The cryptocurrency space has been growing rapidly in recent years. The idea of digital currencies and blockchain technology has now entered into the mainstream and more people than ever are interested in this industry. There are countless promising projects that have spawned in this space, with many more to come in the future.
However, there are certain aspects of the cryptocurrency world that are off-putting to some. Unfortunately, some label the sector as being full of scams and hackers. While there have been high-profile incidents involving hackers, the space is becoming better developed and stronger protective systems are in place now than ever before.
Unfortunately, when a sector is so new and a lot of people are getting involved in it for the first time, this lack of information can make certain people susceptible to being taken advantage of. There are a number of common scams that occur in the cryptocurrency space that people need to watch out for.
Initial Coin Offering (ICO) scams
ICOs exploded in popularity during 2017 and 12018. It became a great method for cryptocurrency and blockchain projects to raise funding. They no longer had to turn to traditional venture capital firms or angel investors who would receive a lot more than they gave during the transaction.
Instead, these companies were able to issue tokens to the world in exchange for funds. Massive sums of money were raised through these offerings in 2017 and 2018, with it still being a popular method of fundraising.
However, as there were so many new ICOs cropping up on a daily basis, it was hard to keep track of all of the different projects.
A lot of people thought that if they got in the ground level of an investment opportunity, i.e. through an ICO, that they could potentially make many multiples of their investments in the long run when the project became more established and the tokens would appreciate in value. Therefore, a lot of people were throwing money around at projects that ended up not having much potential, some of which were even scams.
There were a lot of fake ICOs. This is where they pretended to be developing some sort of platform or technology in the blockchain space. They would create extensive marketing campaigns based on this fake idea, persuading investors to part with their money.
When the ICO finished, the scammers would then run off with all of the funds. Others would lie about the scope of their technology and would over promise. Ultimately, when they failed to deliver on key milestones, it would be revealed that it was all a scam.
Some of the warning signs that an ICO may be a scam include a white paper that has been copied from elsewhere and has spelling mistakes, if a lot of the project’s team are anonymous or have pictures that prove to have been copied from elsewhere.
There may be contradictions in their pitches and they will not reply to legitimate questions about the project. Many people lost significant sums through these scam ICOs.
Phishing Scams
Phishing is a problem that people in all walks of life have to deal with. Emails with dodgy links can often lure people into succumbing to some form of phishing. This allows the scammer to get control a lot of times of a person’s computer and they can steal the likes of passwords, bank details and so on.
In the cryptocurrency space, there were scammers that would use traditional phishing techniques to try and steal people’s passwords or private keys. Some of these would be through fake airdrops for example. The lure of free tokens would get people to sign up for accounts with these fake airdrops without conducting their due diligence first.
Pump and Dumps
Pump and dumps is a scam that is common in the traditional world of finance, particularly in the penny stock space. Some of the main forms of communication for communities in the cryptocurrency space are Telegram, Twitter and Slack.
There are tens of thousands of groups on Telegram for example relating to cryptocurrency. These groups discuss different projects and talk about the viability of different investments.
A lot of these groups have people who are trying to generate hype for a particular coin in order to inflate its price. These will be coins with low market caps. The scammers would buy initially at a low price and when the hype builds up and the price explodes, they can cash out near the top of this hype.
Then prices will plummet and investors will lose a large proportion of their investment. This is why a low of people are careful about buying small cap coins. There are systems where you can judge the volume of trading for certain tokens in a given space of time and it will alert you to any suspicious patterns that may indicate that there is some form of price manipulation going on.
Pyramid schemes
Pyramid schemes are those scams that hide in plain sight. While most people can easily spot them, a lot of people still fall foul and lose funds through this type of scam. They promise to maximize the returns for investments on a regular basis.
They are effectively Ponzi schemes, as they use newly taken in money to pay returns out to the first wave of investors. Eventually, the money stops coming in and people will lose their investments.
Any type of investment opportunity that promises a return greater than that of the average returns of the market is not to be trusted. If something also focuses more of its effort on trying to attract new investors rather than their offering itself, this is another major warning sign.
One of the major alleged Ponzi schemes in the cryptocurrency space was that of BitConnect. At one stage, the BitConnect coin was in the top 20 coins in terms of market cap. However, when the apparent scheme began to unravel, the price collapsed almost completely.