Cryptocurrency crime hit a record year in 2021, with a new report finding that fraudsters received $14 billion in cryptocurrency last year.
That’s nearly double the $7.8 billion scammers took in 2020, according to data-chain data company Chainalysis “2022 Crypto Crime Report,” the results of which were released Thursday, January 6.
With interest in cryptocurrencies booming over the past year, it’s no wonder that “Olympic-level scammers” have noticed new opportunities for illicit activity, says William E. Quigley, a prominent investor and co-founder of WAX blockchain. Quigley said during a panel discussion hosted by Light Node Media last month that the high-tech nature of cryptocurrencies will continue to attract professional fraudsters.
Consider a recent “Squid Game” scam in which investors claim that a new SQUID cryptocurrency token and an immersive online game was actually just an elaborate scam. Investors claim that the developers disappeared after the price of the coin went up, and it seems that they got more than 3 million dollars.
Before you invest in cryptocurrency
Experts say it is smart to keep your crypto investment under 5% of your total portfolio. Cryptocurrency prices fluctuate wildly every day, and experts also say it’s smart not to invest more than you would lose if the market stopped completely. Cryptocurrency investments should not get in the way of other financial priorities such as saving for emergencies, paying off high-interest debt, and saving for retirement using more traditional investment strategies.
Like it or not, cryptocurrency investors are opening themselves up to this new and evolving risk of scams and fraud. If you have incorporated crypto into your investment portfolio or are interested in investing in Bitcoin or Ethereum in the future, here are some common scams and red flags to look out for.
What are some common scams about cryptocurrency?
In the United States, nearly 7,000 people lost over $80 million in cryptocurrency fraud from October 2020 through March 2021, according to the Federal Trade Commission (FTC), based on fraud reports filed in the United States. And $7.5 million in losses during the same months a year earlier only. With cryptocurrency scams on the rise, here are some patterns to look for:
Claim Crypto Payments Only
If a credible person or retail establishment claims that they cannot accept any form of currency other than Bitcoin, it is likely a scam. Bitcoin and other cryptocurrencies are a booming asset class, so experts say that trusted institutions will not and will not accept cryptocurrencies It also accepts US dollars through regular means such as bank transfers, checks, credit and debit card payments, and cash.
In general, anyone who asks you to pay them with bitcoins may try to store it and take advantage of its high value. And unlike banks, the blockchain lacks know-your-customer (KYC) protocols. This means that people can open wallets without having to provide a valid ID, Social Security number, or address and contact information. Although the blockchain is public and creates permanent, open-access records, people can transact on the blockchain more or less anonymously – making it easy to trick you into taking your money and running it.
Anonymous or fake identities
The lack of KYC protocols on the blockchain is a major question mark for its widespread use, says Jonathan Padilla, former head of blockchain strategy at PayPal and CEO and co-founder of Snickerdoodle Labs, a California-based blockchain data security company that is looking at using blockchain to give consumers ownership of files Their cookies and browsing data.
“With a decentralized platform, there are no real guarantees of determining who is a good actor and who is a bad actor,” Padilla explains. “It’s really just buyer beware.”
On a promising note, blockchain could provide a new form of transparency: since data cannot be changed or removed from the blockchain, all transactions are a public record. When Colonial Pipeline paid an anonymous hacker 63.7 bitcoin (worth roughly $2.3 million) in June, US Department of Justice investigators were able to trace transactions on the blockchain and seize the ransom money.
“[The hackers] Use a hosted wallet to move Bitcoin, which means [law enforcement] “I found them in about five days,” Padilla says. There is transparency built in [to blockchain]And now with the tools [coders are developing]You can use complex software to do on-chain analysis and keep track of where these things go. “
However, it will be a matter of time before law enforcement agencies at every country level become familiar enough with the new tools to effectively investigate smaller blockchain frauds. There is currently still a possibility that crypto tokens, NFTs and other digital blockchain assets could be used by bad actors to launder money on both small and large scales.
“This is a very real concern,” Padilla says. “For example, you can get money from Colombia, buy NFT with what was previously known as cartel money, and it can be laundered into NFT.”
Padilla says that large-scale money laundering is not very prevalent, but the tools and compliance framework needs to catch up quickly.
“The technology gets to where it needs to be…to be able to trace where that money is coming from and where it’s going,” Padilla says. “But it didn’t exist in the latter half of the year,” as the popularity of cryptocurrencies and the NFT spread.
Experts say sticking with beginner-friendly cryptocurrency exchanges like Coinbase and Gemini is one way to avoid the risks that come with smaller niche exchanges. It is also a good idea for novice crypto investors to stick with the two most popular cryptocurrencies – Bitcoin and Ethereum – which have a longer history of increasing in value compared to other altcoins.
Digital collectibles and games
As we saw in the Squid Game scam, sophisticated programmers now have the ability to create new games and entire fantasy worlds on the blockchain. And to do that as soon as the next viral Netflix show takes off.
