Photo by Michael Heise from Unsplash
Cryptocurrency investing offers new and exciting opportunities, but it’s also rife with scams and tech-savvy con artists. And, as the money invested in crypto grows, so do the scams.
“Crypto investments are the top type of investment scams reported to CAFC (the Canadian Anti-Fraud Centre).” This is the grim truth according to Jeff Horncastle, the organization’s acting client and communications outreach officer.
In 2021 alone, 1,128 Canadians reported falling prey to cryptocurrency investment scams with crypto as the payment method, with losses amounting to about $38.5 million. Things are not looking good in 2022 either. In the first six months, over 1,000 Canadians were conned, with a total loss of nearly $35 million. And these are just the cases CAFC knows about. “It is estimated that less than 5% of Canadian victims report to the Canadian Anti-Fraud Centre,” says Horncastle.
Cryptocurrency scams are often intertwined with other types of scams. According to Horncastle, “In some cases, the scam starts as a romance scam and quickly turns into an ‘investment opportunity.’ Because suspects have gained the victim’s trust, it can lead to a high-dollar loss for the victim.”
Since cryptocurrency is an emerging technology, and crypto regulation is still evolving, investors need to tread carefully. It’s possible to invest responsibly and profitably in cryptocurrencies, but the space is riddled with scams and fraud—and the criminals behind them cast a wide net. “Unfortunately, everyone is targeted,” Horncastle says.
Con artists frequently find potential marks on social media. According to a recent analysis by TradingPlatforms, nearly one-third of social media crypto frauds happen on Instagram, and one-quarter on Facebook.
There are many types of scams to watch out for, and unfortunately, as investors get savvier, the cons evolve and become trickier to spot. To protect yourself, always know where your money is going, and only use trusted and compliant crypto trading service providers. (As a starting point, see MoneySense’s picks for the top crypto platforms in Canada, which are all registered with Canadian securities regulators.)
An exhaustive list of crypto scams is likely impossible, but to protect yourself, be on the lookout for these.
Pump-and-dump, or rug pull
In a “pump and dump” or “rug pull” scheme, promoters of a cryptocurrency hype it up to boost demand, and when the price soars, they sell all their coins for a quick profit. Because they sell in large volumes, other investors get nervous and sell their coins, too. As panic sets in and the selling spreads, the value of the coin plunges. This makes the promoters rich and leaves many small investors “holding the bag,” faced with huge losses.
A notorious example of an alleged crypto pump-and-dump scheme is a coin called Squid Game. Launched in October 2021, it rode the popularity of the Netflix series of the same name—despite having no affiliation to the show. Less than two weeks later, Squid Game’s crypto developers suddenly sold their holdings when the coin’s price hit $2,800, making themselves $3.3 million richer (all figures in U.S. currency). Today, one Squid coin is worth about a penny.
The pump-and-dump scam is not unique to crypto, of course. It’s what high-flying stockbroker Jordan Belfort—the subject of the Hollywood film The Wolf of Wall Street, starring Leonardo DiCaprio—engaged in during the 1990s. His firm was accused of artificially inflating the price of penny stocks before selling their shares to make lots of fast money—costing investors up to $200 million. In the early 2000s, Belfort served 22 months in federal prison for securities fraud. He’s now marketing himself as an investment guru and sales trainer.
Giveaway scam, or 2-for-1 scam
In a giveaway scam, someone asks you to send cryptocurrency to their wallet address, with the promise of sending you double the amount. “Send me 1 token, I’ll send you 2 in return” is a typical overture.
This type of scam is especially effective during crypto bull markets when investors may be experiencing FOMO and the prospect of free crypto may seem too tempting to pass up.
Airdrop scams are a type of giveaway scam. In a typical airdrop, coin marketers give away assets like new crypto coins and non-fungible tokens (NFTs) in an effort to promote a project. To qualify, users may have to complete tasks like resharing social posts or creating an account. Once received, these assets need to be “claimed” in order to be sold.
For this, scammers may use airdrops as a ruse to lure people to a fraudulent website in the hope of collecting sensitive information, like the private keys to their crypto wallet. It’s much like those email scams that ask you to tap a link to sign into a bank account to receive a refund or wired money—same strategy, different currency.
Service provider support scams
Support scams are an internet-wide problem, and crypto is no exception. Con artists pretend to be representatives of crypto companies to trick their targets into parting with their money or revealing private information, such as passwords to their crypto exchange accounts or the private keys to their crypto wallets. With this information, they could rob you of your investments.
Scammers impersonate the staff of crypto services—such as decentralized apps (dApps), wallets and exchanges—on community platforms and messaging apps such as Discord or Telegram. They create authentic-looking accounts to gain the trust of unsuspecting investors, asking for passwords, private keys or remote access to their devices. Then they transfer the victim’s assets to their own accounts.
Genuine service providers will not communicate through unofficial channels like unverified social media accounts or personal email addresses, nor will they ask for your passwords or private keys.
Phishing scams use phony communication through channels like email or social media to trick people into sharing confidential information like credit card numbers and PINs. It’s called “phishing” because scammers try to bait people into clicking a link that will take them to fraudulent websites—for example, an imitation of a bank or crypto exchange site.
