Crypto Scams: How to Understand and Avoid Them Part 1
2023年2月1日
Disclaimer: This article aims to educate participants in the crypto space about potential scams. It is not a comprehensive list of all scams, but meant to be a starting place to promote safety and awareness. This document is not financial advice, and all crypto investors are advised to do their own research. It is also advised that you know your assumptions and risk tolerance before investing in any project.
What are crypto scams?
The cryptocurrency space is a little bit like the wild west - it is still very much a high risk investment. Founded with the creation of Bitcoin over a decade ago, regulators have only recently started to take note of the crypto industry. Currently, it seems efforts are focused on understanding blockchain technology and how to regulate it. In recent years, there has also been a great deal of hype around the evolution of our current money systems with the creation of Central Bank Digital Currencies (CBDCs). The industry is still in its infancy with a lot of different blockchain projects vying for a share of what most consider to be an undervalued sector. There is a lot of research and innovation, but trust in cryptocurrency, and the most stable protocols, will only be proven with time.
One major issue of the cryptocurrency space is highlighted by the lack of customer protections, or insurance, that is more readily available in traditional money systems. Concurrently, the rhetoric for many in the mainstream tends to label the cryptocurrency industry as one that is riddled with scams. Unfortunately, that criticism holds truth.
It is true that there have been many scams, and most often it is the normal everyday consumer that suffers the most. However, this does not mean that the entire industry should be labeled a scam. Scams are nothing new, and throughout history human greed has presented numerous examples where people have been defrauded of their money. With the novelty of crypto however, and the current lack of regulation, the industry is such that new and inexperienced crypto investors are often easy targets for scammers. Educating oneself and being aware of potential scams is an important step in protecting against bad actors.
In this article, we will discuss potential scams, including fake wallets, disreputable exchanges, “pump & dump” groups, fraudulent initial coin offerings (ICOs), phishing scams and pyramid/Ponzi schemes.
Common Crypto Scams
Fake Wallets
If you are new to cryptocurrency, it is important to note that your private wallet is an interface for interacting with the blockchain. Your coins are actually on the blockchain and are accessed through your private wallet interface - one for which you hold the private keys. Since wallets are the gateway to your interaction with the blockchain, it makes sense that bad actors try to create false wallets to rob you of your assets.
There are many scam wallets available for download through websites, webpage extensions, and even on the android play store. Do not pick a wallet randomly without doing research because there is a chance that it could be fraudulent. If you restore a wallet with a malicious extension or download, that software may steal your seed phrase (your private key) after it has been entered. After creation of the wallet, and once you have deposited a sizable amount of money into it, the wallet will be emptied using the copied key phrase. It is important to fully research the project you are investing in and make sure you are only using project approved wallets. One tip is to only use links to wallets from trusted sources. There are many ways to access safe information, such as a blockchain project’s official website as well as trusted community forums for the respective cryptocurrency. With Ergo, the first source one should consult is the Ergo Platform website - this site offers all of the trusted links for Ergo wallets. From there, it is recommended that interested parties also explore the Ergo Platform Twitter account and/or Reddit account.
Disclaimer: NEVER share the private keys to your wallet(s) with anyone. No one from the Ergo Foundation will ever ask you for that information, and no person should ever need you to reveal your secret seed phrases. If someone claims they need you to share your seed phrase, it is almost certain that they are trying to defraud you. Keep your private keys stored securely. It is recommended you write them down and avoid storing them on digital devices.
Links for available Ergo wallets:
Ergo Platform Team Wallets
Other Trusted Wallets
Disreputable Exchanges
New exchanges with enticing marketing are alluring and can be very tempting. They may offer incentives for you to deposit your funds with them, such as promising to match some portion of the amount you deposit. As an investor, you must be very careful with these exchanges. You may be depositing your money into a trap with no way of retrieving your funds. Always research the exchanges you are using to make sure they are widely used and trusted within the cryptocurrency community. For a list of approved Ergo exchanges, it is recommended to consult the Ergo Platform website.
