Crypto Scams: How to Identify & Prevent Crypto Fraud [2024]

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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Understanding Cryptocurrency: A Brief Primer

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?

How is crypto different from traditional fiat currency?

• Decentralization: Cryptocurrencies are not controlled by any central authority
• Anonymity: While transactions are transparent and traceable, the involved parties can’t be identified without additional information
• Accessibility: Cryptocurrencies can be accessed by anyone with an internet connection

Why Crypto Scams are Prolific

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:

1. Anonymity and Lack of Regulation: Cryptocurrencies offer anonymity and minimal regulation, making scams hard to trace and giving scammers freedom to operate with reduced legal risks.
2. Technological Complexity: The intricate nature of cryptocurrency technology may be confusing, allowing scammers to easily deceive people with false promises of low-risk, high-return investments.
3. High Volatility: The price fluctuations in the crypto market foster unrealistic expectations of quick wealth, leaving individuals vulnerable to high-return scam promises.
4. FOMO (Fear of Missing Out): Media stories of quick crypto fortunes create a widespread fear of missing out, which scammers exploit with promises of easy gains.
5. Global Reach: Cryptocurrency's global accessibility broadens the potential victim pool, enabling scammers to operate across borders and evade local law enforcement.
6. Lack of Knowledge: A general misunderstanding of how cryptocurrencies work and are valued makes it easier for scammers to mislead and exploit the uninformed.
7. Emerging Technology: The nascent and rapidly changing nature of crypto technology lacks comprehensive safeguards, providing continuous new opportunities for scammers.

How Much Money Has Been Lost to Crypto Scams?

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

Most Popular Types of Crypto Scams in 2024

• Phishing scams
• Romance scams
• Fake ICOs
• Ponzi and pyramid schemes
• Pump and dumps
• Malware and ransomware attacks
• Fake mobile apps and wallets
• Impersonation and fake giveaways 
• Fake customer support

Crypto Scams Explained

Phishing Scams

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>

Romance Scams

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:

• Verify Identities: Confirm the identity of online romantic interests through video calls, especially if things escalate quickly.
• Keep Finances Private: Avoid sharing any financial or cryptocurrency details with someone you've met online.
• Independent Research: Always independently check the legitimacy of investment opportunities suggested by a romantic interest.
• Seek Second Opinions: Discuss online romantic relationships with friends or family before making financial decisions.
• Report Scams: Report any suspicious or scam-related activities to relevant platforms and law enforcement.

Fake ICOs (Initial Coin Offerings)

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:

• Generic White Papers: Often lacking in detail or originality, with plagiarized sections.
• Team Anonymity: No credible information on project members.
• Guaranteed Returns: Promises of surefire profits in a highly volatile market.
• Overambitious Goals: Unrealistic project promises.
• No Working Prototype: Absence of tangible development or open-source code.
• Pressure Sales Tactics: Urging quick investment decisions.
• Unconventional Funding Methods: Soliciting investments through non-standard channels.
• Regulatory Non-compliance: Missing compliance details or security protocols.

Each of these red flags deserves careful consideration. The more that are present, the higher the likelihood of the ICO being fraudulent.

Ponzi and Pyramid Schemes

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

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:

• Watch for Sudden Buzz: Be cautious of unexplained hype on social media, especially if there's no fundamental news to back it up.
• Question Guaranteed Returns: Promises of guaranteed returns are a red flag.
• Scrutinize Anonymous Advice: Treat anonymous tips or investment advice with skepticism, particularly if it urges buying in large quantities.
• Monitor Trading Patterns: An abrupt spike in trading volume and price without clear reasons can indicate manipulation.
• Beware of Coordinated Signals: Coordinated "buy signals" from multiple accounts or groups are suspect.
• Exercise Caution with Unsolicited Advice: Approach unsolicited investment advice cautiously, especially if it pressures immediate action.

Malware and Ransom Attacks

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. 