An easy way to cheat enthusiastic blockchain beginners is to get them to buy some type of coin or game token. If enough people push the price up through supply and demand, this gives the original scammers a chance to sell all their holdings and disappear in a move known as “pulling the rug.”
Unlike federally regulated currency bank accounts, there is no such thing as fraud protection or FDIC insurance on the blockchain. When your money is stolen on the blockchain, the only way to get it back is for the recipient to pay it directly. In a decentralized exchange, this is highly unlikely. And while mainstream cryptocurrency exchanges have better fraud security measures than lesser-known ones, there is still no guarantee for investors to recover stolen cryptocurrencies.
Cryptocurrency investment schemes
New forms of cryptocurrency are constantly being minted, and when new coins arrive on the blockchain it is known as an Initial Coin Offering (ICO). But ICOs are also opportunities for scams. A company or individual might say that they have a once in a lifetime opportunity to invest in a new form of cryptocurrency with guaranteed returns of 1,000%. They may then pressure you to deposit a bunch of new coins into a digital wallet that has been hacked in some way, or “pump and dump” by buying the coin and selling when the price explodes.
Dating apps are full of coding scams. According to the FTC, about 20% of the money lost in romance scams from October 2020 through March 2021 was sent in the form of cryptocurrency. Scams include such long-distance or digital relationships in which one party pressures the other to buy or offer money for some new cryptocurrency, and this is really just a way to cheat people out of their money.
This type of fraud is as old as the internet, but with encryption there are some new implications. Just as a “normal” phishing attack would succeed, bad actors send emails trying to lure recipients to click links and enter their personal data – including crypto wallet key information. But unlike most passwords and usernames, you only get one private key for your blockchain wallets. This is part of the design of a decentralized blockchain, ensuring that no single entity can control your information, but it poses a problem if you ever need to change your key.
How can investors protect their crypto
Even the most advanced and enthusiastic cryptocurrency experts are aware that there are many new and evolving risks in the crypto world at the moment. Some have survived the scams themselves, such as investor and entrepreneur Ian Ballina, who said he lost $2.5 million after his private wallet key information was hacked by someone who hacked his Evernote account.
Ballina’s story highlights the potential for loss and fraud when dealing with such a new and volatile class of assets, even for successful investors.
Financial experts advise most passive investors to keep holdings of cryptocurrency at less than 5% of their portfolio, and never invest in cryptocurrency at the expense of emergency savings or paying off high-interest debt. If you feel ready to start investing in cryptocurrency, here are some best practices to protect your money:
Cryptocurrency red flags
For starters, watch out for some common red flags that are similar to traditional money transfer and credit card scams:
- Obvious typos and misspellings in emails, in social media posts, and during any communication
- Promises to double your money
- Contractual obligations that lock you into holding cryptocurrencies without being able to sell
- Fake influencers or pretending to be famous
- Psychological manipulation such as blackmail or blackmail
- Big social media coding schemes
- Promises of free money
- Mysterious details about where your money goes
Know when to use a crypto wallet
Just like your physical wallet, you need to protect your digital wallets from hackers. Practice good digital security habits similar to how you would handle large amounts of physical cash by putting it into a secure or FDIC-insured savings account.
Experts say that small investors with cryptocurrencies worth a few hundred dollars are likely OK to hold them on a major exchange like Coinbase. However, if you amassed thousands of dollars worth of crypto, it might make sense to incorporate a wallet for additional safekeeping.
There are two types of cryptocurrency wallets, commonly described as “hot wallets” and “cold wallets.”
Hot wallets are hosted or stored online. It’s secure, but it’s more vulnerable to hacking than cold storage, which is when you store encryption offline on a piece of hardware. Think of cold storage as a kind of safe in the format of a USB drive. It’s more secure, but if you forget your password or lose the device, you could lose access to your money forever.
Cryptocurrencies held in hot wallets are not FDIC insured like cash in a bank. So you’ll need to make sure that any platform or wallet you store your crypto in has strong security measures in place, including:
- Two-factor documentation
- Store part of the collectibles in his cold storage
- Private insurance policies in case of theft or piracy (separate from FDIC insurance)
Keep track of your wallet keys
You only get one unique key to access your wallet, says Mac Gardner, a Florida-based certified financial planner and founder of FinLit Tech. Losing or stealing your key could mean losing your cryptocurrency completely.
“You need a great deal of control over access to [your wallet key.] “It’s not something where you can forget your username and password if you don’t write them down,” Gardner says. “Each code has a process and a certain number of characters. It is very personal because of this virtual space. If not, someone can go in there and then take your things, right?”
You should report fraud and other suspicious activities involving cryptocurrency to the following offices using these links:
Also, don’t forget to report the scam to any crypto exchange you used to complete a crypto transaction when you suspect or have evidence of bad actors.