The cryptocurrency market is full of opportunities. There are plenty of stories about crypto millionaires, who went from zero to hero. But, there are also stories of hard-working traders, who have lost millions due to scams or hacks. This article is a guide to cryptocurrency scams. What are the most common mistakes and how to avoid them?
In general, internet scammers tend to wake up when the price of Bitcoin starts to rise. The spring of 2018 was probably the worst period ever, but the scammers’ market has been pretty quiet in the past year. It looks like we’re now entering a new bull market in crypto. Hence, it’s likely that we’ll be seeing more scams and hacks again. It’s time to prepare and educate yourself properly! This article is a good place to start.
The world of crypto is a wild west
Bitcoin turned 10 years in January 2019. It’s still an asset class, which only a small percentage of the population is familiar with. A fully digital currency running in the blockchain is a completely new concept to grasp.
In order to fully understand cryptocurrencies, one must spend some time studying them. Buying and storing your Bitcoin requires educating yourself. This is quite different from using euros or dollars in your local food store.
It’s ironic, that people are actually using fiat currencies without understanding how they truly work. There are very few individuals, who really understand the concept of money. People think they do, but very few actually know how the whole system is run by the central banks.
You can still use your fiat currencies without knowing about fractional reserve banking or inflation or SWIFT etc. There are plenty of safety nets built around people in order to fix errors, thefts or hacks. If your credit card gets stolen, VISA and Mastercard can cancel transactions. If you try to use a wrong account number, your online bank software is there to alert.
There are also safety nets for professionals. The security markets are being supervised to spot market manipulation and using inside information.
Embed from Getty Images
Picture: Jay Clayton is the chairman of the U.S. Securities and Exchange Commission. He’s also trying to regulate cryptos.
The world of cryptocurrencies is very different from the fiat world. There are close to no safety nets available. It’s a virtual wild west, where opportunist individuals are after easy money. There are very few rules and the scammers know this.
Crypto markets will be certainly more regulated in the future, which will limit the opportunities internet criminals have. For now, it’s a dangerous place for amateurs. Your best weapon against scammers is education!
Typical crypto scams: Twitter, ICOs and phishing sites
Let’s get one thing straight: the crypto universe has more scams than anywhere else. It’s like walking on a crowded street in the city with the highest pickpocketer’s population in the world. You have to be constantly on your toes. Make one mistake and you might lose your precious coins.
Twitter is a very popular social media platform among cryptocurrency enthusiasts. CT (Crypto Twitter) can be a very hostile environment, but also provide you with great information, laughter and joy every single day. Pretty much anyone who matters in the crypto world is active on Twitter as well.
This makes Twitter a popular platform for scammers. Things got almost unbearable in 2018 due to constant spamming by scammer bots. Popular threads got filled with junk tweets, which had only one goal: to take Bitcoins from amateurs.
The following picture has a typical Twitter scam in it:
Scammers make a copy of a popular Twitter account by changing one or two letters from the handle. For example, @Binance could be B1nance or Blnance. They buy fake followers and steal the profile picture, which makes the account look real for hasty and greedy Twitter users.
After the scam account is created, it usually announces a competition or a giveaway for all followers. The rules are simple: send a small number of Bitcoins or Ether to a certain address and get 5-10 times more in return.
These Twitter scams became such a nuisance in 2018, that almost all popular accounts had to add a text “Not giving away Ether” on their name. The scam might feel so stupid that nobody buys it, but there are people who fall for it. The scammers also create fake accounts and reply to these contests by showing screenshots of how they actually got 10x Bitcoins back.
Scamming people is a game of volume. When this scam is repeated thousands of times, it lures enough people in to pay off nicely. Even if the hit rate would be less than one per cent.
Selling “professional trading tips” is another classic crypto scam. A person presents himself as a professional trader and advertises his paid group (often Telegram) on Twitter. Here is an article about the most famous Twitter scammers, you’d check.
First draft of the "known scammers on Twitter". https://t.co/XQF8vyjQfx
— The Crypto Monk ⛩ (@thecryptomonk) May 15, 2019
Luckily, it’s easy to avoid these scams by following two simple steps:
- Never ever send cryptos to any competition or giveaway, which promises you more cryptos back. These things don’t exist.
- Don’t pay for trading tips.
