Thoughts of the American Frontier, also known as the Wild West, often conjure up visions of lawlessness and expansion into new unknown territory. This period is often characterized by volatility, risk, reward, and loss. Feelings of what it was like in the Wild West often hit close to home for those who find themselves within a period of history where new markets, manufacturing processes, or technological innovation upturn traditional ways of living or doing business.
Today, the fast-changing state of the cryptocurrency market and the type of impact it will have on the future of commerce trigger many similarities to those sentiments mentioned above. As the attention of retail investors, speculators, and various types of institutional investors continues to turn toward the lucrative cryptocurrency markets, so too is the attention of scammers and cheats.
According to the Federal Trade Commission’s Consumer Sentinel, since October 2020 through March 31, 2021, reports of crypto-related scams skyrocketed to nearly 7,000 people reporting losses of more than $80 million. These figures reflect a 12-times increase in the number of reports compared to the same period on a year ago and a nearly 1,000% rise in reported losses.
Given the exponential rise in crypto scams being reported, it is important to be aware of the common types of scams and what kinds of things you can do to protect yourself from being cheated.
- The mad rush into cryptocurrency over the past several years has caught the attention of all kinds of investors, but it has also caught the attention of scammers.
- Crypto scams are most often targeted at gaining private information such as security codes or tricking an unsuspecting person into sending cryptocurrency to a comprised digital wallet.
- Social engineering scams such as giveaways, romance scams, phishing, extortion emails, and others mentioned within the article are a problem in broader society, but they are especially prevalent when it comes to cryptocurrency.
Types of Cryptocurrency Scams
Generally speaking, cryptocurrency scams fall into two different categories:
- Initiatives targeted at obtaining access to a target’s digital wallet or authentication credentials: This means scammers look to get information that gives them access to a digital wallet or other types of private information such as security codes. In some cases, this even includes access to physical hardware.
- Transferring cryptocurrency directly to a scammer due to impersonation, fraudulent investment or business opportunities, or other malicious means.
Social Engineering Scams
Social engineering scams are those in which scammers use psychological manipulation and deceit to gain control of vital information relating to user accounts. The basis of these types of scams condition people to think that they are dealing with a trusted entity such as a government agency, well-known business, tech support, community member, or friend. Scammers will often use any angle or amount of time needed to gain the trust of a potential victim so that in turn they reveal key information or send money to the scammer’s digital wallet. When one of these trusted connections demands cryptocurrency for any reason, it can often be a sign of a scam.
Scammers often utilize dating websites to make unsuspecting targets believe that they are in a real long-term relationship. Once trust has been granted, conversations often turn to lucrative cryptocurrency opportunities and the eventual transfer of either coins or account authentication credentials. Approximately 20% of the money that people reported losing in romance scams was in cryptocurrency.
Imposter and Giveaway Scams
Moving down the sphere of influence, scammers also try to pose as famous celebrities, businesspeople, or cryptocurrency influencers. To capture the attention of potential targets, many scammers promise to match or multiply cryptocurrency that gets sent to them in what is known as a giveaway scam. Well-crafted messaging from what can often look like a valid social media account can often create a sense of validity and spark a sense urgency. This mythical “once-in-a-lifetime” opportunity can lead to people transferring funds quickly in hopes of an instant return. For example, in the six months prior to March 31, 2021, there have been reports of more than $2 million in cryptocurrency being transferred to Elon Musk impersonators. According to the FTC, 14% of reported losses to imposters of all types are now in cryptocurrency.
Within the context of the cryptocurrency industry, phishing scams target information pertaining to online wallets. Specifically, scammers are interested in crypto wallet private keys, which are the keys required to access funds within the wallet. Their method of working is like that of many standard scams. An email is sent leading holders to a specially created website that asks them to enter private key information. When the hackers have acquired this information, they can steal cryptocurrency contained in those wallets.
Phishing scams are some of the most common attacks on consumers. According to the FBI, more than 114,700 people fell victim to phishing scams in 2019. Collectively, they lost $57.8 million, or about $500 each.
Blackmail and Extortion Scams
Another popular social engineering method used by scammers is to send blackmail emails. In such emails, scam artists claim to have a record of adult websites or other illicit webpages visited by the user and threaten to expose them unless they share private keys or send cryptocurrency to the scammer. These types of cases represent a criminal extortion attempt and should be reported to enforcement agency such as the FBI.
Investment or Business Opportunity Scams
The adage “if something sounds too good to be true, then it probably is” is one to keep top of mind for anyone venturing into investing in general, but it is especially true for cryptocurrencies. Countless profit-seeking speculators turn to misleading websites offering guaranteed returns or other setups where investors need to invest largest sums of money to be guaranteed even larger returns. While funds flow freely inward, these bogus guarantees often lead to financial disaster when individuals try to get their money out and find that they can’t.
New Crypto-Based Opportunities: Initial Coin Offerings (ICOs) and Non Fungible Tokens (NFTs)
With the rise of new crypto-based investments such as initial coin offerings (ICOs) and non-fungible tokens (NFTs), there are now even more avenues for scammers to try and gain access to your money. The background of these investments is beyond the scope of this article, but what is important to know is that crypto-based investment or business opportunities may sound lucrative, but sometimes they don’t reflect a true reality. For example, some scammers create fake websites that ICOs and instruct users to deposit cryptocurrency into a compromised wallet. In other instances, the ICO itself may be at fault. Founders could distribute tokens that are unregulated by U.S. securities laws or mislead investors about their products through false advertising.
DeFi Rug Pulls
DeFi rug pulls are the latest type of scam to hit the cryptocurrency markets. Decentralized finance, or DeFi, aims to decentralize finance by removing gatekeepers for financial transactions. In recent times, it has become a magnet for innovation in the crypto ecosystem. However, the development of DeFi platforms is beset with its own problems. Bad actors have made away with investor funds via such avenues. This practice, known as a rug pull, has become especially prevalent as DeFi protocols have become popular with crypto investors interested in magnifying returns by hunting down yield-bearing crypto instruments.
The Bottom Line
For many people, the excitement and the mad rush into cryptocurrencies has surfaced feelings of the wild west. As the crypto ecosystem continues to gain scale and complexity, it will undoubtedly remain a top focus of scammers. As mentioned above, crypto scams generally fall into two main categories: socially engineered initiatives aimed at obtaining account or security information and having a target send cryptocurrency to a comprised digital wallet. By understanding the common ways that scammers are trying to steal your information, and ultimately your money, hopefully you will be able to spot a crypto-related scam early and prevent it from happening to you.