Once the target has taken the bait, the scammers get in touch by email or other means and ask them to share or enter their data using various pretexts, such as a software upgrade or a limited-time special offer. The scammers then use it to hack into the victim’s exchange accounts and wallets.
Crypto Ponzi schemes: Mining or staking pool scams
Ponzi schemes, which get their name from con artist Charles Ponzi, are a type of scam in which new investors are paid what they’re owed using the money of existing investors—rather than from legitimate investment gains.
In the crypto world, Ponzi scams are applied to mining and staking pools. With the growing popularity of crypto, many investors want to participate in blockchain technology and the decentralized economy. One way is to mine or stake coins such as bitcoin (BTC), ethereum (ETH), polkadot (DOT) and cardano (ADA) through a mining pool or a stake pool—more often the latter.
How does staking work? Investors contribute to the operation of a blockchain—the technology that securely and permanently records crypto transactions—by pledging, or locking up, their coins for a period of time. In return, they may receive crypto rewards.
Scammers try to trick people into joining fake pools. Unlike other scams where the goal is to make a quick buck, mining and stake pool scams are a variation of a classic Ponzi scheme. They typically begin with an unsolicited invitation to join a pool, with the promise of lucrative rewards. You may initially receive returns, as the scammers attempt to gain your trust. However, as in all Ponzi schemes, these rewards are paid using the money received from new investors, rather than from legitimate returns on investment.
The scammers hope that receiving returns will prompt you to invest more of your crypto in the pool. If you stake a larger amount, your crypto could be transferred to an unknown address—and you will likely never see it again.
Was that really Reese Witherspoon touting NFTs? Can you really buy virtual property near Snoop’s? Trend-jacking off these real endorsements is a slew of faux celebrity crypto endorsements. A common concern around crypto investing is whether a coin or a project is genuine and trustworthy—but if your favorite actor or influencer is on board, it’s probably fine, right?
For marketers, exploiting the popularity and credibility of celebrities is a time-tested way to feign authenticity and garner trust. But things may not always be what they seem. Scammers create fake social media content or manipulate existing content to make it appear as though celebrities endorse a particular cryptocurrency. They tend to use faces already prominent in the crypto space—such as Tesla CEO Elon Musk or Ethereum founder Vitalik Buterin—to draw investors in.
Also beware of fake influencers: people who create social media accounts, buy followers and pretend to be influencers in order to peddle specific coins, crypto products or services. Scammers also use fake comments to make it appear that social media users recommend their services.
Blackmail scams are among the most disturbing crypto schemes. Scammers issue threats, often claiming they have access to a victim’s internet browsing history, passwords or an embarrassing webcam recording. They demand that the victim transfer crypto to their wallet address to make the problem go away. Or, the demand may be for the victim to promote a particular crypto to their contacts.
While these experiences can be harrowing for victims, it is important not to respond to blackmailers.
How to protect yourself from crypto scams
Unfortunately, at least for now, scams are rampant in the crypto ecosystem. Here’s what you can do to avoid being trapped.
- Be skeptical: Anyone can be a target, even experienced crypto traders, so it’s best to maintain a healthy dose of skepticism whenever a crypto “opportunity”—or any other investment offer—comes your way.
- Verify all links: Don’t click on a link without examining it carefully to make sure it’s from a trusted and verified source. You can inspect shortened URLs using a link-expansion service, which will verify an email ID directly with the institution it’s supposedly sent from, or using a URL decoding tool to find out a link’s real destination.
- Don’t send crypto to unknown wallets: If you’re transferring crypto to a wallet that’s not yours, make sure you know and trust the person or company it belongs to. A con artist trying to pull a 2-for-1 scam, for example, might send you a wallet address. Never send crypto to a wallet you can’t verify, no matter how good the deal sounds.
- Use official support channels: Don’t trust anyone who reaches out to you in the guise of a support representative on social media platforms or community messaging platforms.
- Do your research: When choosing a crypto trading platform or a mining or staking service provider, stick with trusted names and companies with a clearly visible public footprint.
- Never disclose confidential information: Don’t share your passwords, private keys or seed phrases with anybody under any circumstances.
- Don’t respond to blackmail: If someone attempts to blackmail you, the best way to protect yourself is not to respond at all. Instead, report the scam to the CAFC.
How to report a scam
If you’re a victim of a crypto scam or fraud, don’t hesitate to report the incident to the police and the CAFC. If you don’t report, they can’t investigate, and we won’t understand the extent and nature of crypto fraud in Canada.
Beware the risks of crypto investing
In addition to protecting yourself from scams, remember this: Cryptocurrency investing can be profitable, but prices are also highly volatile. Before you buy or stake any digital coin, consider whether it fits your investment plan, risk profile and long-term goals. Always do your own research, and carefully review service providers’ user agreements and risk disclosures before you click “buy.”
Aditya Nain is an internationally published author, educator and business owner. His firm specializes in investment research, writing and content. Connect with him on LinkedIn for daily posts on investing, business and life.