What is a scam in cryptocurrency. How to protect yourself from Crypto Scams?



While many people believe that they can easily spot a scammer, the statistics for the industry are still quite saddening. The FTC reported that US citizens lost over $8 billion to crypto-related scams proliferating on social media platforms. While many smart investors are using a crypto trading bot or a staking strategy to earn money, those who are chasing easy money fall victim to bad actors.

How to spot a Bitcoin scammer

One of the issues with this particular question is that there are many types of questionable and illegal activities that commonly take place in the crypto industry. Discerning which is a scam and which is just a bad investment is quite challenging especially when lines are so blurred.

The decentralization of the cryptocurrency industry and its anonymity made the initial crowd of early adopters jumping with excitement. The fallout of the 2008 financial crisis certainly affected the way many people perceived the traditional financial system. They wanted change. Bitcoin was a very good solution:

  • The coin can be effortlessly transferred across national borders without any limitations;
  • Users enjoy total anonymity and do not have to put their personal information on the line;
  • The limited supply of the coin made it naturally resistant to inflationary mechanisms;
  • The blockchain ledger is something that anyone can easily verify and monitor;
  • The whole system exists outside of any centralized supervision.

The latter is the biggest selling point and the most apparent disadvantage of the crypto industry in general. While not having any governmental oversight can be good for some forms of business and caters as a phenomenon to libertarians, laymen who want to get into crypto often fall victim to scammers and cannot even retrieve lost funds.

Another important issue to mention is that we need as many people as possible to adopt various cryptocurrencies if we want our BTCs to appreciate over time. Without the general population using it, prices on crypto tokens will quickly start falling once the novelty is gone. Hence, we need to focus on identifying and teaching others to avoid Bitcoin investment scams.

The difference between a scam and a bad project

The crypto industry is quite young and still has many issues that it needs to figure out. Many startups that operate in the decentralized finance area are simply business ideas that still need to prove that they can exist and provide actual value to users. Unfortunately, just like in any other industry, the vast majority of startups fail to deliver even minimal viable product let alone something worth using.

People who invested in such projects lose money and believe that they were scammed. However, nothing can be further from the truth. One of the biggest mottos adopted by the crypto community is DYOR or “do your own research”. It means that people who want to put their money on the line should personally explore potential risks associated with investing in something untested.

On the other hand, we also have projects that make huge technological blunders. It is possible for many developers working in the DeFi ecosystem to make critical errors while creating smart contracts and cause millions in damages.

In essence, we have several scenarios that all look like scams or are scams:

  • Irresponsible or lackluster development. Technology is a huge part of any decentralized finance project. When people creating code make mistakes and create vulnerabilities, they don’t do it because they are trying to invite people into crypto currency scams. They simply skip quality assurance processes and build a bad product.
  • Inherently flawed business models. On paper, every single DeFi platform works excellently. We also have fantastical predictions about the future of Bitcoin. However, we have to address the fact that many startups don’t make sense. When it comes to Bitcoin itself, the network is still way too slow to substitute for something like VISA and we don’t have any good solutions proposed to increase the throughput.
  • Bitcoin mining scams. These projects are still going strong since many people do not understand how mining works in general. Some crypto mining scams continue promoting Ethereum mining which is not possible anymore with the network being a PoS blockchain platform since the fall of 2022.
  • Fake cryptocurrencies or pump-and-dump schemes. Many social media influencers and smart marketers simply create new platforms and promise their users that the token they are issuing will go to the moon. In some cases, the product may not be a scam, but people promoting it do it with malicious intents and force people to lose money.
  • Typical social media scams related to investments in general. These scammers aim at people who do not have any exposure to the crypto industry. One of the most common personal finance management advice is to start investing as early as possible. With the hype surrounding Bitcoin and other coins, people perceive cryptocurrencies as good investment opportunities and often believe scammers who offer them a way to buy coins.

Now, you know different types of cryptocurrency investment scams. However, we still want to talk in depth about them and explain why people believe scammers.

Cryptocurrency cloud mining scams

People who have some knowledge about the cryptocurrency industry know that you need to mine coins using your PC or other computational devices. Unfortunately, for many people, that’s the full extent of their exposure to the world of Bitcoin which is the last big coin that still relies on mining for block creation.

Ethereum decided to move away from mining altogether and reduce its carbon footprint in the process leaving thousands of ASICs (powerful computational devices with multiple GPUs) without any way to continue monetizing their hardware. In general, people believe that the switch to the proof-of-stake system was a good idea.

However, the many people are not aware that you don’t need to mine ETH. You can still mine ETH classic but it is not even close to being as recognizable as the main blockchain network. How to spot a Bitcoin scammer?

