Learn how to identify crypto scams, how to protect yourself and what to do when you're affected.
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The shadow of crypto scams looms larger than ever, threatening the assets and trust of new and old crypto investors alike. These fraudulent schemes continue to become more sophisticated, increasing the need to recognize and understand them.
Read this guide to learn everything you need to know about crypto scams, how to identify them and how to protect yourself as a crypto investor. Stay informed, stay safe!
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Cryptocurrency represents a digital or virtual form of currency that uses cryptography for security, making it difficult to counterfeit.
Unlike traditional currencies, cryptocurrencies operate on decentralized platforms based on blockchain technology, a distributed ledger enforced by a disparate network of computers.
This innovation not only ensures transparency and security but also eliminates the need for central authorities like banks, fostering peer-to-peer transactions.
You can learn more about cryptocurrencies and how they work in our comprehensive guides: Cryptocurrency for Beginners and What is Bitcoin?
Crypto scams have proliferated for several reasons, rooted in both the unique attributes of cryptocurrency itself and broader societal factors.
Here are the key reasons why crypto scams are so widespread:
It is estimated that cryptocurrency scammers stole 4,600,000,000$ from crypto users and investors in 2023 alone. This corresponds to around 0.013% of the total transaction volume of cryptocurrencies in 2023.
Compared to 2022, the amount of scammed crypto assets fell by just under 30%, from 6,500,000,000$.
Crypto scams account for only a portion of all illegal crypto transactions. The total value of cryptocurrency obtained from illegal addresses, including money laundering, darknet markets and other criminal activities, is estimated to be 24,200,000,000$ in 2023.
Source: Chainalysis
Phishing scams manipulate individuals into disclosing sensitive information, such as passwords and private keys, through deceitful communications that mimic legitimate sources.
In the cryptocurrency sphere, these scams target the irreversible nature of crypto transactions, exploiting users with convincing fake websites and emails that resemble trusted crypto exchanges or wallets.
Scammers entice victims with alarming security alerts or free token offers, leading them to malicious sites where their critical data is stolen. Once access is gained, scammers can quickly transfer crypto assets to anonymous wallets, making recovery almost impossible.
<div fs-richtext-component="info-box" class="info-box protip"><div class="flex-info-card"><img src="https://assets-global.website-files.com/65098a145ece52db42b9c274/650c6f4b151815fb0be48cec_Lightning.svg" loading="eager" width="64" height="64" alt="" class="icon-info-box"><div fs-richtext-component="info-box-text" class="info-box-content"><p class="color-neutral-800">Due to the popularity of our crypto tax calculator and crypto portfolio tracker, scammers have been caught impersonating Blockpit employees. Read this article to learn how to stay safe: Protect Yourself from Phishing</p></div></div></div>
Crypto romance scams are a nefarious blend of emotional manipulation and financial fraud, targeting individuals looking for romantic connections online.
Scammers create fake profiles on dating apps, social media platforms, or chat rooms, pretending to be interested in a romantic relationship. Over time, they build trust and emotional intimacy with their targets.
Once a significant level of trust is established, these impostors introduce the concept of a lucrative cryptocurrency investment or a financial emergency that requires crypto assets as the solution, persuading their victims to transfer funds or disclose sensitive wallet information.
Ways to protect yourself from romance scams:
An Initial Coin Offering (ICO) is a crowdfunding method for new cryptocurrency projects, offering investors tokens in exchange for funding. However, fake ICOs exploit this process, presenting elaborate but fraudulent projects to siphon funds from investors.
These scams often feature sophisticated websites and aggressive marketing to mimic real ICOs, accepting payments in popular cryptocurrencies like Bitcoin or Ethereum.
Once the funds are collected, the scammers vanish, leaving investors with valueless tokens.
Red Flags to Spot Fake ICOs:
Each of these red flags deserves careful consideration. The more that are present, the higher the likelihood of the ICO being fraudulent.
Ponzi schemes, named after Charles Ponzi's 1920s scam, involve paying returns to earlier investors with funds from new investors, not actual profits. Unlike legitimate business earnings, these schemes falsely imply returns come from product sales or successful investments.
Pyramid schemes, similarly, rely on recruiting members for payment, leading to unsustainable operations as recruitment becomes difficult.
Cryptocurrency has given these traditional scams a new veneer of sophistication. Ponzi schemes have emerged in the form of high-yield investment programs that promise exceptional returns on crypto investments.
