Cryptocurrencies are a relatively new asset class, yet they are gaining popularity at a fast pace. However, with popularity come significant risks, too. In fact, more than $2.57 billion was lost online due to the surge in crypto scams in 2022 alone, which was a 183% increase compared to 2021, according to the FBI’s recent Annual Internet Crime Report.
Potentially, the numbers will not become better, primarily due to advancements in new technologies such as artificial intelligence (AI). Charles Hoskinson, the founder of the popular cryptocurrency Cardano (ADA), warned that generative AI tools had become a new window for scammers to ruse crypto holders into parting with their currencies by pretending to be someone else or generating fake information.
In this line, the risk of getting scammed is always there. However, you can minimize it by doing a thorough research and implementing various risk management strategies.
This guide will provide you with five essential tips that can help you protect your finances from fraudsters and safeguard your sensitive personal information when investing in crypto assets.
What is crypto fraud?
Definition
How to avoid cryptocurrency scams: 5 essential tips
Since crypto scams can cause irreparable damage, it is crucial that you do all in your power to avoid them. Here are five tips to help you get on the right track and avoid cryptocurrency scams:
Tip 1: Get educated on crypto
Before investing in crypto, you should go the extra mile and learn all you can about crypto and its implications as an asset.
First, familiarize yourself with the terminology. Learn what blockchain technology is, different types of crypto, what altcoins are, how decentralized markets work, what types of wallets you can use, etc. You will see such terms thrown around a lot. If something is unclear, always look it up, as even seemingly small and insignificant oversights can lead to losses.
Further, do a lot of research on the exact token you want to invest in. You can do that by asking yourself the following questions:
- When was the token made, and for what purpose?
- Who is the team behind the project?
- What kind of reputation does it enjoy?
- Does the project provide transparent contact details?
- What makes it different from other tokens on the market, and how can that help you?
- How many coins are there?
- Was the token audited by a recognized crypto audit firm?
There are many coins nowadays, way more than at the beginning of crypto as an asset. Some of them are, unfortunately, created for the sole purpose of scamming the unwary and making a few people rich. So, before investing, make sure that the token is secure and that its founders have a solid reputation.
Tip 2: Do research on crypto scams
Once you’ve learned more about the nature of crypto and the token that caught your attention, you must familiarize yourself with some of the more common crypto scams, such as:
- Rug pulls: In a rug pull scheme, token founders trick investors by intentionally manipulating the value of a token or its liquidity. This type of scheme became rather common in the crypto sphere during the 2017/18 bull market;
- Ponzi schemes: In a Ponzi scheme, token founders purport to pay existing investors from the funds of newly arriving investors. Typically, payments are made only initially to create a false sense of security in newly arriving parties, but instead of using the funds for further investments, they are distributed to those at the top;
- Fake Initial Coin Offerings (ICOs): A lot of fake brokers develop convincing websites and market their coins as legitimate, usually with promises of unrealistic profits, which are the biggest red flag in addition to vague terms of service, no track record, lack of user support, etc.;
- Phishing: Phishing is one of the oldest tricks in the book. Essentially, it refers to the practice of tricking investors into revealing personal and sensitive information, such as passwords or wallet logins. That is usually done via emails, social media, and AI-generated media;
- Pump and Dump Scheme: Essentially, “pumping” is the act of spreading false information that helps inflate the price of an asset. Consequently, the scammer can “dump” (i.e., sell) the asset at the new inflated price and make immense profits.
These are only some examples of potential crypto scams. Crypto hoodwinkers are creative, and they will often go to great lengths to deceive those not careful enough to do research. To avoid falling prey to any scam, stay updated on emerging trends on the market, educate yourself constantly, and always exercise due diligence before investing in unknown coins.
Tip 3: Use secure wallets and crypto exchanges
Relying on reputable crypto exchanges and secure wallets is essential for maintaining high security levels.
A recognized platform, such as Binance, can offer higher safety standards and safeguard your funds against potential hacks and security breaches and provide you with customer support to further the integrity of your transactions. The platform also has its own SAFU fund, which holds 10% of all trading fees generated on the platform to compensate users in case the exchange suffers a data breach.
Likewise, utilizing a secure wallet will give you full control over your funds and reduce the need for third-party intermediaries and curators. In turn, that will make you more immune to hacks and data breaches, as hackers typically target whole centralized platforms instead of individual traders.
Note
Tip 4: Be careful with your personal information
Being careful not to overshare online is common sense. Still, it’s even more critical when dealing with crypto if you want to safeguard your information and avoid giving illegitimate brokers access to your funds.
In addition to researching the broker and the token you are investing in, you can:
- Use VPN: If you can, always use a secure, encrypted internet connection when investing in crypto. Also, try avoiding public Wi-Fi networks;
- Use two-factor authentication (2FA): A strong, unique password is mandatory, but taking extra steps does not hurt, so enable 2FA whenever possible. By doing so, you will add another layer of security to your wallet and broker account, as you will have to enter additional codes when signing in, usually by receiving them via SMS;
- Use cold, i.e., hardware wallets: There are software (hot) and hardware (cold) wallets. The latter, resembling USB drivers, are more secure, as they allow you to keep your private keys offline and thus safe from potential security threats.
Tip 5: Stay up-to-date with the crypto market
It helps to stay informed on the recent developments in the crypto market to avoid falling victim to fraudulent behavior.
Sometimes, the news of crypto fraud reaches massive proportions, so it’s hard to miss. In March 2023, for example, the Securities and Exchange Commission (SEC) sued Justin Sun and eight celebrities for unregistered selling of Tron (TRX) and BitTorrent (BTT), which made it into the mainstream almost immediately. Something similar happened in 2021, when the Squid Game token (SQUID) crashed to zero in a rug pull scheme.
Other times, however, things happen on a much smaller scale, with little coverage that would help potential investors take caution. To stay in the loop and keep up-to-date with even the smallest developments in the crypto world, you can engage with crypto communities on social media and in chat groups.
There are also many experienced traders and industry experts on platforms such as Twitter and Telegram sharing insight and expertise to help newbies recognize some of the red flags we’ve mentioned. If you’re engaging with a new broker or a token, their advice might prove crucial to ensuring a fruitful investment.
Conclusion
Investing in crypto is inherently risky, and even experienced crypto traders can fall for a scam. After all, the crypto market and internet technologies are constantly evolving, and various con artists are following suit. While you can’t completely remove the chance of fraud, however, being aware of how it works and staying vigilant can help you make a more informed decision when investing in crypto.
In short, to avoid falling prey to fraudulent behavior, you must arm yourself with a skeptical mindset, do a lot of research, and rely on trusted crypto exchanges only. If you are new to the game, start small, and even if you do fall victim to a scam, remember that all investors learn from their mistakes.
Disclaimer: The content on this site should not be considered investment advice. Investing is speculative. When investing, your capital is at risk.
