How to Spot Cryptocurrency Scams

April 18, 2018
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There are a myriad of cryptocurrency scams out there. If you’re new to trading, it can be difficult to spot a scam without diving in too deep. Since the explosion of cryptocurrencies, coverage of the crypto space has flooded the internet. This makes it difficult for newcomers to really understand where to find authoritative information, what to read, or know just how to spot a crypto-scam.

Cryptocurrency scams proliferate because it’s new and exciting, but has slow-moving and evolving regulations that predate Satoshi. Most of the new investors do not really understand the complexities of it all – but that’s changing, and for the better. Most common sense steps will help investors avoid scams. The more you read up on what scammers are doing, the safer you’ll be from some of the most dubious scammers out there.

How to Spot a Scam

Shady Exchanges

Practice due diligence and do your research before choosing an exchange. There have been plenty of exchanges that have disappeared overnight, been hacked, or simply have terrible customer service. Many veteran crypto-investors choose not to keep your cryptocurrency on exchanges and instead transfer them to an offline wallet at the end of the day. (But make sure your offline wallet is secured, too.)

Pyramid, Ponzi Schemes or Multi-Level Marketing Services

If you come across exchanges that use upselling, the targeting of multiple individuals to “bring in” under you, or promising to multiply your initial investment in some way or another – it’s likely one of these scams. As the old adage goes, if it’s too good to be true, it probably is. The technology might be new, but these scams are as old as time. Scammers and fraudsters are technology agnostic, plying their trade to any opportunity that presents itself in the market, whether it’s the purchase of postage stamps or crypto.

A great example of a crypto-Ponzi scheme was BitConnect, the startup that promised insanely high value returns to investors. It eventually became an internet meme after Carlos Matos made a high-energy keynote address to investors.

Cold Calls for Fake Coins

Back in August 2017, the London Police shut down a “cryptocurrency telemarketing business” that was calling people directly to sell fake digital currency. A real investor will never cold call you to offer you a financial opportunity or ask you for money to invest. If this happens to you, it should be reported to every level of authorities you can find, including the SEC where you can file a fraud report.

ICOs Too Good to Be True

In the cryptocurrency universe, ICOs, or Initial Coin Offerings, are the IPOs of the world. Startup companies in the cryptocurrency space create ICOs to raise money for their respective ventures. However, many of them overvalue their startup (financially and otherwise) as with many startups, the overwhelming majority of them fail. This is why the SEC is extremely skeptical about ICOs and will suspend trading when: 1) there’s no information, or no accurate information about a company; 2) concerns arise as to the accuracy of publicly available information about the company; and 3) when there are shady trading practices like market manipulation, Ponzi scheming, or insider trading.

Coin Monopolization

While it is not unusual for a cryptocurrency creator to keep most of the supply of the coins, many of the scams have this in common. When a developer puts aside a substantial number coins solely for themselves, it could be a sign of what is called “pre-mining.” Pre-mining is when a developer keeps most of the coins for themselves before making the source code available to investors.

Downloading Malware 

The information superhighway has on it many hijackers, thieves, and potholes – metaphors for viruses, malware, and spyware that can infect your computer and affect your trading practices. Nearly one-third of all home computers are infected with malware. And a new form of malware is here – one solely in the business of stealing bitcoins.

Savvy investors know how to spot phishing attempts and other forms of baiting or social engineering so as to never release sensitive information to unknown parties online. As said before, there are many safe crypto-exchanges out there – but you won’t get to any of them by clicking on an ad-link or a shady link on an already questionable website.

What the Feds Say

One of the first places consumers can turn to in order to spot a scam is through the safeguards developed by the United States Securities and Exchange Commission. Tips and advice from regulators should be taken seriously, but should never scare you away from participating in this new and evolving industry. You just have to know how to take the right precautions to protect yourself. Here are a few from the SEC:

  • Consumers should beware of “non-reporting” companies that do not have to file reports with the SEC. There are risks in trading stocks with these companies, and the SEC sees cryptocurrencies as stocks or financial assets, not currency. No regulatory body would have any information about said company to help an investor make an informed decision about their investment.
  • To see if an offering is registered with the SEC, use the agency’s EDGAR
  • Educate yourself well before investing in cryptocurrencies – read everything: blogs, articles, updated news, but be skeptical of stock tips or promotions or anything related to promotions for an upcoming ICO.

While cryptocurrency traders do face a lot of risks, these are just some of the few simple ways to spot some of the scams out there. Regulators are still working out the kinks to secure and regulate the industry. Until then, it is the responsibility of every ethical investor to look out for –and report—cryptocurrency scams.

If you still have questions, feel free to contact us today! We’d love to chat!

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