Almost as popular as cryptocurrency in America, right now there exist “Olympic-level scammers.”
According to William E. Quigley, co-founder of WAX blockchain and a prominent investor, the rise in popularity of crypto and blockchain technology will result in an influx of cryptocurrencies scams.
As a result of crypto’s high-tech nature, scammers will be able to pull off “Olympic-level” hacks and schemes, Quigley said last month at a panel discussion hosted by Light Node Media, a blockchain firm.
Take, for example, the recent “Squid Game” scam, which alleges that an immersive online game and cryptocurrency token called SQUID were just elaborate scams. Apparently, the developers cashed out over $3 million before disappearing after the currency skyrocketed in value.
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Cryptocurrency: What You Need to Know Before Investing in it
Crypto investments shouldn’t make up more than 5% of your portfolio, according to experts. The price of Bitcoin fluctuates by the day, and experts recommend not investing more than you would lose if the market disappeared altogether.
It is also important that cryptocurrency investments do not interfere with other essential financial priorities such as saving for emergencies, paying down high-interest debt, and building a nest egg for (retirement) using more conventional investment strategies.
Crypto investors are becoming more open to fraud and scams, whether they like it or not. Here are a few common scams and red flags to look out for if you’re looking to invest in Bitcoin or Ethereum, or any other cryptocurrency in the future.
How Common Are Cryptocurrency Scams?
The Federal Trade Commission (FTC) reported that nearly 7,000 people lost a total of 80 million dollars to crypto scams between October 2020 and March 2021. In comparison, there were 570 cryptocurrency investment scams during the same period a year ago, resulting in $7.5 million in losses. Here are some examples of cryptocurrency scams to watch out for:
Payments based only on Crypto
Any merchant or person claiming they only accept Bitcoin as a form of payment is likely to be a scammer. The Bitcoin and altcoin industries are booming, but experts say it’s not likely that credit institutions will accept cryptos without not accepting U.S. dollars payments through standard channels such as wire transfers and checks or credit and debit card payments.
Generally, people who require Bitcoin payment are likely hoarding it, hoping to profit from its skyrocketing value. Blockchain does not have standardized know-your-customer (KYC) protocols like banks. It means people don’t have to present identification, SSNs, addresses, or contact information in order to open wallets. Blockchain records are permanent and open to all, but transactions can be made more or less anonymously, which makes it easier to trick you and steal your money.
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Fake Identities or Anonymous
According to Jonathan Padilla, former PayPal blockchain strategy head and CEO and co-founder of Snickerdoodle Labs, the absence of KYC protocols puts blockchain use in doubt.
“With a decentralized platform, there’s really no safeguards in place to say who is a good actor and who is a bad actor,” Padilla explained. “It’s really just buyer beware.”
Blockchain provides a new level of transparency: All transactions in the blockchain are public records since data cannot be altered or deleted. Using blockchain technology, U.S. Justice Department investigators tracked hacker payments and seized the ransom money Colonial Pipeline paid worth 63.7 bitcoins (valued at about $2.3 million) back in June.
“[The hackers] used a hosted wallet to move the Bitcoin around, which means [law enforcement] found them in about five days,” Padilla says. “There’s transparency built in [to blockchain], and now with the tools [coders are developing], you can use sophisticated software to do an on-chain analysis and track where these things go.”
Nevertheless, it will take some time before all federal, state, and local law enforcement agencies become familiar with effective tools for investigating smaller-scale blockchain scams. Presently, crypto tokens, non-functional tokens, and other digital blockchain assets can still be used as a means of money laundering.
“That’s a very real concern,” Padilla pointed out. “For example, you could get money from Columbia, go buy an NFT with what was previously cartel money, and it could be washed in an NFT.”
Money laundering on a large scale isn’t common, but the tools and regulatory framework to curtail it are behind the clock, Padilla explained.
“The tech is just getting where it needs to be … to be able to track where that money is coming from and where it’s going,” Padilla continued. “But it hasn’t been there for the last half-year,” since crypto and NFTs have exploded in popularity.
One way to avoid the risks associated with smaller, niche exchanges is to stick with beginner-friendly crypto exchanges such as Coinbase and Gemini. New crypto investors may also find it beneficial to stick with the two most popular cryptocurrencies, (Bitcoin and Ethereum) since they have been more consistent increase in value than other cryptocurrencies.
Games and Digital Collectibles
Coders with sophisticated skills can now create fantasy worlds on the blockchain, as we witnessed with the “Squid Game” scam.
Scammers can easily take advantage of blockchain novices by getting them to buy a token or coin for a game they’ve never heard of. When enough people are interested in the scam, and the price rises after purchase, the scammers sell everything and vanish.
