5 Common Cryptocurrency Scams and How to Avoid Them
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How do you avoid cryptocurrency scams? The easiest way is just to stay at home and don’t play with your hard-earned cash. But if you’re determined to invest Is There Ever a Safe Time to Invest in Bitcoin or Ethereum? Is There Ever a Safe Time to Invest in Bitcoin or Ethereum? There will always be a measure of risk when "investing" in Bitcoin, Ethereum, or any other form of cryptocurrency. However, that risk can be managed. Here's how to do it. Read More in the somewhat risky world of cryptocurrency, there are a few common scams you should be aware of.

As with any scam, being caught out is going to hit you hard. We don’t want that. Here are five common scams, and how to avoid being caught out.

1. Shady Exchanges

The explosive popularity of Bitcoin The Current State of Cryptocurrency The Current State of Cryptocurrency It's been a wild ride for cryptocurrency since Bitcoin (BTC) became the first decentralized digital currency in 2009. Read More and other altcoins has seen a huge rise in cryptocurrency exchanges. They all want your attention, and the transaction fees that come with handling your purchases.

However, there aren’t many completely trustworthy cryptocurrency exchanges. Popular exchanges have been known to completely disappear overnight, taking all the cryptocurrency with them. At other times, you’ll encounter extremely unhelpful customer service. Sent your Bitcoin to a Bitcoin Cash wallet? Bad luck (although this particular transaction issue can be fixed).

If you’re entirely new to cryptocurrency, you might not have heard of Mt. Gox. This was an early cryptocurrency exchange that at one point accounted for over 70 percent of all Bitcoin transactions worldwide. One morning, in February 2014, Mt. Gox suspended trading. It later emerged that 850,000 Bitcoins had been stolen (valued at $450 million at the time, over $3.5 billion as of this writing — yeah, you read that right!) over a period time. Some 200,000 were recovered and returned to the site and some users.

The point is that trusting people in an entirely digital world is extremely difficult, especially if you cannot audit or verify what is taking place behind the scenes.

A Short List of Somewhat Trusted Exchanges

I’m not one to spread FUD without offering you some good news: there are some excellent exchanges out there. I hold a number of altcoins, and I’ve never had any trouble with any exchange I’m going to list below. Of course, this is subjective. But my experiences are relatively uniform with other cryptocurrency enthusiasts.

  • Coinbase: Support for Bitcoin, Ethereum, and Litecoin.
  • Kraken: Support for Bitcoin, Ethereum, Litecoin, Monero, and other popular altcoins. Some smaller altcoins too, such as Augur, and Stellar Lumens.
  • Bittrex: Support for almost every coin you can think of, and more you’ve never heard of. Support can be slow, but are helpful.
  • Cryptopia: Support for a ridiculously large number of coins, also features an extremely low transaction fee.

This is just my personal experience. Do your due diligence before placing any amount of Bitcoin or altcoins onto an exchange.

My final tip to avoid getting burned here is do not keep your cryptocurrency stored on an exchange. Transfer those coins to an offline wallet at the end of the day — it only takes a short amount of time to send them back to an exchange for trading. If you’re going to really get into cryptocurrency, consider upgrading to a cryptocurrency hardware wallet.

2. Pyramid and Ponzi Schemes

In the spring of 2017, a Mumbai-based company called OneCoin was delivering a sales pitch to a room of investors. Indian financial enforcement officers raided the meeting, ultimately jailing 18 OneCoin representatives for operating a cryptocurrency Ponzi scheme. At the time of their arrest, OneCoin had already moved over $350 million through a payment processor.

bitcoin multiplier scam

Investors had been duped through a combination of enthusiastic upselling, lack of knowledge of the technology in front of them, and a lot of positive media coverage (of both the project and booming cryptocurrency prices).

A lot of people lost a lot of money. And we like to think we’re clever enough to spot a scam when it is front of us. But cryptocurrency is creating new scams, using jargon and technology most people have never heard of, let alone truly understand. Even grasping the basics of blockchain technology and smart contracts is difficult for the layman.

3. Pump and Dump

Many prominent financial experts have also dismissed cryptocurrency as a scam. While some compare Bitcoin to other safe haven investments, such as gold, others believe it is merely a speculator’s heaven, ripe for pumping and dumping.

Bitcoin has a market capitalization of over $70 billion at the time of writing. It would be very difficult to directly manipulate the price. But smaller altcoins are extremely vulnerable to a standard pump and dump.

In many ways, the thousands of smaller altcoins have taken the place of penny stocks, albeit with a technological edge. Furthermore, there are several groups dedicated to this exact practice. They hold a monthly vote to choose an altcoin with a tiny market capitalization, and descend.

4. ICOs

Initial Coin Offerings (ICOs) are the IPOs of the cryptocurrency world. Cryptocurrency startups create initial coin offerings to raise substantial amounts of money. However, many of them vastly overestimate the value of their startup. Others are simply elaborate pump and dump schemes.

The Securities and Exchanges Commission (SEC) is extremely wary of ICOs. They advise that they will suspend trading in stock when:

  • There is a lack of accurate or current information about a company.
  • Questions arise concerning the accuracy of publicly available information, including press releases and media coverage.
  • There are questionable trading practices, such as insider trading, market manipulation, and more.

Of course, this doesn’t actually always protect potential investors from scam ICOs, as we saw earlier with OneCoin. Due to the market hysteria surrounding ICOs, and the potential for large short-term profits, many scammers are attempting to profit. Alternatively, companies announce their ICO before the technology is truly ready.

