Introduction
Scams have been around for centuries and have unfortunately been a part of our lives for far too long. A scam, in its simplest form, is a fraudulent attempt to get money or goods from someone, usually by posing as a legitimate business or person. Scams can take many forms, from swindling people out of their money, to identity theft and phishing, and they can occur in any number of places, from online to in person. This CryptoNewsHerald educational article will provide an overview of what a scam is, how they can operate, and how to protect yourself from them.
What is scam?
The term “scam” comes from the English word “scam”, which translates as “fraud”.
Initially, scammers were called those who extorted money through phone calls and emails. Cryptocurrency scams are scams in which digital currencies or fiat money are stolen from the trust of their owners.
Do not confuse scammers with hackers who break into cryptocurrency wallets and steal user funds. Unlike them, scammers convince the victim to transfer funds to them on their own.
What are the types of scam?
Fraudsters are constantly creating new ways of deception, but there are several basic schemes.
Imitation of famous projects and people
The classic type of scam is extortion under the guise of a famous person or company on social networks or on YouTube. Usually, they open an account on a social network on behalf of a famous person who is associated with some well-known crypto project.
Further, on his behalf, they announce an “advertising campaign” or a “free” distribution of cryptocurrencies. To participate in it, you only need to transfer a small amount of cryptocurrency to the specified address. In return, the fake account promises to “return” a larger amount. After sending crypto assets, the scammers hide.
In addition, they often post fake “live broadcasts” of previously recorded interviews on YouTube, on which they overlay their address in order to receive cryptocurrencies. These videos are promoted in advertising networks on sites with pirated content.
Pyramid
The most famous type of fraud, which also moved into the field of cryptocurrencies from the traditional finance industry. Any pyramid scheme (the term “Ponzi Scheme” is often used in the crypto community) is built on the promise of a large and quick return on the participants’ investments.
In reality, the founders of the pyramid do not do any real work. If they do pay income, it is only to a few contributors and only at the expense of new participants. Ultimately, the organizers of the scheme appropriate the savings for themselves, and the pyramid collapses.
The founders of many modern pyramids often imitate cryptocurrency investment products, as the price of some popular coins grows much faster than classical financial instruments.
exit scam
Exit scam is a sophisticated form of fraud. It differs from fake token sales in that the project receives funds not through fundraising, but through a plausible imitation of real activity. For example, scammers can launch an application with a minimal set of functions that involves the transfer of cryptocurrencies to their account, allegedly for some kind of service.
Some pseudo-projects only promise results and create the appearance of some kind of work. Their representatives participate in conferences and give interviews, but the planned launch of the product is constantly postponed. Sooner or later, the organizers of the scheme disappear. Exit scams can be difficult for the average user to recognize, but experts and technicians can do their research and expose the scammers publicly.
Sometimes exit scams occur in running applications, whose founders unreasonably and unexpectedly stop working and hide with users’ funds. In rare cases, this can be done by cryptocurrency exchanges, whose leaders can steal user funds, disguising it as a site hack.
Pump & Dump Diagram
This type of fraud is associated with the issuance of a token. To organize the Pump & Dump scheme, a crypto asset is released to the market, which is not backed by a working product, funding, or team. However, they try to associate him with some kind of hype event – for example, with a movie or series, presenting the coin as his “official” asset. This was done, for example, by the creators of the Squid Game token, who positioned it as an asset supposedly from the creators of the Squid Game series.
If scammers manage to create a hype around their token, they wait for its price to rise due to high demand, and then suddenly start selling tokens. As a result, the issuer earns and throws further support for the asset, and its holders are left with worthless coins.
Scam in DeFi
Decentralized finance has created new ways to trade and use cryptocurrencies, but it has also spawned new types of scams.
Rug pull. Attackers create an asset (often disguised as popular tokens), for which they launch a trading pair and a pool on a decentralized exchange. Other users add their funds. As a result, the organizers of the scheme abruptly withdraw them, leaving other users with depreciated tokens.
Another option: scammers create a decentralized trading protocol and add an exploit to its code. They begin to attract users and their funds to the protocol with high rates of return, but in the end they exploit the vulnerability of the code and steal all the funds of users.
honey pot. Fraudsters create a token, issue it on a decentralized exchange, and start aggressively advertising it. At the same time, the smart contract of the token contains a ban on its sale by anyone other than the organizers of the scheme. They start buying the asset, and when its price reaches a significant level, scammers sell as many tokens as possible while they are at least worth something.
