The Dark Side of Cryptocurrency: Scams

The Dark Side of Cryptocurrency: Scams

Where there is money to be made, there are bound to be scams. Some people have gone to the extent of condemning the entire industry and labelling all cryptocurrency as scams. That’s being unfair to a lot of legit companies and exchanges that exist. However, one should definitely be diligent in recognizing and protecting themselves against such scams.

Here is a list of scams to look out for:

Phishing scams

This type of scam is common not only in the cryptosphere, but on the Internet in general. Here, scammers will use various methods (listed below) to fool you into giving them your username, passwords, or seed keys.

Phishing websites

Scammers create fake versions of websites to try and get you to enter login details. Beware of clicking through from fake ads. Before entering any details, check the website address carefully to make sure you are at the correct URL.

Email phishing

Attackers will send legitimate-looking emails in an attempt to convince you to share your login details. Always double-check the sender’s email, and make sure the website to which you are directed has the correct address.


Scammers who know you have cryptocurrency may impersonate cryptocurrency company support staff to gain your trust. These impersonators may contact you by phone or email to obtain personal information from you.

Pyramid Schemes and Mining Scams

These scams use the lure of incredible returns to attract its victims. It could be investing and encouraging the recruitment of more investors to maximize profits (in the case of most pyramid and Ponzi schemes), or exploiting technical aspects of cryptocurrency (in the case of mining scams). In reality, they don’t have access to some great tech or trading secret – if they had, would they really need your investment?

Pyramid/Multi-Level Marketing/Ponzi schemes

Such schemes are common in many consumer-based industries. Not surprisingly, the cryptosphere is not spared either. A company pitches an attractive investment offering amazing returns, with returns further multiplied with every person you recruit into the scheme. Sounds familiar? Early investors get paid with investments from new investors. The scheme collapses when in becomes difficult to recruit new investors, and almost everyone loses money. Only the promoter and a handful of early investors (who may be in on the scheme) stand to profit.

Mining scams

Mining requires large amounts of processing power and electricity (and thus money) to mine. Furthermore, as the pool of minable cryptocurrency diminishes, the returns on investment on mining diminishes. Beware of scam companies who rent mining servers on long-term contracts. These companies often promise outstanding returns without being transparent about true costs and dimishing returns.

Legit Bitcoin miners will tell you that profit margins are razor thin (and only getting thinner).

Shady/Insecure Exchanges

The rising popularity of cryptocurrency has led to a surge in cryptocurrency exchanges. These exchanges usually earn from transaction fees, but there are fraudulent ones that can disappear overnight, taking all the cryptocurrency they are holding with them.

Always be careful and read up on the backgrounds of exchanges before depositing your coin with them. Even so, an exchange with a seemingly good track record can fail because they have failed to innovate to stay relevant in the market. One well-known example, and also one of the worst hacks in Crypto history is the Mt. Gox incident.

One good practice to avoid such traps is to not keep your coins in an exchange. Instead, transfer all your coins to an offline wallet at the end of each day.

Fake wallets

This is one of the easiest ways to scam one of their cryptocurrency. They take the form of a fake wallet app, often a clone of a legit one. The unsuspecting user downloads the fraudulent app, enters their private keys, and – poof – all the coins tied to that private key is gone.

To avoid falling prey to such scams, only download apps from legitimate wallet providers.

Fake ICOs

Seeing how well Bitcoin has been doing, many consumers scour the cryptosphere hoping to cash in early on the ‘next Big Thing’. Thus, initial coin offerings (ICOs) have become a popular way for emerging blockchain-based companies to raise the capital needed to fund their projects.

Inevitably, this massive lucrative opportunity has attracted scammers to the game. Scammers set up fake ICOs or token sales, create hype and dupe people into buying the non-existent coin. One popular method scammers use is by creating a fake website closely resembling an ICO’s, and instructing users to deposit coin into a compromised wallet.

Some traits of fraudulent ICOs/token sales:

  • Unusually rushed execution
  • Copied or poorly-written whitepaper
  • Largely anonymous team
  • No roadmap or real purpose for the token

Pump and Dump Schemes

This scheme works by artificially manipulating the price of certain coins in the following way:

  • A group of investors stir up interest on a certain coin by marketing it on various social media channels. (Commonly used for this are messaging platforms like Telegram and Discord.)
  • Buying frenzy ensues (mostly by unsuspecting traders).
  • This buying spree causes the coin price to climb.
  • Once the coin reaches a certain price, the investors in on the scheme sell their coin and earn a neat profit. The coin price declines sharply, and traders who joined late in the game are left in the red.

In the first half of 2018, there were about 125 pump-and-dump schemes, and prices of 121 different coins manipulated. Being lesser known and having low liquidity are what makes altcoins easy targets for such schemes.

Such schemes have been used in traditional stock markets, so it is no surprise that the crypto-market is hit as well.

In conclusion…

There are always sneaky new ways bad eggs out there will come up with to rob people of their hard-earned money. So, always be diligent and do the due research before investing your coin.

Here are some useful resources to avoid scams:

This last piece of advice may sound old-fashioned, but it still rings true:

If something seems too good to be true, it probably is.

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