Top 4 Crypto Scams to Watch out for in 2021

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One reason why investing in crypto is so daunting for new investors is because of the number of scams that infest the space.

Some are obvious, whereas others appear more legitimate. Scammers evolve to keep their business alive. They con users who think they are immune to scams through new strategies and patterns of operation.

2020 was full of tragedies, particularly the COVID-19 virus. Another tragic issue denting the image of cryptocurrencies was the famous Twitter hack back in July.

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Towards preventing similar scams in 2021, Blockdesk brings a list of crypto scams all investors should avoid.

Ponzi Scheme:

This format of scam is way older than crypto itself and dates back to the 1920s. It is named after Charles Ponzi, an Italian who defrauded investors.

It works as long as scammers pay existing investors from money brought in by new investors. The “business” does not have a legitimate income source. Instead, it creates an illusion of income. Investors get excited when they keep getting paid and keep bringing new investors on board.

Often times, the scam requires that you refer people which is why it is akin to a pyramid scheme. Amidst these, Ponzi scams could be hard to identify as they exist for years and dupe sophisticated investors. An example is Bernie Madoff, who ran one of the most sophisticated and deceitful Ponzi schemes. His victims were not average investors but sophisticated hedge funds, mutual funds, and high net individuals.

Ponzi scams in crypto space

Similar patterns now exist in the crypto space because they could be easily set up and disappear without much repercussion. They come in different guise or leverage fake business operations, allowing them to justify their returns.

Ponzi operators choose methods easily believable as not to raise too many questions. The most well-known business model for a Ponzi scheme are crypto lending platforms. Investors supply capital and they acquire a certain percentage of interest.

If they are a centralized lending service with annualized interest rates that are outrageous, investors should be furious. Bitconnect is an example: they paid monthly interest that exceeded 40 percent. It was ridiculous and unsustainable, and it eventually got exposed.

Another example is cloud mining which makes believe that investments earn a return on crypto mining. These investments don’t go anywhere but only sustain the scheme. Bitclub network falls in this category. It existed for over 5 years and made over $720 million dollars.

Another Ponzi format is crypto investment platforms that claim to trade for investors or have a trading bot that generates regular returns. However, they are easy to avoid as they claim to have a certain trading strategy and bot that don’t need money. An example of this is AMFEIX which made close to $60 million and pulled an exit scam.

How to avoid

When there are guarantees of a certain amount in return, it is a red flag. Nothing is guaranteed. Scammers try to convince investors with portfolios and need more capital.

Another red alert is platforms offering a bonus or points to refer others. Crypto Ponzi usually have high profile promoter above who makes money from those below.

Advertisements and publicity for a platform, Bitconnect was publicized by one of the foremost crypto media and AMFEIX was promoted by Coinmarketcap. Usually, media platforms and advertising sites don’t analyze before they promote them.

Ponzi operators spend a lot of money on publicity as new victims are always needed to remain alive.

Giveaway scam

Of all crypto scams, this one is very popular. Giveaway scams have been used to disappear  with millions of dollars. Operators ask victims to send some money and in return, they multiply the money.

Despite how silly they sound, giveaway scams have worked well in the past. Usually, they impersonate popular individuals on social media (Twitter, YouTube) and sometimes hack their accounts.

One example is the popular Twitter hack that was perpetrated earlier this year where multiple prominent Twitter profiles were hacked. The scammers made close to $150,000.

Twitter giveaway scams are now less common as the firm continues to crack down on these “businesses”. However, scammers use YouTube through fake live streams analyzing how funds would be multiplied. These have been quite effective as they feature high-profile individuals in their fake live streams (edited videos). YouTube ads are also used to publicize these giveaway scams.

There is no “free lunch” on the internet, especially in the cryptocurrency space.

Phishing scam

It can be used in multiple ways. Scammers try to acquire your data so they can access your crypto accounts. Of all crypto scams that exist, this is the most problematic tactic.

Phishing scams are not only unique to crypto but can also affect people’s bank accounts, email, and other password-protected accounts.

Usually, the culprits try to make you visit a website that is legitimate and requires you to input a password. They clone websites that look like popular exchanges, online wallets, etc.

There are also homograph attacks that use using Unicode characters for non-Latin writing systems. By making the domain look the same as the intended one, they get your details,  and cart away your assets.

How to avoid

Set up two-factor authentication which is not SMS-based. Google authenticator or Authy are recommended tools to keep your online accounts safe from harm.

Private key phishing is another scam format hackers use. Web wallet users are usually targeted as the culprits try to make users download a malicious wallet. Users then need to decrypt these wallets with private keys. At that point, all hell breaks loose.

Back in August, a user lost $16 million in Bitcoin to this scam technique.

Tips to avoid this scam:

  • doublecheck that wallets are downloaded from the real website and not a cloned one
  • Fake applications are also uploaded on centralized stores (Google Playstore, Apple store, chrome store), and others.
  • Scammers produce fake reviews and comments to make it look real.
  • Don’t rely on external updates, always do it through the application itself

These are just some tips to protect your online identity and crypto funds.

Fraudulent ICOs

Scammers, in this case, try to make investors buy cryptocurrencies through an Initial Coin Offering. Afterward, they wait for more and more investors and when they make enough money, they simply exit.

In 2017, this scam was very prevalent with many high-profile ICO pulling exit scams. However, with reduced interest in ICO’s now, scammers adopt new strategies.

The DeFi space has become a prominent target. They launch a new protocol or fork well-known code. Once completed, they now offer their own token as an incentive to convince investors to put their capital in the protocol.

It is not uncommon for scammers to dump the token and escape with some of the locked capital.

The best way to avoid them is by not getting involved in any DeFi project in the first place.

Even when ICO’s or DeFi protocol are not scams, there is always a high probability that there is a smart contract bug capable of leaving the protocol susceptible to a hack or other failures. Dozens of incidents have been documented in recent years. The list will only keep growing over time.