In September 2018, New Zealand Police warned against cryptocurrency scams, after a Canterbury investor was scammed of NZ$320,000 in life savings. And in Australia in July 2018, the Australian Competition and Consumer Commission (ACCC) released a warning that cryptocurrency scams had become the second most common type of investment scam offer pushed on victims. ACCC Deputy Chair Delia Rickard had the following to say in a media release:
The rise in popularity in cryptocurrency trading has not been missed by scammers who are latching onto this new trend to con people. These are similar to any other investment scam: the scammer will claim to have inside knowledge about price movements they will use to make you a fortune. If you invest, your money will quickly disappear.”
Checklist: How to detect a crypto scam
Unsure whether a particular crypto website is a scam or not? Use this checklist to help sort legitimate providers from those platforms you’re better off avoiding altogether.
Please note that this checklist is far from foolproof, as it’s possible for a website to pass several of the above tests with flying colours and still be a scam. The important thing to remember is to do your due diligence before providing any personal or financial information to any website or app.
The first scam on the list is one that you may well be familiar with already, as it’s also been widely used to target customers from New Zealand banks.
Known as “phishing”, this type of scam occurs when you receive an unsolicited email that looks as if it’s from your bank – or, in this case, from your crypto exchange or wallet provider. This email contains a link which will take you to a site that looks almost identical to the exchange or wallet you usually use, but is actually a scam site.
Once you enter your account details on this unofficial page, the scammers have everything they need to log in to your real account and steal your funds.
How to avoid phishing scams
Always double-check URLs to make sure you’re visiting the genuine website.
Don’t click on suspicious links that are emailed to you.
Never disclose your private key.
2. Fake exchanges and wallets
In a similar vein to phishing scams, keep an eye out for fake bitcoin exchanges. They might walk and talk like a reputable exchange, but they’re merely a front to separate consumers from their hard-earned cash.
Some will entice users with promotional offers that sound too good to be true. Others pressure users into creating an account and depositing funds, perhaps even offering “bonuses” to those who deposit larger amounts. But once they have your money these platforms might charge ridiculously high fees, make it very difficult to withdraw funds or simply steal your deposit altogether.
Other scammers have turned their attention to creating quite sophisticated fake wallet apps which, once downloaded to a user’s smartphone, can be used to steal critical account details. These apps have even made it into official, legitimate app stores like Google Play, so it pays to do your research before downloading anything to your phone.
Thoroughly research any exchange or wallet before creating an account – who is the team behind the exchange or wallet? Where is the company registered? Are there reliable reviews from other users confirming its legitimacy?
Don’t let yourself be pressured into depositing funds or providing any personal information.
Two of the apps, “Poloniex” and “Poloniex Exchange,” were downloaded more than 5,500 times before they were removed from the store. These apps asked Poloniex users to enter their account credentials, thereby giving fraudsters a way to perform transactions on behalf of users and even lock victims out of their own accounts.
3. Old-school scams
Cryptos may be based on new technology, but there are still plenty of scammers using old tricks to con unwitting consumers.
The classic example of this is an unsolicited phone call or email from someone claiming to be with the Inland Revenue Department. This fictional tax man will try to convince you that you owe the IRD money and you’ll be facing legal action if you don’t transfer them a certain amount of bitcoin as soon as possible.
The tried-and-tested “Nigerian prince” scam has also migrated into the world of cryptocurrency. So if you’re ever contacted out of the blue by someone overseas promising you a share in a large sum of digital currency if you help them transfer funds out of their own country, use your common sense and recognise it for the scam it is.
How to avoid old-school scams
Use your common sense.
Don’t trust unsolicited emails or phone calls.
4. Fraudulent ICOs
Seduced by the astronomical price rises bitcoin has experienced since its inception, many everyday consumers venture into the world of cryptocurrency looking for the next big thing. After all, if “the next bitcoin” ever actually arrives, getting in at the ground floor could see early-adopters earn a fortune.
And if you want to get in on the ground floor, the easiest option for the average person is to buy coins or tokens in an ICO. There’s a huge appetite for new digital currencies – in the first half of 2018 alone, ICOs raised a total of US$11.69 billion – and with many new buyers having limited knowledge of how the crypto industry works, it’s the perfect breeding ground for scammers.
Pincoin and iFan
In April 2018, the Pincoin and iFan ICOs, run by the same Vietnam-based company, are believed to have cheated more than 30,000 investors out of a combined total of US$660 million.
iFan was meant to be a social media platform for celebrities and Pincoin promised 40% monthly returns to investors. Both were later shown to be multi-level marketing (MLM) scams.
This has led to the rise of fake ICOs which, with some slick marketing and a little bit of hype, can convince people to buy a cryptocurrency that doesn’t actually exist. For example, one report found that 78% of ICOs in 2017 were scams, while a separate report put that figure at above 80%.
Finally, if you’re dreaming of getting rich quick from a crypto ICO, be aware that for every ICO success story there are many, many more failures, even if the project isn’t a scam.
How to avoid fraudulent ICOs
Thoroughly research any ICO before buying in. Look at the team behind the project, its whitepaper, the purpose of the currency, the tech behind it, and the specifics of the token sale.