Fake Mobile Apps and Wallets

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:

• App Authenticity: Always verify an app's legitimacy by examining developer information and reading user reviews before downloading. Look for inconsistencies or red flags that may suggest deceit.
• Avoid Non-Official Stores: Stick to official app stores for downloads. These platforms offer better security measures and vetting processes compared to third-party stores, which may host malicious apps rejected by legitimate channels.
• Direct Updates: For additional safety, download updates directly from the developer's official website or through the app's verified update mechanism within the official stores.

Impersonation and Fake Giveaways

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:

• Critical Awareness: Always approach unsolicited offers with skepticism and verify the authenticity of any social media account or message claiming to represent a known figure or organization.
• Official Verification: Double-check account details against official websites or verified social media profiles. Look for verification badges on platforms like Twitter or Instagram.
• Report Suspicious Activity: If you encounter a potential scam, report it to the social media platform and warn others within your network.

Fake Helplines and Customer Support Traps

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:

• Use Official Channels: Only contact support through verified methods listed on the official website or app.
• Caution with Online Searches: Be wary of support numbers found via search engines, as scammers can manipulate search results.
• Protect Your Information: Do not disclose private keys, passwords, or sensitive details over the phone to unverified individuals.
• Verify Legitimacy: Confirm the support service's authenticity through official company emails or verified social media interactions.

Easy Ways to Identify Crypto Scams

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:

• Skeptical of High Returns: Beware of promises of guaranteed, above-average returns. The crypto market is volatile; guaranteed outcomes are unrealistic.
• Question Aggressive Marketing: Avoid offers pressuring quick decisions with "limited-time" urgency. Legitimate ventures value informed choices.
• Demand Transparency: Legit projects offer clear plans and financial details. Secrecy or vague responses are red flags.
• Evaluate Online Presence: Professional, consistent online profiles indicate credibility. Poor quality or inconsistent information suggests scams.
• Verify Team Backgrounds: Trustworthy projects have verifiable, experienced teams. Lack of detailed backgrounds or fabricated identities is concerning.
• Assess the Whitepaper: A genuine whitepaper outlines the project's goals and token economics. Avoid projects without one or with plagiarized content.
• Check for Contact Information: Legitimate projects provide ways to contact them. Total anonymity indicates a lack of accountability.
• Inspect Smart Contracts: Refusal to audit smart contracts or share code hints at potential fraud. Community vetting adds security.
• Monitor Community Feedback: Consistent negative feedback or deleted posts suggest unreliable practices.
• Watch Transaction Patterns: Unusual token distribution activities might indicate a scam.
• Investigate Domain Details: Short-term domain registrations or hidden information can be signs of fraudulent intentions.

Best Practices to Protect Yourself From Crypto Scams

• Secure Your Investments: Protect your valuable crypto assets with hardware wallets or cold storage solutions and enable multi-factor authentication to add an extra layer of security against unauthorized access.
• Use a Portfolio Tracker: Monitor your investments using a reputable portfolio tracker, allowing for a consolidated view of your assets and better management of your crypto holdings without compromising individual crypto wallets.
• Research Thoroughly: Evaluate crypto investments thoroughly using reliable sources, steer clear of baseless hype, and weigh community feedback and independent reviews to make informed decisions.
• Be Cautious with Personal Information: Guard your private keys and mnemonic phrases zealously. Disregard unsolicited offers and communications that request sensitive information.
• Regular Backups and Updates: Maintain the security and functionality of your software by performing regular updates and securing backups in a safe location, protecting against data loss and cyber threats.
• Invest in Trusted Assets: If you’re new to crypto, it might be a good idea to stick to popular cryptocurrencies until you have a better understanding of the ecosystem. Read our guide to get started: Best Crypto 2024
• Stay Educated and Vigilant: Engage with reputable crypto communities and commit to continuous learning about the latest in scam tactics and security measures, as the landscape of cryptocurrency scams is ever-evolving.

What to Do if You Fall Victim

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.

Can Crypto Scams Be a Tax Write-Off?

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 tax rules and regulations for your country.

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