Fake token sale
Another type of scam depicts fundraising activity.
The attackers create a site dedicated to a supposedly new startup and fill it with content in such a way that it creates a plausible impression. In particular, they come up with a description of the “blockchain project” and team members, open pages on social networks.
Next, the scammers announce the initial sale of project tokens, from the participants of which they collect real funds. Shortly after that, the scammers stop their activity and take everything for themselves. This type of fraud was especially popular during the ICO era in 2017-2018.
Famous Cryptocurrency Scam Examples
OneCoin
The most famous pyramid in Europe, the “brand” of which even spread to other countries. It was founded in 2014 by Rudzhi Ignatova, a resident of Bulgaria. OneCoin sold “educational packages” that were given a set amount of “coins” as a gift. In fact, the company did not have either a cryptocurrency or a blockchain. After the exposure, Ignatova disappeared. According to various estimates, the total damage from this pyramid scheme ranges from $4 billion to $15 billion. CryptoNewsHerald has released a detailed investigation into OneCoin.
Plus Token
The largest crypto pyramid founded in China. Worked under the guise of a wallet for digital currencies. About a year after the launch, in June 2019, users began to complain about the inability to withdraw their funds. In 2019-2020, Chinese police arrested dozens of members of the scam group. The Chinese authorities estimate the total damage from PlusToken at $5.8 billion.
Finiko
Russian financial pyramid, which offered to make money on investments in cryptocurrency and stock markets. Stopped working in July 2021. The total damage from Finiko’s activities is about $4 billion, and the number of victims reaches 850,000 people. Only one of the founders is under investigation in Russia.
BTC-e and Wex
One of the oldest cryptocurrency exchanges in Russia, BTC-e, worked until the summer of 2017, when it abruptly closed trading and blocked user funds. After that, she allegedly got a new owner, who renamed the platform to Wex and promised to return their cryptocurrencies to users. However, soon Wex also stopped working. The total damage from this exit scam is estimated at about $400 million, but the amounts are also several times higher. Investigations into Wex’s leadership are ongoing in several countries.
Africrypt
African pyramid under the guise of a “cryptocurrency investment platform” based in South Africa. Having existed for about a year, it stopped its work in April 2021. After that, Africrypt investors accused its founders of fraud. The police are now looking for them. The amount of stolen funds ranges from $200 million to $4.5 billion.
Damage from scammers
Only in Russia every year hundreds of fraudulent groups appear and disappear, advertising fake cryptocurrencies or investment products based on them. Global damage from scammers amounts to tens of billions of dollars annually.
In 2021, the Bank of Russia identified almost 2,700 illegal companies and pyramid schemes. Of these, almost half raised funds in digital currency or offered investments in various non-existent crypto assets.
According to Chainalysis, scammers stole $7.7 billion from cryptocurrency holders in 2021, of which 37% came from rug pull schemes.
Analysts at Elliptic believe that in DeFi alone, the total damage from fraud in 2021 amounted to $10.5 billion.
How not to become a victim of a cryptocurrency scam?
In order not to fall for the tricks of scammers, follow simple but effective rules:
- Do not invest in projects that promise, above all, high returns, and not a quality product. A conscientious entrepreneur never guarantees a profit.
- Before investing in a new project, carefully study its team, read publications about a startup in the media, and reviews of recognized experts.
- Do not give your money and cryptocurrencies to little-known traders or companies to manage.
- Check online for the history of the project or service you plan to send your funds to. If there is no mention of it in authoritative sources, it is better not to risk it.
- When trading on decentralized exchanges, beware of “clones” of famous coins. Pay attention to ticker names and the amount of liquidity in the pool.
- If you decide to use a new decentralized protocol, make sure that independent professionals conduct a detailed audit of its code. Notable auditors of DeFi applications include: Certik, Hacken, Consensys.
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Conclusion
Scams are a real and growing threat to society. They come in many forms, from phishing emails to online auction fraud to fake businesses and more. By understanding the different types of scams and their tactics, you can take steps to protect yourself and your family from becoming victims. Be sure to stay vigilant and never give out personal or financial information unless you are absolutely sure of who you are dealing with. By staying aware of the dangers of scams, you can help protect yourself and your loved ones from becoming victims.
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