5. Ponzi or pyramid schemes
A Ponzi scheme is a simple but alarmingly effective scam which lures in new investors with the promise of unusually high returns. Here’s how it works: a promoter convinces people to invest in their scheme. These initial investors receive what they believe to be returns, but what are actually payouts from the money deposited by newer investors. Now satisfied that the scheme is legit, those investors who have received payouts pump more of their money into the scheme and encourage others to do the same.
Sooner or later, the scheme collapses when the promoter runs off with the money or it becomes too difficult to lure new investors. These types of pyramid schemes are nothing new and can be easy to spot, but that hasn’t stopped some crypto buyers being scammed in a handful of high-profile incidents.
In January 2018, bitcoin investment lending platform Bitconnect shut down its lending and exchange services amid allegations it was a Ponzi scheme. Launched in early 2017 with promises of returns of up to 40% per month, the platform was quick to attract criticism from the wider crypto community and soon drew the attention of regulators.
How to avoid Ponzi/pyramid schemes
Look out for cryptocurrency projects that encourage you to recruit new investors to enjoy bigger profits.
Never trust a scheme that promises returns that sound too good to be true.
Malware has long been a weapon in the arsenal of online scammers. But thanks to the complicated and highly technical nature of cryptocurrencies, much of which isn’t well understood by most people, malware now poses an even bigger threat.
Update your antivirus software regularly to protect yourself against malware.
Never download and install programs unless you’re 100% sure they’re from a reputable, legitimate provider.
Don’t open suspicious attachments.
7. Mining scams
Cloud mining allows you to mine cryptocurrencies like bitcoin without having to purchase the expensive hardware required to do so. There are several legitimate cloud mining services that let users rent server space to mine for coins at a set rate.
However, there are also plenty of cloud mining scams out there. Some promise astronomical (and implausible) returns and fail to disclose a range of hidden fees, while others are fronts for Ponzi scams and are simply designed to part you from your money.
Thoroughly research any cloud mining operation before signing up. Does it use https? Does it have a public mining address? How long has it been in business? Can you find any legitimate reviews from other users? Does the site have a registered domain name? Can the company provide proof of equipment?
Be extremely wary of companies that “guarantee” profit.
8. Pumps and dumps
Cryptocurrencies are often dismissed as a speculator’s dream come true that are ripe for a little bit of market manipulation, which has led to the rise of what are known as “pump and dump” schemes. This is where large groups of buyers target an altcoin with a small market cap, buy that coin en masse at a particular time to drive its price up (which attracts a whole lot of new buyers fueled by FOMO – a fear of missing out), and then sell to take advantage of the significant price rise.
This sort of thing is illegal in traditional securities markets, but is a common occurrence in the largely unregulated world of cryptocurrencies. In fact, there are several online groups and forums dedicated to this exact practice, so it’s important that you stay savvy and know how to steer clear of these scams.
How to avoid pump and dump scams
Be wary of low market cap cryptos that normally have a low trading volume but that suddenly experience a sharp price rise.
Keep an eye out for “fake news” on social media that hypes particular coins.
Carefully research the credentials of any cryptocurrency before buying.
In January 2018, a fake Twitter account purporting to belong to cybersecurity guru and crypto enthusiast John McAfee tweeted support for the GVT cryptocurrency, naming it “coin of the day”.
For some in the crypto community, this was good enough reason to buy some GVT, and just four minutes after the tweet was posted the price of GVT had jumped from $30 to $45 and trading volume had doubled. Fifteen minutes later, the price was hovering around the $30 mark once again, after early buyers had “dumped” and run.
There are plenty of other simple steps you can take to protect yourself against fraud, such as:
If you’re using a crypto wallet or exchange that supports 2-factor authentication, enable this feature before depositing any funds. It’s simple to set up and provides an extra layer of account security.
A “hot” wallet is one that’s connected to the Internet, while a “cold” wallet is one that’s held offline. Storing your crypto offline in a physical cold wallet is usually considered to be a much safer option than using an online wallet.
Avoid new and untested platforms. Let the early-adopters take the risks and make sure you don’t get involved with an exchange or wallet until you can be sure it’s legitimate.
Make sure your PC is protected against malware by keeping your antivirus software up to date.
Get into the habit of scanning the URL bar to look for the https and “secure” lock symbol, and remember to double-check the URL to make sure you’re visiting the correct site.
You need your private key to access your crypto holdings, so make sure you never disclose any of your private keys to a third party.
If you’re targeted by cryptocurrency scammers or you’ve fallen victim to a scam, report it to the FMA. Doing so will help other innocent crypto users stay safe and avoid fraud.
Disclaimer: Cryptocurrencies are speculative, complex and involve significant risks – they are highly
volatile and sensitive to secondary activity. Performance is unpredictable and past performance is no guarantee of
future performance. Consider your own circumstances, and obtain your own advice, before relying on this information.
You should also verify the nature of any product or service (including its legal status and relevant regulatory
requirements) and consult the relevant Regulators' websites before making any decision. Finder, or the author, may
have holdings in the cryptocurrencies discussed.
Disclosure: At the time of writing the author holds ADA, ICX, IOTA, POWR and XLM.
Tim Falk is a freelance writer for Finder, writing across a diverse range of topics. Over the course of his 15-year writing career, Tim has reported on everything from travel and personal finance to pets and TV soap operas. When he’s not staring at his computer, you can usually find him exploring the great outdoors.
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