Crypto scams are becoming more elaborate and pervasive as the sector goes mainstream.
Choosing a fraudulent investment opportunity could lead to the complete drain of your entire crypto portfolio.
Crypto is not protected in the same way it would be if you put your money into a bank or other protected financial service.
Many cryptocurrency investors have fallen foul to scammers, without realising it's a trap until the last minute.
The amount of detected illicit activity from cryptocurrency scammers has dropped in 2022.
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The total revenue lost to crypto scams so far in 2022 currently sits at $1.6bn (£1.32bn), according to a report by Chainalysis. This was down 65% from the same period last year.
However, this decline appears to be linked to falling prices across the entire cryptocurrency sector when compared to 2021.
Below is a list of some of the worst crypto scams prowling the burgeoning web3 market in 2022, how to spot them, and how to avoid them.
Crypto giveaway scam
On Twitter (TWTR), many people get sent direct messages stating they will receive "free crypto" if they send a small amount of cryptocurrency to a wallet address.
When the victim clicks on the link in the message they are given instructions on how to send the crypto to a certain wallet.
In this scam, victims never receive the cryptocurrency that was promised in return.
To make the process seem more legitimate, a hacker will often compromise or impersonate a prominent public figure or company.
Scam tokens in a cryptocurrency wallet
When a person connects their digital wallet to a decentralised cryptocurrency exchange, scam tokens may appear in their wallet that usually seem to be worth thousands of dollars.
The immediate reaction of most people is to sell the tokens.
However, this is a serious scam, and if you sell you will lose all your money.
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When you sell the token, you activate a smart contract that transfers all of your other legitimate cryptocurrency tokens to the scammers who sent you the bogus coins.
If you receive a strange token in your digital wallet that you did not trade yourself, just ignore or hide the token from your wallet.
Do not interact with the token as this will set up the smart contract that will steal the private keys to all of your funds.
The rug pull
A "rug pull" or exit scam is when you buy into a new coin or NFT and when the value of the coin rises to a specific point, the developers behind the scam remove all of their holdings and so plunge the value down to zero.
The infamous Squid Game cryptocurrency scam in October 2021 was an example of a rug pull scam that caught the attention of mainstream media outlets.
Encouraged by former memecoin success stories, early investors in the Squid Game cryptocurrency saw the token as a way to make gains of upwards of 10,000%.
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Soon the hype and fear of missing out became feverish, a multitude of retail investors got on board and the charts for Squid Game went green and pitched upwards at a steep angle.
Then one morning in early November, a red vertical line suddenly appeared on the memecoin's price chart, the token's value plummeted to a pittance and it could not be traded on any decentralised exchange.
The memecoin’s Telegram group was deleted, and all trace of the project’s social media footprint was wiped and it became apparent that the whole enterprise was a rug pull.
The crypto-sphere is unregulated, and there are no official bodies to turn to when scammers strike.
Celebrities with vested interests in NFT projects
Truth in Advertising (TINA), a non-profit consumer advocacy group, sent letters to 19 celebrities, saying that their promotion of various NFT projects are misleading since they have a “material connection to the NFT companies they are promoting".
According to Federal Trade Commission law in the US, these connections must be laid out in full in conjunction with any kind of endorsement.
Singer Justin Bieber and actress Reese Witherspoon, both proponents of the NFT space in different ways, were among the list of celebrities that TINA reached out to.
Celebrity endorsement of NFT projects pumps the price of these digital assets.
Reece Witherspoon has promoted the World of Women NFT collection, which claims to celebrate “representation, inclusivity, and equal opportunities for all".
Witherspoon has used her Twitter account to promote the NFT collection but failed to include a caveat in her endorsements that she has a partnership with the organisation behind the collection.
Mining pool scam
Another pitfall to avoid is the cryptocurrency mining pool scam, a relatively recent development.
With mining difficulty levels escalating, individuals now need to "pool" their processing power in order to compete with the big operators.
This can be done by downloading a mining pool app.
However, access to the mining returns promised comes with a monthly subscription, and prices range from £9.35 to £187.18.
Scammers have created legitimate-looking mining pool apps that steal subscription money from users and never deliver the promised mining returns.
Protection against mining pool scams can be enhanced by installing lookout scanning software from the Lookout Threat Lab. It maintains an up-to-date database of apps that could be linked to cyber criminals.
Phishing scams are now targeting investors directly through their crypto-wallets.
Scammers have been able to successfully "phish" the private keys or passwords of unsuspecting users' cryptocurrency wallets.
They use nefarious ways to fool people into handing over their mnemomic seed phrases — the list of words that allows you to gain access to your cryptocurrency wallet if you have lost your password. However, a seed phrase is only ever requested when you are resetting your wallet, or cannot remember your wallet password.
Bogus websites will ask investors to enter their seed phrases when they connect their cryptocurrency wallet to the scam platform.
You should never insert your seed phrase to send funds and if a crypto platform is asking you to do that. Instead, immediately leave the site and never visit it again.
Fraudulent crypto wallets
Scammers will send people who they think have invested in crypto a direct message on Twitter or Facebook, with the opportunity to gain access to funds if they download a toxic cryptocurrency wallet.
Such scams start by revealing how much money you will receive as a reward to entice action.
If you download the wallet and enter in the seed phrase, you will be downloading malware onto your computer.
The whole of the crypto ecosystem has been referred to as a Ponzi Scheme at different stages in its development, but this is generally seen to be hyperbole.
The distinct Ponzi Schemes in the crypto-space will hook in victims by persuading them to lock away their funds as they then begin to receive daily returns.
When a person is fully convinced that the scheme will continue to pay out every day, they are encouraged to partake in multi-level marketing activities, such as persuading friends and family to also buy into the scheme.
One way to spot a Ponzi Scheme in the decentralised finance (DeFi) space is to evaluate how much the daily returns compare to the market average when you lock funds. If the daily returns seem too good to be true, then they most likely are.
Ultimately, before an investment is made, the functionality and adoption strategy of a cryptocurrency project should be evaluated.
Many memecoins collapse because they have no intrinsic function, and functionality should be detailed in the project’s whitepaper.
A cryptocurrency project should also have a comprehensive adoption strategy, where the developers outline how the token can work in the wider economy and become sustainable long term.
Adoption strategy details should also be set out in the project’s whitepaper.
It is also a red flag if the developers behind the project wish to remain anonymous. They may represent themselves as NFT avatars. This could be to allow for an untraceable getaway when the funds in the particular crypto project are drained into the coffers of the criminals that run the enterprise.