Regardless of one's opinion on cryptocurrency, it cannot be denied that there is a significant amount of money at stake. Whenever there is a large sum of money involved, particularly in the case of cryptocurrencies which can easily vanish, scammers tend to emerge in abundance.
Crypto enthusiasts appreciate the privacy and anonymity that cryptocurrencies offer, but unfortunately, these same features attract criminals and scammers. Consequently, we have witnessed numerous colossal cryptocurrency scams throughout the years, employing various deceitful tactics to separate users from their crypto assets.
1. Pyramid Schemes
A pyramid scheme, also known as a Ponzi scheme, is a fraudulent investment scheme where organizers entice individuals to invest in a program by promising higher returns if they recruit others into the program. These types of scams have infiltrated the cryptocurrency world and have become highly detrimental.
For example, members of a cryptocurrency community may be offered an unrealistic return on their investment, such as a 10% interest rate per week. The organizers present a seemingly plausible explanation, such as engaging in crypto arbitrage activities, to justify the returns. Once individuals invest in the program, they are encouraged to recruit more participants in order to increase their potential earnings.
As the invested funds move up the pyramid, each recruiter receives a portion of the amount until it reaches the organizers, who may utilize it for personal expenses. Eventually, the pyramid scheme becomes unsustainable and collapses. According to CoinMarketCap, two of the largest cryptocurrency scams, Onecoin and Bitconnect, resulted in a combined loss of $9.3 billion for investors.
2. Initial Coin Offering
ICOs, or Initial Coin Offerings, are fundraising exercises that utilize smart contracts and cryptocurrency to automate transactions between an organization and its stakeholders. These fundraising methods are commonly employed by cryptocurrency companies to gather funds from potential users. However, it is important to note that while ICOs have been instrumental in the success of many reputable companies, there have also been instances where fraudulent activities have taken place.
Scammers behind ICO frauds invest significant time and effort into promoting their fundraising campaigns, despite lacking functional products or services. They employ various tactics, such as offering rewards for guerrilla marketing, raising funds, and making enticing promises. Once they have accumulated enough funds, they abruptly cut off all communication with their investors, leaving them empty-handed.
Interestingly, some ICOs appear to be operated by legitimate entrepreneurs with commendable track records. However, it often turns out that these so-called "entrepreneurs" are actually anonymous criminals who have assumed the identities of others. In certain cases, these fraudulent projects even manage to gain public support from well-known figures within the industry.
Differentiating between a genuine ICO and a fraudulent one can be challenging. This is primarily due to the fact that ICOs are conducted online, without any face-to-face interactions between the organization and its stakeholders. Furthermore, even legitimate ICO projects are not immune to the risk of hacking, which can result in financial losses for investors.
3. Pump-and-Dump Schemes
Pump-and-dump schemes have been around for some time, however, the advancement of cryptocurrency technology has significantly streamlined the process. The entire operation can now be conducted online. The fraudster initiates the scheme by developing a crypto token and establishing the necessary technology, complete with a white paper and other elements to give the appearance of a genuine cryptocurrency venture.
Social media influencers are recruited and added to exclusive online forums, where they collaborate to strategically purchase cryptocurrency assets in order to create an organic market trend devoid of sudden surges. Once the preparations are complete, they commence promoting these assets to their followers on social media platforms, resulting in prospective investors purchasing the tokens and driving up their prices.
Subsequently, the orchestrators meticulously plan a dump, commonly referred to as a rug pull, which entails selling off the tokens, guaranteeing profits for those within their inner circle. Meanwhile, unsuspecting individuals are left holding worthless tokens, unaware that the token's value swiftly plummets to zero, leaving the scammers to abandon the project.
An illustrative instance of a pump-and-dump scheme is the Squid Game token, where the creators vanished in 2021, absconding with over $3 million. However, the true extent of the damage was far greater. According to Chainalysis, crypto investors suffered losses amounting to $4.6 billion after investing in dubious pump-and-dump tokens in 2022.
4. Bitcoin Mining Scams
Throughout the years, the process of Bitcoin mining has significantly increased in complexity. Nowadays, in order to generate profits from mining activities, individuals need access to more sophisticated hardware, which can be challenging for the average person to obtain and operate. As a result, there is a growing trend of people opting to delegate their cryptocurrency mining tasks to external parties.
As a result, fraudsters exploit individuals' eagerness to utilize cryptocurrency mining services. The perpetrators of cryptocurrency mining frauds persuade their targets to invest in their mining pool with the promise of substantial returns. Once they receive the funds, the scammers typically cease communication with their victims.
Hence, scammers are capitalizing on the willingness of individuals to use cryptocurrency mining services. The masterminds behind cryptocurrency mining scams convince their victims to invest in their mining pool in order to receive significant profits. Subsequently, the scammers ignore their victims' messages after receiving the funds.
Therefore, scammers are taking advantage of people's readiness to utilize cryptocurrency mining services. The orchestrators of cryptocurrency mining scams persuade their victims to invest in their mining pool with the hope of earning substantial returns. Once they have received the funds, the scammers often cease all communication with their victims.
5. Impersonation Scams
Impersonation cryptocurrency scams vary in appearance and scale, yet adhere to a common pattern of actions. The fraudster assumes a false identity, engaging with potential targets through social engineering strategies. They request personal details from the victims, which can be exploited to access their assets, or solicit cryptocurrency donations for a fictitious purpose.
In 2022, American senior citizens incurred losses of over $1 billion, as reported by the FBI IC3 unit, due to their lack of familiarity with the digital realm. Tech support scams exemplify this, where scammers masquerade as customer service representatives for reputable cryptocurrency platforms, engaging with customers to obtain sensitive information like private keys, ultimately defrauding them.