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Scams are so ubiquitous that we’ve all probably encountered one, either a phishing email or faulty investment advice. The lack of regulation in crypto, especially considering that crypto’s not bound to any jurisdiction, makes scams abound in these markets. This doesn’t mean that there aren’t scams in traditional finance; cryptocurrencies are just more prone to it.
Most crypto scams are versions of traditional schemes adapted to a new environment. Pump-and-dump scams already happened in the 1990s stock markets. Now, even the Argentinian president fell for one and drew many of his supporters to it as well.
Shortly after he promoted a new crypto project that rose over 500,000,000%, it turned out the coin was allegedly a rug-pull scam. Dozens of investors put their money into it and, in a matter of days, lost their investment when the coin dropped.
Considering that even country leaders fall for these types of scams, it’s worth taking a look at them. This way, we can avoid them the next time we see one.
What Is a Pump-and-Dump Scheme?
Pump-and-dump schemes work, well, by pumping the price to attract investors and then dumping it. The mechanics, of course, are more elaborate than that. In general, scammers create a fake token with no real purpose and start advertising its features to unsuspecting investors.
Just like in The Wolf of Wall Street, these scammers try to generate a false demand for the coin. They lure investors in so the price grows rapidly. After the price rises, they sell their positions, making huge gains and making the price fall. Meanwhile, the victims lose most of their investments without realizing any profit.
5 Major Warning Signs of Fake Crypto Exchanges
Let’s take a look at some of the red flags that can let us know that a platform is a scam. In general terms, fake exchanges have a lack of transparency about their team and operations. They usually also guarantee great rewards without risks, and there’s usually little to no customer support. A lack of genuine reviews is also an evident sign of a fake project. You can often tell when a user review looks fake, in the way it’s written or the commenter’s profile. All these factors must be taken into account when encountering a new platform, especially if you’re approached by one of its promoters.
1. Lack of Regulation & Transparency
These two factors go together for a reason. In most jurisdictions, cryptocurrencies are regulated one way or another. Some are more permissive than others, but major economies like the US have regulations for crypto exchanges. If you research the most popular platforms, they indicate where they’re located and whether they’re licensed or not.
That’s where transparency comes in. If an exchange or project doesn’t have any public information about its founders, headquarters, or law compliance, there’s a chance it’s a scam. It’s better to stay away from unlicensed or unverified sites.
2. Unrealistic Profit Guarantees
The first thing we should know when planning investments is that no legitimate project will guarantee a profit without risk. It’s even more suspicious if the promised profit is unrealistically good. The phrase too good to be true applies here.
Pump-and-dump promoters always offer large gains in a short time, doubling or tripling the investments without any risk. It also happens in pyramidal schemes, where you’re required to invite new investors to multiply your profit.
In the case of fake exchanges, they can offer staking plans with high interest yields. If the potential profit is too high, they’re likely trying to attract investors to steal their money.
3. Withdrawal Restrictions & Fund Freezing
Once they receive a large amount of investments from unsuspecting investors, they’ll start to freeze funds or restrict withdrawals. They could either claim there are technical issues preventing the correct operation of the platform or apply additional fees or requirements.
In some cases, they could outright close operations and shut down the platform. To avoid this, it’s important to go back to the first point: check if the platform’s registered and licensed.
4. Security Risks & Fake Websites
The lack of licenses goes beyond the registered company. In some cases, fake exchanges also have fake or harmful websites. These sites lack appropriate SSL certificates that indicate to users that the website is secure. If this certificate is fake or missing, the site could potentially steal your data, including your financial information.
To verify if a certificate is real, you must check the URL of the site and click on the “Site information” section. Some web browsers will notify you if a site lacks a certificate or displays a fake one.
5. No Customer Support & Fake Reviews
Poor customer service and fake user reviews are clear signs of a scam. In the first case, these projects don’t allocate resources to customer support and focus on advertising to attract users. After all, there’s not a legitimate service to begin with. In the second, since there isn’t any service, there are no real customers who leave positive reviews. These are forged as a publicity strategy.
How to Verify if a Crypto Exchange Is Legitimate
Next time you encounter a new exchange, use these signs to verify its legitimacy. For example, let’s say you want to buy Ethereum with PayPal, and the platforms you use don’t support this payment method. While you look for another option, check their regulatory status, website details, and customer reviews. At the first sign of a scam, discard that option and move to another alternative.
Will Crypto Ever Be Scam-Free?
The crypto ecosystem is constantly evolving, and scams are a major concern. Besides the advances in proper regulations, there are efforts to develop tools to detect fraud. But scams are older than crypto, and they’re still present in traditional finance, so an end to crypto frauds is not a realistic prediction for 2025.
The best tool to reduce scams is to educate traders about the major telling signs and make each user verify and report known scams. Recognizing and denouncing fraud is the key to building a safer ecosystem.
David Prior
David Prior is the editor of Today News, responsible for the overall editorial strategy. He is an NCTJ-qualified journalist with over 20 years’ experience, and is also editor of the award-winning hyperlocal news title Altrincham Today. His LinkedIn profile is here.
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