The cryptocurrency space has been so alluring and impossible to resist especially for newbies. That is why if you are new in the trading world, you’ll be gullible to cryptocurrency scams or other forms of fraud just because you want the shiny object that much. There’s nothing wrong with crypto – you just have to know the books to avoid being scammed.
Ask anyone who has followed the cryptocurrency space for more than a few weeks and they’ll tell you that the industry is rife with scams and frauds everywhere you look.
From fake phishing websites to Ponzi Schemes, to fraudulent ICO’s to exchanges disappearing with people’s funds overnight, to Twitter and Telegram impersonation scammers to anonymous trading “gurus” that boast of how much money they’re making trading, the list of scams involving cryptocurrency is a long one.
Mushrooming of Cryptocurrency Scam Online
The word “scam” is also very vague. The term scam typically constitutes most actions by a perpetrator that is outright fraud or allow for theft of the cryptocurrency from the victim. But there are many other scams as well.
For example, there are cryptocurrency projects, often ICOs, that may be legitimate and well-intentioned at least at first, but slowly, over time, the project begins to fade away, before simply closing up shop entirely.
This is the Soft Exit Scam. Other people use the term scam to simply describe anything they don’t like. Indeed, some Bitcoin maximalists even consider Ethereum itself to be a scam.
Phishing involves scammers disguising electronic communication to appear as if it was from the legitimate source they are posing as. Phishing comes in many forms.
Fake crypto exchange websites, fake Ledger websites, fake websites to legitimate web wallets, fake phone applications, among many others. These fakes tend to do a fairly good job mimicking the real sources.
There are a variety of reasons a victim may click on a phishing link. It may have been posted on Twitter, Reddit, or they may have found it in an email, or in a Telegram channel they follow for example. Or they may find it when conducting a Google search as one of the top results if the scammer has properly utilized SEO to get the website or application listed high enough.
These scammers also buy ads for their websites so it’s very possible a phishing link may end up being the top result on a Google search of yours!
The scammers often use very similar URLs and links whose differences are imperceptible in many cases. The phishing website isn’t actually dangerous unless you mistakenly believe it’s real, and given how difficult that can be to determine in many cases, it’s very much possible to fall victim to this scam.
The goal of phishing websites is always the same; fool the victim into believing the source is authentic then get them to enter personal details such as a ‘seed phrase’, or username and password while they secretly record your information, and then utilize it to steal your funds shortly thereafter.
Hard Exit Scams
A Hard Exit Scam involves a project that fraudulently obtains investor funds or customer assets and eventually shuts down, running off with the money. More often than not, the project was a ruse from the outset and only existed to garner as much funding from victims as possible.
There are quite a few cryptocurrency-related projects that fit this category, some of which include investment schemes, fraudulent ICOs, and some cryptocurrency exchanges. Generally speaking, most ICOs that ‘exit’ better fit the categorization of Soft Exit Scam, but there are some notable exceptions.
Investment Schemes Masquerading as ICOs
There are ICOs that frankly weren’t really ICOs at all. ‘ICO’ was just the descriptive they used to better solicit funding for their investment scheme, which could reasonably be described as Ponzi Schemes.
In many cases, these projects didn’t even bother to create a coin or token for their ICO! So it would be hard to describe them as ICOs and they’d be better described as Investment Schemes that ‘Exit Scammed’, as naturally ends up happening with such schemes.
Also, there is no shortage of “Real estate-backed cryptocurrencies”, “gold-backed” and “diamond-backed” cryptocurrencies that conducted “ICOs” that fit this description either.
What might surprise some people, however, is just how brazen these scammers are with what they do with the ‘investments’ from a forensics perspective.
When an exchange goes bust, it’s not necessarily an ‘Exit scam’. Exchanges fail for a variety of reasons, sometimes taking customer funds with them, but that doesn’t necessarily make it a Hard Exit Scam. It’s extremely rare to find an exchange that was started by founders with the express intent of scamming customers from the outset. There are exchanges that took customer funds with them, but that more often than not that wasn’t the intent from the outset.
A Hard Exit Scam from an exchange typically involves a sudden and sustained disappearance from the founders. Sometimes on the way out, they’ll quickly claim that the exchange was “hacked” when in reality, any competent forensic investigation will reveal the founders took the customer funds for themselves.
Generally speaking, if the exchange hasn’t falsely claimed that they were “hacked” and lost customer funds, and doesn’t vanish but rather continues to correspond with users on social media, it’s reasonable to presume it’s not a Hard Exit Scam unless solid evidence arises indicating otherwise.
These actions typically constitute fraud among other crimes such as embezzlement. As scammers’ actions were fraudulent and malicious, recourse and recovery are typically best found with the help of law enforcement.
Law enforcement is generally willing to pursue these cases as long as the loss is high enough to make it worth their resources, among a variety of other reasons. The reasons law enforcement neglects to get involved in some cases often boils down to lacking the technical expertise to properly investigate and uncover key information about the scams and frauds to allow for prosecution.