The DAO

When The DAO (a decentralized autonomous organization named for the acronym) completed their 2016 ICO, raising over $34 million, it was considered a success. That was until some users exploited a vulnerability in the DAO code, and siphoned one-third of The DAO’s funds Why Your Crypto Coin Is Not as Secure as You Think Why Your Crypto Coin Is Not as Secure as You Think Bitcoin continues to hit new highs. Cryptocurrency newcomer Ethereum threatens to explode into its own bubble. Interest in blockchain, mining, and cryptocurrency is at an all-time high. So why are cryptocurrency enthusiasts under threat? Read More to another account. To return the funds to the original account, the Ethereum community had to agree to a hard fork, tearing the cryptocurrency in half.

DAO is now delisted from major exchanges, and is seen as a major factor in the (much needed) close scrutiny of the SEC in cryptocurrency ICOs.

Excellent ICOs Are Out There

Again, I don’t want to spread FUD without giving some really positive ICO information.

Most recently, Filecoin raised over $200 million for their decentralized storage system based on blockchain technology. Filecoin had some seriously impressive backers, too, including Winklevoss Capital (owned by the Winkelvoss twins), Sequoia Capital, and Andreessen Horowitz.

There are also a number of very promising ICOs on the horizon — but as we have just seen, it is difficult to know exactly what to trust without considerable research.

ICO Ban

ICOs have also made the (cryptocurrency) news after both China and South Korea took steps to ban them. The South Korean Financial Services Commission said that institutions and individuals conducting business relating to an ICO would face “stern penalties.”

This move comes after the Chinese government banned all ICOs, calling them “illegal fundraising.” China is also worried about the power cryptocurrency gives its citizens. Decentralized anonymous currency in the form of ICOs (and other altcoins) could easily “disrupt their social order.” China has previously banned Bitcoin and cryptocurrency related activity, each time causing a slump in global markets.

5. Coin Doesn’t Exist

In August, 2017, the City of London Police shut down a “cryptocurrency business” that was cold-calling people to sell fake digital currency. Victims were cold-called and persuaded to purchase non-existent cryptocurrencies. Nine victims came forward to the U.K. firm, Action Fraud, with combined losses exceeding £150,000.

The man who allegedly set up the scam used a central London address, in financial centre, to lend the scam authenticity.

Real investors will not cold-call you to offer an opportunity, cryptocurrency or not. If you receive a call asking for your investment in a project, note the name of the caller, the company name and address, and put the phone down. You next call should be to the SEC to report potential securities fraud.

Impersonators

A growing threat comes from social media. Prominent cryptocurrency company accounts are being impersonated on Twitter and Facebook. The scam pages directly contact individuals, asking for investment in their project, or to buy discounted Bitcoin or Ethereum.

scam bitcoin twitter accounts

The addresses provided are, of course, the scammers own. Note the double underscore in the above images? Both of these accounts are now suspended.

Is Cryptocurrency Bad?

No. Far from it.

But any burgeoning technology will attract unscrupulous individuals. Especially one that involves money, high returns, and an amount of anonymity for scammers.

The key to staying safe in cryptocurrency is research. There are always unfortunate individuals that take the plunge, and will fall victim to fraud. Things that seem too good to be true probably are. Some cryptocurrency day traders do make vast amounts of money — but they know what they’re doing. And many of them have trading, buying, and selling Bitcoin and other altcoins since the very early days of cryptocurrency.

Remember, start small, and only invest what you can afford to lose What You Need to Know Before Investing in Cryptocurrencies What You Need to Know Before Investing in Cryptocurrencies Read More .

Have you encountered any cryptocurrency scams? Did you spot it straight away? Where was the scam, and what was it? Let us know your experiences below!

Image Credit: Krivosheevv/Depositphotos

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  1. Swaha
    November 30, 2017 at 9:11 pm

    Where did my extensive comment go?

  2. Swaha
    November 30, 2017 at 9:08 pm

    Palm Beach Confidential should be out there as an "avoid". For $2500, they theoretically sell you a crypto guru for a year. While they have videos on setting up wallets that are helpful (i.e. if you paid $50 for access to these, you'd probably consider it worth it). But for the rest, you get a once a month recommendation, long holds on the phone (and no help when you finally get a person - they are obviously paid not to know anything); no response whatsoever to customer support emails. Worse, they recommended Gemini as a "getting in" platform (to buy Ether AND Bitcoin), and over 10 days, it's been a total fiasco. Gemini is responsible for considerable financial losses, and are now holding coin purchased with a bank wire and won't let me withdraw it. (They said I tried to access my account from a "different device" yesterday, which I did not, and that I had to click on a confirmation link in an email that they DID NOT SEND ME - repeated this process 5 times, and still no help or recourse. Earlier they held on to wired (not ACH) funds for 4 days and did not let me withdraw them (you pay for the bank wire for quick access, but not at Gemini!). I suspect they make lots of money on yours while they don't let you have access to it, but who knows? They (Gemini) may just be overwhelmed rather than crooks, but in any case, plan on long delays and lots of missed opportunities in the market if you use them. And Coinbase couldn't even verify a bank acct after a 2 1/2 day wait, plus they charge absurd commissions for buying coin. So you pay PBC a LOAD of money to have them recommend utterly incompetent service providers. Plus what THEY provide is available from other outlets for maybe 2% of what they charge, so save your money and spread the word. Big egos, lots of hype, a pretty stale portfolio, bad platform recommendations (though so far the actual trading platforms - Binance and Bittrex - have been OK, though Bittrex charges you a fortune to transfer your assets out of the exchange); and no help at all if you find yourself in a bind with one of their recommended agents. Everyone says "Only invest what you can afford to lose", but you should AT LEAST be given the opportunity to lose it in the market itself, not have your money stolen before you even get there! I'm out about $3300 so far, in less than 2 weeks - less than 10% of that has anything to do with the market, but skimmers and scammers. Don't just beware - walk away from these guys!