The recent volatility of cryptocurrencies has resulted in an influx of investors trying to profit from the new asset. Non-fungible tokens (NFTs) and decentralized finance (DeFi), for example, are cryptocurrency-based assets and platforms that may add to the attractiveness of potential new ways to make money.
However, as cryptocurrencies become more mainstream, scams are on the rise. Cryptocurrency scams come in a variety of shapes and sizes, which is why so many individuals and businesses fall for them, especially those with limited knowledge.
Rug pulls
They’re a lucrative scam in which a developer promotes a new project to investors, generally a new token, and then vanishes with the investments. It’s possible that the scam’s popularity stems from its simplicity. Creating new tokens on a blockchain and getting them listed on decentralized exchanges (DEXes), or peer-to-peer marketplaces for crypto dealers, is a relatively simple process.
Code audits are critical from a security standpoint since they check any new code for flaws, bugs, and the organization’s quality requirements. Malicious developers can more easily introduce bugs or flaws in smart contracts’ programming, providing security gaps to steal user funds and commit exit scams.
How to avoid
Rug pulls are frequently conducted by unknown founders promising quick, easy profits in exchange for blue-chip cryptocurrencies, but not always. Although the blockchain sector values anonymity, checking to see if the orchestrator has a track record as a good actor will help you avoid potential hazards. Keep an eye out for their proof of history.
Do your own research. Never take a project seriously just because it appears to be official. It’s all about reputation, and only believe what you can verify. Always read social media reviews. For NFTs, vet new projects and research NFT teams on social media.
Rug pull scams are popular when a new crypto project has little liquidity, which means it’s difficult to convert the coin or asset into cash. Because of the hazards of unstable prices and price manipulation, seasoned crypto traders should avoid investing in ventures with minimal liquidity.
Pump-and-dump scams
Pump-and-dump schemes work when an individual or group of investors buys a large number of coins at a low price. Following the purchase, that person or group will begin spreading the news about the asset in question, the majority of which will be false. This draws in more investors, causing the asset’s listed value to rise or pump.
When the asset’s price rises to a level that the scam’s creator can profit from, they sell their position to new investors, but because the originator owns the majority of the asset’s liquidity, the asset’s price (and worth) begins to fall.
How to avoid
If you notice a flurry of headlines, articles, or posts on the internet regarding a new cryptocurrency’s rapid adoption, don’t be the first to jump in. Instead, seek up the coin in question and read the white paper that accompanies it to learn more about its creators and their motivations for minting it. If there isn’t a white paper, this could be your first indication that the coin is becoming a new pump-and-dump scheme.
If a coin’s development has stopped despite the fact that it has been available for a longer period of time, this should alert investors to a possible scam. When an asset performs well, but its creators and/or lead investors refuse to publicize it, the legitimacy should be questioned.
Initial Coin Offering (ICO) scams
An ICO is a way of raising funds used by organizations wanting to fund the development of a new coin. The investor receives a new issuance of coins in exchange for pledging funds. Investors are frequently put at risk due to a lack of regulation in the crypto world. ICOs could be brand-new businesses with no track record, making it impossible to tell the difference between a legitimate offering and a scam. ICO scams, like rug-pulls, take money from early investors only to quit the project soon after.
How to avoid
Read the whitepaper for the project to obtain a better understanding of everything. Any blockchain-related project’s whitepaper lays out the project’s background, goals, strategy, concerns, financial models, SWOT analysis, and implementation timeframe; hence, organizations that don’t produce whitepapers should be avoided at all costs.
Individual members of a project’s team should be well researched. This is critical since the most significant success factor for any ICO is the development and administrative team. Examine their profiles on social media sites like LinkedIn and other sites.
Phishing scams
Phishing scams are much just like faked emails and SMS texts from an unknown number. They’re a depressingly common occurrence. A crypto wallet, which can be a digital or physical device, is required to exchange cryptocurrency. The keys in these wallets are both public and private. Many fake emails/SMS contain links that allow fraudsters to access your wallet and password once you click them. Anyone with access to that password has complete control over the funds in the account, allowing them to empty your wallet and steal all of your investments.
How to avoid
Keep your private keys in a secure location, just as you wouldn’t disclose your credit card number to a stranger. Do not click on anything until you have double-checked its legitimacy.
Fake offers and giveaways
Fake giveaways and offers can be held on fraudulent social media accounts and servers, tricking people into assuming they’ve won a major prize or have a significant offer. Users will get messages from a fake account, usually via Twitter or email, informing them that they have won a prize. After that, the user will be directed to a fake website where they will be prompted to connect their crypto wallet and enter their seed phrase. This phrase, or password, will allow them to gain rapid access to your wallet, allowing them to drain your funds and leave you bankrupt.
How to avoid
Use strong passwords and activate two-factor authentication to make your accounts more secure. Don’t click on any odd social networking links that are emailed to you. Check to see if the URL matches the company’s official website. For NFTs, look for a verification tick on the seller’s Discord or social media page before bidding.
Summary
There is currently a significant gap between crypto users and security. Scammers are considerably more knowledgeable about the technology behind cryptocurrencies and the exchanges where they are traded than most crypto users. The best approach to avoid these crypto frauds is to conduct depth research and not to be impulsive.
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