Cryptocurrencies are a groundbreaking and transformative innovation, and, for some, an alternative to an old or dysfunctional financial system. It lets investors move away from traditional investment properties such as stocks and bonds. Given that the FTC reported more than $1 billion in losses due to crypto fraud in just one year, we may argue that this fast and unprepared transformation exposed investors to significant danger. The allure of big rewards offered may make investors overlook the risks involved in the cryptocurrency world.
In contrast to the traditional banking system, cryptocurrencies are currently not tightly controlled. The EU has just signed the first-of-its-kind crypto regulatory framework known as MiCA. As a result, it’s more up to the user to safeguard themselves. Keeping an eye on these points and being an informed investor are critical in order to make excellent use of our capital while achieving our targets.
The Most Common Scams
The cryptocurrency world is self-renewing and evolving day by day. Unfortunately, this feature, which revolutionized the world of finance, can also be a disadvantage in some areas. When we combine an ever-evolving atmosphere with ever-increasing popularity, we get a picture of high risk. Fraudsters who take advantage of this popularity are not lagging behind, just like blockchain protocols that renew themselves each day. Investors are tempted by a new scam every single day.
The exploitation of investor trust by persons or organizations pretending to be part of this world is one of the most prominent types of crypto fraud. The first thing to evaluate is whether the cryptocurrency exchange in which we intend to invest is a legitimate, trustworthy organization. Fake crypto applications and websites that look similar to the genuine thing are the quickest method to entice people looking for new thrills. That is why, while considering where to invest, it is critical to look beyond the storefront. It’s also a good idea to read the exchanges’ whitepapers, protocols, and team pages before investing even a single cent. The second scam option is considerably more easily deceived. Scammers exploit the legal loopholes of this market, where there are currently just few rules, by impersonating already well-known crypto pages or impersonating authority figures from the government, judiciary, and so on, abusing the user’s trust. This ultimately can result in serious financial losses for the investor.
If you have already settled on a cryptocurrency exchange to invest in, we may go on to the following step. Your account and wallet login information, which everyone warns you to “do not share with anyone” in big letters. This is your personal, highly secure data, which is nearly hard to recover or be compensated for any loss. So, if a reminder is insufficient, let us highlight it once more. Never provide someone your security details, such as crypto wallet keys. At this point, create a barrier between your wallet and everyone else but yourself, including the cryptocurrency exchange you use.
If your wallet is the castle behind this wall of protection, don’t think of letting Trojan horses into this castle. Fraudsters using manipulation techniques such as phishing scams or blackmail and extortion scams may try to make you believe that sharing your personal information is mandatory. But this is not the case. Since most scammers lack the means to realize their claims, it may be worthwhile to treat these threats with skepticism and consult with law enforcement before acting for extra protection.
The types of scams mentioned above are particularly targeted at new investors. An investor who is excited to be part of a new investment world but lacks previous experience, may find it more difficult to distinguish between the real and the fake. A good preparation is the best way out for the investor. But scams don’t only hit newbies. Unfortunately, many experienced and crypto-savvy traders may also be blinded by the desire for big profits, leading them into a trap they wouldn’t normally fall into.
Watch Out for Pump and Dump and Rug Pull Schemes
To lure relatively more experienced investors into their traps, scammers use social media and forum platforms that these investors follow. One of the most common examples of this is Pump and Dump schemes. Pump and dump schemes involve manipulating the price of a cryptocurrency through misinformation spread on social media and other platforms, causing the unaware investor to suffer while they profit. In this “hype” culture, when even hollow bubble ideas have their moment of fame, it is important not to get caught up in the momentary excitement. Scammers also know no limits to their creativity. Recently, victims were tricked by a message to their voicemail with a supposedly hot stock tip. A method known as “Wrong number” tricks the listener into believing that the specially crafted message was delivered by mistake. Another scam method, Rug Pull, draws investment by inflating the value of the digital asset, similar to a Pump and Dump scheme, but ultimately abandons the project or drains investor funds. Finally, the investor suffers as a result of being caught up in the moment and failing to make an informed judgment.
As we can see from these two examples, fraudsters know crypto investors well. They know that most of them expect high profits in a short period of time. This is a weak point in the eyes of them, making the investor an easy target. Scammers who take advantage of this weak point identify suitable investors, especially on social media.
Sometimes impersonating public figures or celebrities, scammers lure victims by promising free money or prizes and demanding personal information or cryptocurrency deposits in return. While there is no good deed without strings attached, that’s not how the system works here. It is especially important to be careful with giveaways and to understand what is expected of you.
Pyramid or Ponzi Schemes
Lastly, the classic Pyramid or Ponzi schemes, which we have been aware of almost since the day we started talking about trading, are also another type of crypto scam. These crypto Ponzi schemes try to lure investors with promises of unusually high returns on investment. However, the returns are paid out of the funds of new investors. This bottom-feeding system can be very disappointing for the investor who goes in expecting big profits.
How to Protect Yourself?
Yes, we must consider that scammers are familiar with investors and already know their possible flaws. Add to it the expanding popularity in crypto and it’s natural for warning bells to go off in our heads. However, as investors, we are not absolutely defenseless. As already stated, it is our responsibility as smart investors to avoid these scams as a high priority.
Many people have different ideas about what makes a smart investor, but we can all agree on a few key points. First and foremost, prepare in advance. Crypto is a volatile, fast-changing market, and being prepared for this involves being on top of market trends and news that will affect the market. As we’ve seen from the types of frauds we’ve discussed, social media is one of the areas where investors are most vulnerable. That is why, rather than taking someone else’s perspective of getting rich quick, it is critical to examine market factors and form your own analysis. On the more technical side, it is important to interpret charts and price movements correctly. For this point, learning how to read candlestick patterns and other technical analysis indicators such as RSI, MACD, Bollinger Bands, or Moving Averages can make it much easier to predict market entry and exit points and make a consistent profit.
Once you have prepared yourself well in terms of information gathering, it is time to decide what you want for yourself. Take a realistic approach to how you will manage the capital you can allocate, the return you expect from that capital and the risk factors involved. The weakness recognized by the scammers here is greed, which can be defined as unrealistic expectations of large profits in a short period of time. Therefore, when investing in cryptocurrencies, making a good preparation and taking decisive and confident steps will serve as a protection. It will protect us as investors from financial losses and disappointments that may arise from being scammed.