Please note that when you use popular exchanges you may still be at risk of losing your funds. Even these exchanges can not be completely trusted, as was witnessed with the collapse of Terra, Celsius and the FTX disaster. Customers lost millions of dollars when these undercollateralized platforms experienced bankruns. It is important to understand that these types of exchanges are centralized entities, and when you use their platforms to hold your assets, you are blindly trusting others to keep your money safe. The industry does not yet enjoy the same consumer protections as traditional banks. In the FTX situation, Sam Bankman-Fried’s trading firm (Alameda Research) took out loans funded by the deposits from FTX customers without their knowledge. On top of that, it has since been revealed that these deposits were not collateralized with stable assets.
One of the most important things to remember in the crypto space is that if you do not own the keys to the wallet, then they are not your coins. One should try to use trusted decentralized exchanges whenever possible, which connect directly to your private wallet without requiring the use of any third party entities. Depending on the assets you want to acquire however, this is not always possible. If you need to purchase crypto with fiat you will most likely need a centralized exchange. Once you have acquired your assets via a centralized exchange, it is highly recommended that you move said assets from the exchange to your private crypto wallet.
Pump and Dump Groups
There are many “pump and dump” groups on Discord, Telegram, and IRC - which have existed for traditional markets and have now moved into the crypto sector as well. These groups can appear to be well populated with 40000 to 100000 members, and the purpose is to quickly buy into a project and sell out for a profit before it starts dumping. The people who get in early and get out quickly will make money, while those that come near the end of the pump lose. There are people who make money like this, but it is very risky and should be avoided.
Fake ICO
One of the most common types of scams in crypto is the fabrication of an ICO, whereby scammers generate marketing hype and persuade unknowing investors to buy-in. This type of scam is very tempting and works well because many of the legitimate projects in blockchain actually raise capital through ICOs. People who do not fully research new ICOs can easily fall prey to bad actors looking to capitalize on ignorance.
Phishing Scams
Phishing scams often occur through email, but it is important to note that they can take place via social media platforms - or any user interface where links can be shared. A scammer may be impersonating a trusted party and will try to get private information (such as logins or your seed phrase) for the purpose of defrauding you. They may also entice you with fake air drops, or execute a Punycode attack whereby fake URLs look legitimate. Once you have accessed the fake URL, you may be taken to a page that appears safe, but is actually a fraudulent website set up to steal a user’s sensitive data.
Ponzi/Pyramid Schemes
Cryptocurrency scams can be separated into two categories. The first type is related to the types of scams we have discussed thus far, where crypto scammers use deceptive methods to gain access to funds and steal them. The other type is a bit more insidious and can be harder to catch. These scams may seem like legitimate projects with legitimate teams, but their products are built on shaky foundations and questionable assumptions. These projects often offer returns that are too good to be true and require the constant influx of people and investors to build up value. The people who profit the most are the creators of the protocol, who start off with the most amount of coin. They spend the bulk of their budget on marketing and false promises to generate upward price action and general FOMO (fear of missing out). Then they use the new investors as exit liquidity. The protocol itself is a house of cards, and when too many people start removing funds, the liquidity dries up quickly and the pyramid collapses. What remains is a bunch of rich insiders and early investors (such as venture capitalist (VC) firms), while regular investors are left with a bag of useless cryptocurrency.
If a protocol promises regular profits that exceed the average market returns, then it’s a Ponzi. If the focus of a project is solely marketing to recruit new people without creating a product, then it’s a pyramid scheme. These two rules are a good litmus test to see if a project is legitimate.
Conclusion
Scams are in many industries, but they are especially prevalent when new technologies and/or products are involved. Most people are wise to telephone scams and many forms of internet scams, but still may fall prey to crypto scams if they do not clearly understand the fundamentals of how to safely interact with blockchain protocols. It is important to never share your wallet seed phrase with anyone and to keep it in a safe and secure place.
Participating in the crypto industry opens up many opportunities to invest and take part in this emerging and growing industry. Educating yourself and your peers on common types of scams will build resilience in your crypto community, making it a safer place for all participants.
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