Pyramid schemes are often masked as mining pools or multi-level marketing (MLM) operations within the crypto space.
Both rely on the decentralized, unregulated nature of cryptocurrencies to attract a larger pool of victims and to operate with a degree of anonymity. This modern twist makes it harder for authorities to track and shut down these fraudulent operations.
Pump and dump schemes, now more prevalent with cryptocurrency, involve artificially inflating a cryptocurrency's price to sell at a peak. Utilizing social media, scammers spread false hype using fake accounts or bots, pushing optimistic predictions to drive a buying frenzy. Once the price rises, they sell their pre-accumulated holdings, causing the price to crash and leaving new investors with losses.
To identify pump and dump schemes, consider these tips:
Malware, short for malicious software, encompasses various types of software designed to harm or exploit any programmable device, service, or network. In the context of cryptocurrency, malware is often designed to access and steal funds from digital wallets or to hijack computing power for mining operations.
Crypto wallets, where users store their digital currencies, are prime targets for malware attacks. Hackers create sophisticated phishing campaigns, trojans, and even fake wallets to trick users into unknowingly providing their private keys or seed phrases. Once the attackers have this information, they can transfer funds out of the wallets undetected.
Some malware runs quietly in the background of a user's device, searching for wallet addresses that may be copied to the clipboard, altering them to the hacker's wallet address when a transaction is made.
We highly recommend choosing a wallet type that minimizes the risks associated with malware. Read our guide to get started: The Best Crypto Wallets in 2024
Ransomware is a type of malware that encrypts a victim's files or systems, with the attacker demanding a ransom, typically in cryptocurrency, for the decryption key.
The irreversible nature of cryptocurrency transactions makes it an attractive option for attackers, as it leaves no traceable financial footprint.
However, recent studies suggest that ransom attacks have become less profitable as affected users have simply stopped paying the ransom demands.
The ubiquity of smartphones has seamlessly integrated mobile applications into our daily routines, extending to cryptocurrency management apps and crypto portfolio trackers.
Yet, this ease of access has ushered in opportunities for fraud, especially through fake mobile apps and wallets designed to mimic legitimate platforms.
These counterfeit apps, often distributed through non-official app stores, pose significant risks by deceiving users into submitting private keys and sensitive data, granting scammers access to their digital assets.
Key Precautions:
In the cryptocurrency world, the vulnerability often lies not in the technology itself but in the human element. Scammers exploit this by impersonating celebrities, influencers, or tech figures on social media, promising unreal returns or running bogus giveaways that ask users to send crypto with the promise of receiving more in return.
The infamous "Send 1 ETH, get 2 ETH back" scam exemplifies this approach.
The advent of deepfakes, using AI to create eerily convincing videos or audios of trusted figures, has further sophisticated these scams. These deepfakes can mislead users into believing they're receiving legitimate investment advice or instructions from authoritative sources.
Strategies for Protection:
Fake helplines and counterfeit customer support traps stand out for their cunning. Scammers craft these schemes to exploit moments of vulnerability when crypto investors face issues with their crypto wallets or transactions.
During such times, a frantic search for assistance can lead unsuspecting users to fall prey to fraudulent support numbers posted online.
These fake support lines are manned by impostors posing as help agents, whose real intent is to deceive callers into divulging sensitive information. By pretending to offer help, they solicit private keys, wallet passwords, or other security details under the guise of resolving the user's issues.
Strengthening Your Defenses Against Fraud:
Even experienced cryptocurrency users can fall for a crypto scam in the heat of the moment. Use these best practices to evaluate the validity of a crypto offer and identify fraud:
If you fall victim to a crypto scam, it's crucial to act promptly to mitigate the impact. Report the incident to law enforcement and the relevant platforms where the scam occurred.
Sharing your experience can also help prevent others from falling for similar scams by raising awareness within the community.
Take immediate steps to secure your remaining assets, such as changing passwords and enhancing security settings on your digital wallets.
While recovery of lost funds can be challenging, these actions can help regain some control and potentially minimize further damage.
It is generally not possible to deduct lost or stolen crypto on your crypto tax report. While crypto tax laws differ from jurisdiction to jurisdiction, you would have to dispose of a cryptocurrency and actually realize a loss to be able to deduct it.
Be sure to read our crypto tax guides to learn more about the specific crypto tax rules in the UK.
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