Top 5 Common Crypto Scams to Be Aware of Before Investing in Any Digital Currency
Digital assets and cryptocurrency investments are currently the biggest threats for investors in 2022. According to the report, fraud promissory notes, social media scams, and individual retirement account frauds are reported as the top threats to the soundness of investor portfolios. Yet another report revealed that 2021 witnessed a record $14 billion in cryptocurrency being lost to scammers.
Thanks to the growth in scams and theft, crypto-related crimes inflated 79% in 2021 from the year before. The boost in scams and theft is blamed on the popularity of DeFi. It’s being said that the same decentralization that makes DeFi dynamic and presents exciting opportunities to investors also makes it more prone to theft and scams.
Fortunately, there are ways to prevent yourself from crypto scams, like signing up on a reliable cryptocurrency exchange. OKX is a reputed crypto exchange featured in the top 5 of the 100 largest crypto exchanges by the 24-hour volume list of Statista. By choosing the right crypto exchange with stringent security protocols in place, investors can reduce the chances of getting scammed to a large extent.
However, it always pays to know what kind of scams exist, so you are better equipped to spot the signs of a scam and avoid it. Here are the most common crypto scams that every investor should know before buying cryptocurrency.
Pump and Dump schemes are the most common form of a cryptocurrency scam, which means exactly what it sounds like. A pump-and-dump scheme is an individual or group effort to drive the price of an asset high so that they can sell or dump their holding for a profit.
The scheme starts with a pump, which usually means to attempt to inflate the price of an asset. Scammers try to do this by convincing people to buy in by spreading false information about obscure coins on social media and the internet. These online posts often imply that a particular asset is about to surge and investors should buy and hold.
As the momentum around the asset starts to gain pace, investors cash in and drive the price up. That is when the scammers cash out on their holdings and make a quick fortune. Spotting a pump-and-dump scam is very easy and boils down to the credibility of the original poster.
If you come across such posts claiming that an unknown asset is about to blow up, check the profile of the person who posted about it. Next to none posting history and a track record of baseless pumping is a dead giveaway.
Another straightforward but effective scam is market manipulation. It involves artificially influencing or interfering with the price of digital currency. It is done to manipulate the market in the scammer’s favor and make quick returns. It’s a broad concept encompassing several illicit trading activities.
Some of these activities include spoofing buy or sell orders to drive prices higher, front running where scammers use inside knowledge to make trades, and churning that involves excessive trading to earn additional commission. Considering that cryptocurrency is still relatively new and unregulated, it’s more prone to market manipulation.
One of the best ways to avoid market manipulation scams is to HODL, which means buying and holding cryptocurrency. Since market manipulation tactics affect only short-term trading, it’s best to adopt a long-term outlook.
Hacking and Crypto Theft
Cryptocurrency might be based on Blockchain technology, which is regarded as the most secure, but it’s still susceptible to conventional scams like hacking and theft. You might already know that digital currencies are stored in a crypto wallet, which can be digital or a physical device. These wallets have access keys, both public and private. The former can be used to deposit, and the latter is the investor’s password to the stored digital asset.
These work much like traditional online banking, and just like you wouldn’t share your banking credentials with a stranger, the private keys to a crypto wallet should be kept safe as well. Scammers are often after the private keys through phishing emails, scam calls, and other such ways. Always remember that no credible exchange or financial institution will ask for credentials.
A rug pull is a classic scam involving raising funds for a project and then running away with the money. Usually, scammers list a new token on the decentralized exchange and pair it with a legitimate cryptocurrency to make it sound legit and boost interest. Once they have raised enough money from investors, the developers scratch the project and vanish.
These scams target new investors who feel that they are getting early-bird access to up-and-coming cryptocurrencies. However, in reality, they are scammed out of their hard-earned money. It’s always advised to do due diligence when considering new cryptos and practice caution.
ICO or Initial Coin Offering is to crypto what IPO or Initial Public Offering is to stock. It’s through an ICO that developers raise money for development. Investors get newly minted coins from the developers in exchange for the money pledged.
However, there’s one difference between ICO and IPO. The latter is often listed by well-established businesses, while anyone can list the former. The ICO could either be from legit up-and-coming crypto or a fledgling startup with no trading history. Just like rug pull, ICO scams collect the initial fund money before scratching the project. The best way to spot an ICO scam is to check if the company is offering a whitepaper; if not, it’s probably a scam.
You’re now armed with the knowledge of the most common crypto scams and can take proactive measures to reduce risks. The proactive measures include using reputable crypto exchanges and doing due diligence before making any investment.