Crypto scams: What they are and how to avoid them

Crooks and swindlers live by the mantra: "It's only cheating if you get caught." 

Digital assets present a golden opportunity for scammers. Not only can cryptocurrencies carry significant value, but they're also difficult to recover once transferred out of a wallet.

While con artists routinely exploit unsuspecting crypto traders, fortunately, there are ways to prevent fraud before it happens. By taking a few simple steps, anyone can learn how to avoid crypto scams.

This guide explains the most common crypto scams, how they work, and how traders can protect their investments.

What are crypto scams? How do they work?

Crypto scams are fraudulent schemes designed to trick traders into transferring their digital assets by presenting false claims of legitimacy. Many resemble those age-old thieving tactics typically used in traditional finance but with a modern twist. 

From pump-and-dumps that lure unsuspecting investors into fake cryptocurrencies to phishing attacks that steal keys and passphrases to drain their victims' funds, the strategies crypto scammers use are both diverse and deceptive. They often make false promises of high returns on fake crypto products or claim to have insider information on exclusive trade deals. They also frequently leverage professional-looking websites and counterfeit credentials, making their intentions appear all the more genuine. Unfortunately, many victims realize they’ve fallen prey only after losing their assets, which are extremely difficult to recover once they’re gone.

Cryptocurrency scams: A list of what to watch for

Traders are often surprised by the sheer number of scams that occur in the crypto world, but staying informed about all the different types is arguably the most proactive way to avoid them. 

The most prevalent types of crypto scams currently include:

• Rug pulls: In a rug pull, scammers create a fake crypto project to entice traders to invest. Once they've raised enough money, they remove all liquidity and shut down the project, leaving their victims with worthless assets. 
• Fake ICOs: New crypto projects sometimes present investment opportunities through initial coin offerings (ICOs). The funds raised in an ICO typically go towards developing the project before its coins or tokens are released to the public. However, some scammers use ICOs as a means to collect investors' money and then disappear, leaving investors with nothing.
• Social engineering fraud: This involves manipulating traders to reveal sensitive data or transfer cryptocurrency. Scammers will pose as government officials, colleagues, or friends to build trust and extract information.
• Frauds promising romance: Some crypto scammers use dating sites to lure victims with the promise of romance. After building trust and establishing a connection, they shift the conversation to cryptocurrency, eventually asking for a transfer of funds – often citing a need to meet in person or to cover an urgent financial emergency. Once the victim sends the cryptocurrency, the scammer vanishes.
• Imposter and giveaway scams: Con artists sometimes pose as celebrities or famous personalities to attract traders' interest. They may also promise huge crypto giveaways to lure investors. Such opportunities are rarely legitimate.
• Phishing: One of the most widespread crypto scams, phishing involves tricking traders into divulging their private keys or login credentials by creating convincing fake emails and websites that mimic legitimate sources. Once a scammer gains access to this sensitive information, they can quickly drain a trader's wallet, leaving little to no recourse for recovery.
• Blackmail and extortion schemes: In these scams, blackmailers threaten to expose sensitive or damaging information unless victims transfer funds. They usually claim to have compromising details about a trader's online activities, including alleged illicit behavior, and demand cryptocurrency in exchange for keeping the information private.

What makes cryptocurrency so attractive to fraudsters?

Cryptocurrency offers thieves a unique combination of anonymity and global accessibility, making it an appealing target for their schemes. The decentralized nature of crypto transactions, coupled with the irreversible nature of blockchain technology, provides opportunities for bad actors to exploit unsuspecting traders without leaving a trace. 

Here are a few reasons why cryptocurrency scams are particularly popular among scammers:

• Cryptocurrencies are inherently digital: Because cryptocurrency exists online, thieves can operate from anywhere with internet access. This allows them to target individuals globally without the risk of face-to-face interactions.
• Transactions are irreversible: Blockchains are immutable, meaning confirmed transactions are permanently recorded and cannot be undone. Once a scam is complete, there is no way to force a scammer to return the stolen crypto.
• Cryptocurrencies operate on a decentralized network: With no central authority overseeing blockchains, victims of crypto scams have no single entity to turn to for help or recourse. This decentralization leaves traders vulnerable and often without support.
• The process incorporates anonymity: Crypto transactions offer a degree of anonymity. While wallet addresses are traceable on the blockchain, they do not directly reveal the personal identity of the individual behind them. This offers scammers an additional layer of protection, making it harder for authorities to locate them physically.

Preventing cryptocurrency fraud

With so many fake cryptocurrencies and new schemes constantly emerging, the best way to avoid crypto fraud is knowing how to identify a scam early on. Here are some common strategies to help safeguard your crypto:

Blockchain analysis

While cryptocurrency is often perceived as anonymous, the blockchain publicly records various details, including the addresses of digital wallets involved and the timestamps of each transaction. By analyzing the blockchain before finalizing a transaction, traders can more easily trace the origin of potentially fraudulent activity and identify the destination wallet. 

Whitelisted and blacklisted addresses

Traders can set up advanced filters within their digital wallets to automatically allow or deny transactions with specific crypto addresses. Whitelisting trusted wallet addresses ensures secure transfers between them, especially if a trader uses multiple wallets. Conversely, blacklisting addresses found on crypto scam lists helps prevent accidental transfers to fraudulent sources. These tools – whitelisting for approval and blacklisting for blocking – offer effective safeguards against unauthorized transactions.

Data enrichment tools

Data enrichment tools go beyond standard blockchain analysis by uncovering additional details that aren't immediately visible. While blockchain analysis can identify the addresses involved in potentially fraudulent transactions, these tools, such as Chainalysis KYT or Elliptic, also offer insights into a user's trading behavior and other online activities, helping to detect and prevent crypto fraud before it occurs.

Real-time monitoring 

Due to the immutability of the blockchain, crypto transactions are generally irreversible, making the recovery of stolen funds extremely difficult. Real-time monitoring can help mitigate fraud by tracking all transactions on a blockchain and sending instant notifications to a designated mobile device when any transfers involve a customer's wallet address. While this approach helps detect fraud early and reduces the risk of losing more crypto assets to scams, it may not always prevent the initial fraudulent transaction.

Secure your crypto tax reporting with CoinTracker

Security is a top priority for crypto traders, but finding a tax software company that truly understands this can be challenging. CoinTracker stands out by putting security at the core of its business. With end-to-end encryption and token-based 2FA, CoinTracker's robust safety measures provide peace of mind for even the most cautious users.

Users can effortlessly sync their wallets and generate tax reports in minutes. Start for free and discover why over 2 million crypto traders trust CoinTracker for accurate and secure tax filing.

Disclaimer: This post is informational only and is not intended as tax advice. For tax advice, please consult a tax professional.