Phishing is a very dangerous form of internet scamming and it doesn’t just concern cryptocurrency enthusiasts. Phishing is a very common method in stealing login information to an internet bank as well. A person might get an e-mail, which says he/she should log in quickly to prevent some bad things happening.
After a person reacts to such an e-mail, he is forwarded to a website, which looks exactly like the real internet bank. Logging in will also forward the user to his real account, so the poor user has often no idea his/her credentials have been stolen.
Phishing is also done via Google ads. It’s surprisingly common for inexperienced users to click Google’s ads and mistake them for real search results. This scam works, because so many people type for example aboutbitcoin to Google’s search instead of just typing the address aboutbitcoin.io. There was a case in 2018 when Binance users got hacked because of a phishing scam like this.
Even professionals fall to phishing scams now and then, which makes them very dangerous. You just have to be aware they exist and stay alert. If you get an e-mail from your bank or from your crypto exchange, you can always double check from their support if the concern is legit.
ICOs and Bitconnect
ICOs are basically one big ocean of scams. Nowadays they have been partly replaced by IEOs, which are just ICOs launched by cryptocurrency exchanges. ICO boom peaked in late 2017 / early 2018 when investors poured money on virtually every ICO that was created. Eventually, the market died a lot when people lost their money and projects got nowhere.
Big platforms such as Facebook and Google started a war against ICOs in 2018. They simply blocked all crypto advertising. Such a ban was harsh on legitimate projects, but it was probably for the best at the time when looking at the big picture. These ban has since been lifted, and nowadays projects can apply to be an advertiser on Facebook.
We must make a statement here, that ICOs and IEOs are not scams by default. Legitimate and solid projects have been born through an ICO as well. The problem is the amount of scams. Fake projects can be also difficult to spot for newcomers. Some scams even recruit celebrities to act as useful idiots while promoting the projects.
Some scams go really far. The best example is Bitconnect, which was one of the biggest cryptocurrencies in the market for about two years. Bitconnect was running for so long because Bitcoin price kept going up and more victims brought in Bitcoin for out payments. The scam fell apart in January 2018, when the whole crypto market crashed.
Video: Doug Polk goes through the biggest promoters of Bitconnect.
But this is not all. The craziest thing is that there is actually a Bitconnect 2.0! According to bitconnect.io website (we don’t recommend to visit it), the new platform is launched in July 2018.
Ponzi schemes like Bitconnect exist in all areas of business. They can suck in so many greedy investors because people can usually get their money back (with profits!) in the beginning. Early investors are therefor shilling the service in the social media and showing how much profits they have taken out.
The house of cards falls apart when the system runs out of fresh investors. When this happens, the site usually has technical issues or it claims to be hacked. Then it’s already too late to try to take your money out.
The most famous Ponzi in history was created by Bernie Madoff. The biggest investment funds in the worlds put money into his fund, which never made any trades. Madoff managed to fool financial institutions and professionals for 20 years. His scam fell also apart due to a market crash. When the housing bubble burst in 2008 and investors wanted their money out in panic, the scheme was revealed.
Cloud mining is risky business
Cloud mining is a nice idea in theory. Small investors can buy a share of a big mining farm and get exposure to the mining industry without buying expensive equipment. At the moment, it’s very difficult to make profits from mining if you run a miner in your garage and have to buy market priced electricity.
In cloud mining, you buy a small share of the farm’s mining capacity. You can decide the amount invested yourself. The contracts vary from few months to few years. There are also lifetime contracts available.
What makes cloud mining so dangerous, then?
The problem is, that the whole concept is straight from the Ponzi playbook. It is impossible for an investor to know if the mining farm really exists. Also, even if there was a mining farm, nothing prevents the owners from selling more contracts than there is actual capacity.
If cryptocurrency prices go up, the cloud mining company can pay the investors using the fresh money that is flowing in. The scammers make nice profits from just selling the investor money on profit. If crypto prices go down, there are big problems ahead.
Today I introduce, the incoming Hashflare death cross. Somewhere in the next couple of months Hashflare mining payouts won't be able to cover their maintenance fee ($35 per 100 TH/s) and all SHA-256 mining contracts will end/default. pic.twitter.com/8TL2C7xsGF
— Madoff wasn't on the blockchain (@bccponzi) March 27, 2018
Many Hashflare (a cloud mining provider) customers noticed last year the situation described in the tweet above. Crypto prices went down so much that Hashflare couldn’t cover the mining costs anymore. This meant that they simply terminated the mining contracts, which was a nasty surprise for all those investors, who didn’t read the small print.
