to gain your private keys, scammers can contact victims to get them to send over crypto. This could be a romance scam or related to technical difficulties or financial gain. 

Nonetheless, before hitting that send button, remember that this stranger on the internet might not be who they say they are.

Rug Pull

In crypto, a rug pull refers to when a founder builds up a project with hype and expectation, and once they raise funds, they ‘pull the rug out’. To pull the rug, the founder would dump their coins or use malicious code to extract value from the project, leaving their community with nothing.

There are two types of rug pull: hard and soft. A soft rug refers to when a founder tries to keep the project alive, but once they realise the project is not making money, they exit, dumping their tokens onto the market.

On the other hand, a hard rug is when a founder has no intention of completing the project, with their only aim to raise capital before exiting. They usually exit quickly through malicious code ‘backdoors.’ 

The main clues of a potential rug pull are: 

  • An anonymous team 
  • An old Twitter account for a brand new project.
  • No smart contract audits.
  • Unusually centralized and unlocked token distribution.
  • Low social media engagement.
  • The project is a simple rebranded hard fork with no unique use case.

Suspicious Links

With crypto-related crime approaching a $20 billion valuation, phishing attacks are among the most popular ways scammers steal victims’ funds. One of the most dangerous forms of phishing is where scammers send malicious links to look-alike sites that extract private keys.

Recently, Moonbirds Founder, Kevin Rose, lost his $1.4 million NFT collection to a phishing attack. The fact that a crypto founder can fall victim to this type of attack shows how convincing they can be.

That said, there are still some signs you can look out for to keep your crypto assets safe. They include staying up-to-date with new phishing methods, not clicking on links of emails (even if you know the sender) and checking social media before connecting your wallet to a dApp in case the site has been hacked.

On top of this, you can entirely avoid phishing scams by only keeping the crypto you need immediate access to in your hot wallet, with the rest going to cold storage.

The opinions and assessments expressed in the text are the views of the author of the article and may not represent the position of Cryptogeek. Do not forget that investing in cryptocurrencies and trading on the exchange is associated with risk. Before making decisions, be sure to do your own research on the market and the products you are interested in.

Gray walker
23 May, 5:44 AM
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