The blockchain lacks fraud protection and FDIC insurance, unlike bank accounts for federally regulated currencies. If your funds are stolen on a blockchain, it is only the recipient that can freely choose to pay you directly to get them back. This is highly unlikely for decentralized exchanges. Even though mainstream crypto exchanges protect themselves from fraud better than less-popular exchanges, investors cannot be guaranteed that stolen funds will be recovered.
Investment Schemes Involving Cryptocurrency
Cryptocurrencies are constantly being invented, and when new coins appear on the blockchain they are dubbed initial coin offerings (ICOs). Scammers take advantage of ICOs, too. Investing in a new cryptocurrency with guaranteed 1000% returns may seem like a once-in-a-lifetime opportunity for a company or individual.
It is possible for scammers to deceive you into sending a bunch of new coins into a wallet that’s been tampered with, or a “pump and dump” by buying the coin and selling it at a higher price later on.
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Scams Involving Romance
There are a lot of crypto scams on dating apps. It was reported by the Federal Trade Commission (FTC) that approximately 20% of the money lost in romance scams from October 2020 through March 2021 went through cryptocurrency exchanges. This type of scam involves long-distance or digital relationships in which one party attempts to persuade the other party to purchase or send some cryptocurrency.
Scams involving Phishing
Despite being as old as the internet, this type of scam has taken on new ramifications with crypto. As in any “normal” phishing attack, scammers send emails asking recipients to click links and enter personal information – which includes crypto wallet keys. Instead of a username and password, blockchain wallets only come with a single private key. This is in line with crypto decentralized principles, preventing a single entity from gaining control over your data, however, it poses a challenge in the event when our keys need to be changed.
Investing in Crypto and Protecting your Cryptocurrency
There are many risks in the world of crypto, even for the most knowledgeable and enthusiastic cryptocurrency experts right now. Some really big blockchain investors have been scammed too, such as blockchain investor and entrepreneur Ian Balina, who lost $2.5 million after someone hacked into his Evernote account and stole the private wallet key information.
Balina’s story illustrates that even successful investors can suffer losses when dealing with such a volatile asset class as cryptocurrencies.
The majority of financial experts recommend that Investors are advised to hold less than 5% of their portfolios in crypto, but avoid investing in crypto when it comes to saving for emergencies purposes or clearing high-interest debt.
The following are some best practices to protect your money if you decide to invest in crypto:
Warning Signs of Cryptocurrency
Check out the following red flags that are similar to classic wire fraud and credit card scams:
Typographical errors and obvious misspellings in emails, on social media posts, and during any communication
- Promises to multiply your money
- Contractual obligations that lock you into holding crypto without being able to sell
- Fake influencers or claims to be a celebrity
- Psychological manipulation like blackmail or extortion
- Large social media crypto schemes
- Promises of free money
- Vague details about where your money is going
- The Right Time to Use Crypto Wallets
You must protect your digital wallet from hackers just as you would your physical wallet. Put big sums of digital cash in a safe or FDIC-insured savings account to practice good digital security habits.
According to experts, small investors who only own a handful of dollars worth of crypto should probably keep it on mainstream exchanges such as Coinbase. In the event you accumulate thousands of dollars worth of cryptocurrencies, you might consider a wallet to keep them secure.
Crypto wallets fall into two categories. Many refer to them as “hot wallets” and “cold storage,” while others call them “hosted” or “unhosted” storage.
Hosting or storing in hot wallets takes place online. Cryptocurrencies on hot storage are secure but are more prone to hacking than those on cold storage, which is stored offline on hardware. Cold storage can be compared to a USB drive as a kind of safe. Even though it is more secure, you run the risk of losing your money if you forget your password or lose the device.
Cash in a bank is insured by the FDIC, but crypto in hot wallets is not. As such, if you store your crypto in a wallet or platform, be sure that it has strong security measures, such as:
- Two-factor authentication
- Storing a portion of holdings in its own cold storage
- Private insurance policies in case of theft or hacking (separate from FDIC insurance)
Be Sure to Keep an Eye on Your Wallet Key
Mac Gardner, a certified financial planner and founder of FinLit Tech, says you only get one unique key to access your wallet. Should your key be stolen or lost, you could lose your crypto for good.
“You need to have a lot of control around getting access to [your wallet key.] It’s not a thing where you can forget your username and password if you don’t write it down,” Gardner explained. “Each code has a process and a certain number of characters. It’s extremely personalized because of this virtual space. If it wasn’t, anybody could go in there and then grab your stuff, right?”
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Do Not Hesitate to Report Fraud
The following bureaus can be contacted if you suspect cryptocurrency-related fraud or other suspicious activity:
- 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
- In cases of extortion or blackmail, you may also contact the FBI.
Also, report any fraud you suspect or if you have proof that bad actors are involved in the crypto exchange you used to complete the transaction.