Usually, a scammer follows a very simple process:

  1. They look for people who are interested in crypto. Messaging bots are used to send provoking questions to potential victims.
  2. Once a victim is identified, scammers tell them about a new investment opportunity. Victims are told that they can join a cloud mining community and earn Bitcoin or Ethereum.
  3. A link to a fake website is provided to a victim. The website appears normal and may feature professionally made promotional materials. Victims believe what they see and make investments.

Just like banking scams and other forms of scams that focus on investing, these particular cases often go on for years. Websites have fake architectures and show registered users dynamically changing balances and encourage them to continue investing. Some websites even prohibit withdrawals for certain periods to further increase chances to extract more money from victims.

An experienced crypto user will quickly figure out that something suspicious is going on with a cloud mining website that does not have any connections to the real blockchain network or claims to mine currencies that no longer exit. However, people without any deep knowledge about crypto may believe a well-spoken scammer.

Crypto influencers scams

What is a crypto scammer? While the vast majority of them are criminals from third-world countries, many are actual influencers and popular social media celebrities. They use their platform to pitch a new idea or a cryptocurrency to their users. Since many influencers have large audiences of easily persuaded teenagers and young adults, they can extract money from their audience. Often, without any repercussions.

One of the most high-profile scams that somehow keeps going is the CryptoZoo NFT collection by Logan Paul.

This scam works like this:

  1. A famous person posts about their new project or investment on their main social media page. Very often, it happens on Instagram and Twitter.
  2. Victims are persuaded to support the new project of their favorite celebrity or buy coins or NFTs they are promoting.
  3. After the initial wave or purchases, the price is pumped by whales and scammers. The hype convinces more people to buy in.
  4. Scammers and influencers sell their assets at an artificially increased price and leave victims with now worthless digital assets.

This is a tactic commonly known as a pump-and-dump scheme, but the existence of easily minted NFTs and tokens alongside the proliferation of social media platforms make it a very effective way of extracting money from people who can be easily influenced by others.

How to identify a fake cryptocurrency

Due to the amount of scam stories in the industry, many people even wonder “Is Bitcoin real of fake?” The short answer to it is that it is real and offers unique financial utility to people who are interested in the future of the global economy and the international monetary system. However, it is more complex than just using fiat money.

On paper, Bitcoin is much easier to understand than the overly complicated modern monetary system with multiple powerful organizations taking control over finances and the distribution of the economic power. There is a reason why many people give up their rights to control money. The vast majority of people do not understand how money works.

The same is true for Bitcoin. It is a new technology. Bitcoin, Ethereum, Cardano, and many other new blockchain networks offer transparency, responsibility, financial freedom, anonymity, and more perks to their users. The issue is that a layman does not want all of that and wants to focus on spending their money instead of applying it earn more of it.

The number of business owners is still staggeringly low even in advanced economies. The rate of financial literacy is also very low across all nations. This system produces people who struggle to grasp some basic economic principles and often do not bother to actually conduct any meaningful research before investing in something. They simply believe experts.

How to tell if a Bitcoin is real? For any experienced cryptocurrency user, this question is not something puzzling. We can easily verify the integrity of a Bitcoin wallet by looking it up on the blockchain. We can track history of each fraction of a coin to the moment it was first mined. Unfortunately, many people do not try to learn how to use this new technology.

How to spot crypto scams? Here are some red flags:

  • They use a social media account without any real history of interactions with the community. Weird repetitive posts, infrequent publications, small friend lists, and other things that indicate that a profile is fake must immediately raise your eyebrows.
  • They use overly complicated language that looks like a scientific paper or talk like they are trying explain concepts to a five-year-old. Normal people talk without falling into either category. You don’t need a degree to understand Bitcoin. You shouldn’t be addressed like a toddler to grasp investment concepts.
  • They send you links to websites that have strange names, spelling errors in URLs, and low quality web design. If you notice that you need to enter credentials to enter the website or it asks for your personal information, immediately leave and double-check the link.
  • You receive messages out of blue. Since scammers cannot waste time on people who will see through their lies, they have to use automation and send thousands of random messages to thousands of people. Usually, there is no groundwork at all.

What should you do if you were scammed?

Even the wisest of us can believe a well-crafted story told by a charismatic character. If none of Bitcoin fraud detection methods worked for you and you lost money to a scam, you need to stay calm. Below is a simple step-by-step guide of what you can do.