Furthermore, the law enforcement route is typically more effective than the civil route in these cases given the international nature of these cases where suspects are often anonymous; ultimately, the threat of jail time is far more effective at achieving funds recovery than the threat of a lawsuit for such scammers.
Soft Exit Scams
A Soft Exit Scam is not a blatant scam from the outset. Rather, things likely started out with good intentions on the part of the founding team, but over time things slowly fell into disarray, the business model clearly wasn’t working, and no one clearly cared about the project or business anymore, resulting in little or no activity. Incompetence from management and a series of very poor decisions along the way is often involved.
Eventually, it becomes clear to management that no, things are not going to get better and things are not going to “turn around”. There’s clearly no viable way forward, and management sees no point in continuing to invest further time and resources into the project. The problem is that they generally have investor’s funds tied up or invested in the project and/or have customer funds in their custody. In other cases, they may be insolvent.
ICOs, IEOs, and STOs
There are a variety of projects that fit this classification. Many people will realize that many former ICOs, IEOs, and STOs fit well into this categorization. The founders may have genuinely had an idea they wanted to work on and bring to the market and started the fundraiser with the best of intentions, but sometime after raising customer funds, things just didn’t work out for a variety of reasons. Their social channels and community fade into nothingness, before disappearing completely, and no one notices when they do.
But it’s not just ICOs that fit into this categorization. There are actual investment funds that fit into this categorization as well. And I’m not talking about the investment funds run by an anonymous pro trader on Twitter.
Actual legally registered investment funds that abscond with customer assets, refusing to return them. The founders of these investment funds are not anonymous but nonetheless aren’t willing to return funds to their customers for these reasons:
- The founders have a considerable amount of customer assets in their possession and they think they can get away with absconding with customer assets, believing there’s little recourse available to their customers.
- The founders lost customer assets day-trading or in a similar type of activity, and don’t want to tell their investors, as this would inevitably result in inquiries about how it happened, and into requests for transparency about precisely how it happened, which in turn is inevitably going to result in a lawsuit.
Exchanges that disappear with customer assets weren’t always running a scam from the outset. In many cases, they were well-intentioned at least at first. However, there’s an incredibly high amount of competition between cryptocurrency exchanges resulting in very low-profit margins.
These exchanges have difficulty generating a minimal amount of genuine trading volume to give themselves some actual revenue needed to sustain themselves. At the same time, they’re seeing higher compliance and security costs.
Simply put, cryptocurrency exchanges almost operate in the red, at least until they get a healthy amount of genuine trading volume and even then, it’s rough. And the question then becomes who funds the additional expenses?
If they can’t increase revenues or obtain financing, their only option is to borrow against customer assets. When they do this, they become insolvent and operate fractionally. Just as with a Ponzi Scheme, eventually, they have little or no assets left on their books, and they have quite literally forced themselves to ‘Exit’, and have little to no assets to return to customers.
In these Soft Exits, the founders generally start out with good intentions and aren’t anonymous. When people lose money in their investments with these projects, they sometimes get quite upset, but ultimately chalk it up to a bad investment in most cases, which it was in most cases, and take it as a lesson learned going forward. They generally think they have no recourse since law enforcement generally doesn’t do anything about these types of scams.
In reality, there is recourse available in some cases, however, in these Soft Exits, recourse typically involves civil action rather than criminal action.
Impersonation scammers are all over the place. In some cases, it’s quite easy to spot them, while in other cases they can be fairly clever and are not easy to recognize, particularly to people who are not used to all the impersonation scams that occur.
Fake Twitter Accounts & Youtube Channels
There are boatloads of fake Twitter account impersonators that often impersonate people like Elon Musk and Vitalik Buterin, who are seemingly always ‘doing a giveaway’; you just have to send 0.1 BTC to address of theirs and you’ll get 1 BTC back.
Some of these scammers even take the time to show a series of 0.1 BTC deposits to the wallet address to help give legitimacy and show other people are actually doing it. While these impersonation scammers are fairly easy to spot by now, it’s fairly clear that this scam still works, otherwise, the scammers wouldn’t be doing it anymore!
There are also fake Youtube channels running similar scams. They often purport to be well-respected people in the cryptocurrency space and the imposter rebroadcasts a lecture, interview, AMA, or presentation previously given while announcing that ‘they’ are doing a ‘giveaway’ or contest.
The Youtube channels the scammers use are filled with fake views, a number of people watching, and fake subscriptions to better dupe people into thinking it’s authentic.
Be Proactive Against Crypto Scams!
The best way to prevent yourself from falling victim to one of these scams is through education.
Learning about how they work and the techniques scammers use to get you to send them funds will go a very long way in helping you ensure you aren’t victimized yourself.
Many of these scams and frauds will always exist, but we need to do some work to ‘clean up’ the cryptocurrency space. If there are fraudsters and scammers constantly bombarding prospective victims because it’s profitable for them to do so and there are no consequences, that doesn’t exactly bode well for greater adoption, so people need to be smarter than the scammers.