On top of this, the contracts made barely any profit before this due to falling prices.
“To be clear, I think cloud mining is a bad investment compared to just buying and holding bitcoin. The reason why I think hashflare most likely is a scam is because I don’t think they cover all their mining contracts with real mining.
Hashflare has never run out of stock for the past 4-5 months, have mining available within 24 hours. Compare this with Genesis who have contracts up for a limited amount of time and up to 2 months before they start mining.”
Could cloud mining be a smart investment as well? In theory, a well-built and a legitimate mining farm can create profits even on a market that is going sideways. As long as the crypto prices stay above a certain level, miners generate steady income. If you were hodling your crypto instead, your portfolio wouldn’t grow at all.
Mining is a way to make income from the crypto industry. Cloud mining is a good way (in theory) to get exposure to this market. It’s not a recommended form of investment for newbies due to high risks involved.
Fix your computer
On top of all scammers, there are also hackers. They are mostly attacking the crypto exchanges because that’s where the money is. An individual can also get hacked, especially if you shout about your crypto portfolio in public.
The best weapon against hacking is to use common sense and a properly guarded computer. We recommend a combination of Brave, F-Secure Safe and F-Secure Freedome.
Brave is a browser coming from the Basic Attention Token project. Its popularity has grown a lot in the past year. Brave is even faster than Chrome due to its built-in ad blockers. This is a very good safety feature to protect newbies. If you can’t see the ads by scammers, you can’t be tricked into clicking the banners either.
F-Secure is probably the best anti-virus software in the market. It’s made by Finns and it has protected computers since the 1990s. F-Secure Safe includes also browsing protection, which blocks tons of harmful sites if you try to access them. We recommend scanning your computer at least once a week.
F-Secure Freedome is a VPN, which has become very popular in the past few years. More and more people are concerned about their privacy and for a good reason!
Using VPN is important for people who travel a lot and use public wifis on airports, hotels, public cafes etc. Freedome blocks also all tracking cookies and blocks your connection to harmful websites.
There are also other anti-virus and VPN software in the market if you don’t like these. We recommend strongly to protect your laptop and mobile with something.
Tips how to protect from crypto scams
As mentioned in the beginning, crypto investing requires educating yourself. Buying cryptos is not difficult, but you need to know how to store them safely as well.
The best advice anyone can give you is this: always do your own due diligence and use your common sense. If something seems too good to be true, it also is.
Internet scams appeal to people’s greed. Everyone wants to make easy money and fast. Instead of 5% yearly profit, these scams promise you 5% per month, 5% per week or even daily profits! There are also investment gurus promising you massive profits with the system they have developed.
There is no free money and there are no shortcuts to success in the crypto world. Try to get rich slowly, don’t try to get rich quick.
Here are useful tips on how to avoid scams.
- Always keep your computer up-to-date and use antivirus and adblocker.
- Use complex passwords, which are not same as the ones you use in other web services.
- Always activate 2FA when it’s possible. It can be used in every major cryptocurrency exchange.
- Store your cryptocurrency safely to a hardware wallet like Ledger Nano. Don’t keep it in an exchange, if you are not a trader.
- Save the important websites to your browser’s favourites. Don’t access them by typing the name to Google’s search box.
- Think before you click anything. Look from the browser’s status bar where the link is going first.
- Search information of services you are about to use, for example, a cryptocurrency exchange. Visit their Reddit page and find user experiences from Google.
- There are no extraordinary profits or secret systems. If someone is promising you this, it’s a scam.
- If you are not sure, ask from others! Make a Reddit post or join a Facebook group. It’s better to be safe than sorry.
After all this, we have to also be aware of one thing. Every crypto investor will be exposed to manipulation almost daily. The market is still so small, that one operator with deep pockets can cause huge crashes or spikes in prices.
A crypto investor must be mentally prepared for high volatility in the market. There’s no escaping that. The whole industry is still a wild west with few rules in it. It’s always the greedy amateurs who are funding the smart investors. If you want to make money, you must learn things properly and be very careful and patient.
Aboutbitcoin.io is a good place to start learning!