  • Do not panic. Immediately stop talking to the scammer. Even if you think that you can extract vital information from them, once they know that you are off the hook, they will simply ignore you or try to extract more money.
  • Report crypto scams to the Cryptocurrency Compliance Cooperative. This project hosted by Cybera.io collects information about scams and tries to educate other investors about potential dangers that were exposed by others. In some rare cases, they can even attempt to recover your funds.
  • How to report crypto scams to authorities? If you live in the US, you can go to the FTC website and report a crypto scam. It is possible that some of your fiat funds can be restored thanks to actions from the authority. However, don’t count on it.
  • Take your story to Reddit and other social media. Raise awareness and look for people who can help you to further investigate your case. Be careful, don’t believe everyone. Talk to people who have a good reputation in the community.
  • Visit a therapist. Some people lose their livelihoods to scammers which can be a very traumatizing experience. It is better to deal with grief and the fallout of losing money after consulting with a mental health professional.

What you should never do after being scammed:

  • Do not try to get back at scammers by continuing messaging them or trying to get them to return your money. Often, social media accounts you interacted with are shut down immediately after the extraction of money.
  • Never pay companies that promise that they will get your money back for you. These agencies are just another form of scam that preys on desperate people who hope to restore their financial situation.
  • Don’t try to report a Bitcoin scammer to the Police and other governmental bodies. Many countries do not have legal systems equipped to tackle issues related to cryptocurrencies. Only very specific agencies can do something about them. In the US, it is FTC.
  • Thinking too much about the consequences of the scam. What’s done is done. You cannot change the past. The best course of action is to not think about the scam at all and focus on your mental health. Money can be earned. Health is much harder to restore.

How to avoid cryptocurrency scams?

Despite the abundance of cryptocurrency scams, you can still use a variety of safe investment routes to never even meet a scammer.

Here are some investment ideas that are safe:

  • Trading on centralized exchanges that have good reputation or trading on DEX platforms. The former can be somewhat risky. We all know what happened to FTX clients. However, other centralized exchanges are reliable and provide a high level of service and security to their users.
  • Using automation systems like copy trading crypto or DCA buying. Bots are used by thousands of retail traders. It is one of the best investment options for newcomers who do not know much about the crypto industry and its intricacies.
  • Use DeFi platforms that avoided being included in the Bitcoin scammer list of 2023. Projects like Uniswap, MakerDAO, PancakeSwap, and many others are legitimate investment platforms that offer good returns and favorable terms to all their clients.
  • Staking ETH tokens. If you don’t want to deal with scam coins, purchasing and working with Ethereum can be the best course of action. Staking is expensive, but it offers consistent returns and a safe storage of highly valuable tokens that appreciate over time.

You can build a balanced portfolio using these investment methods. While it is still possible to encounter an occasional crypto trading scam, you can reduce chances of stumbling upon one by working only with time-tested service providers and financial platforms.

Here is a list of companies that have good reputation and strong track records in their respective fields:

  • Binance is the biggest centralized exchange in the world that has been scrutinized by multiple auditors and organizations. If you are interested in trading cryptocurrencies and various digital financial instruments, this platform is exactly what you need. Binance has been around for nearly a decade and offers a wide range of financial services including staking and NFT trading.
  • WunderTrading is an automation vendor. Many retail traders who become successful by trading crypto use various bots and automated trading systems to outperform the market. If you are interested in things like DCA buying, GRID bots, arbitrage, social trading, and custom ATS, you should have this company on your radars.
  • Uniswap is a decentralized exchange that allows its users to effortlessly trade their ERC-20 tokens for other digital assets. If you don’t like the idea of custodial exchanges like Binance, you can completely ignore them by trading on a decentralized platform that offers higher security and safer trading options to crypto enthusiasts.
  • Pancake Swap is a DeFi exchange service catering to users of Binance and its native BEP-20 token format. With several million active daily users worldwide, Binance generates a lot of hype and often hosts new projects that issue BEP-20 tokens which you can easily swap for other digital goods.
  • Foundry Digital is a Bitcoin mining pool that offers its users favorable terms. The company is the biggest mining pool by hashrate (over 111 EH/s). You can join the pool by purchasing a share or offering your hardware if it meets the specs. If you are interested in mining Bitcoin, this is a good place to start doing it if you want to work with a reliable company that has a crystal clear track record.

In conclusion

Bitcoin scam artists are not a rare breed. You may encounter one tomorrow after opening your DM on Instagram. You should try avoiding these scammers by all costs. Using common sense practices like never giving away your personal information and credentials is a good start.

Remember that you won’t be able to get back any funds that you send via the blockchain. Report scammers and raise awareness by sharing your story with others. Focus on staying safe and calm after being scammed. Use only reliable companies and platforms to invest in the crypto industry.