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Cryptocurrency Fraud And The Anatomy Of The Scam




With the cryptocurrency market trending worldwide, scammers are also on the rise. As a result, it’s important to be aware of red flags and prevention measures in order to preserve confidence in the cryptocurrency market.

In 2009, an anonymous programmer (or group of programmers) under the name Satoshi Nakamoto released open-source software that established the basis for bitcoin, the first decentralized digital currency. A plethora of other virtual currencies, such as Ether, Ripple, Litecoin, and Dash, have experienced tremendous success in the cryptospace over the last few years. With an over $100 billion estimated market cap at the time of this publication, it doesn’t look like the cryptocurrency market will be slowing down anytime soon.

Along with the increased popularity of cryptocurrencies, the likelihood of being swindled by a scammer has increased exponentially thanks to factors like unverifiable token offerings and vulnerabilities in some wallets and exchanges; it’s becoming easier for criminals to conduct elaborate scams in complete obscurity. According to the FBI:

“A single scam can destroy a company, devastate families by wiping out their life savings, or cost investors billions of dollars (or even all three). Today’s fraud schemes are more sophisticated than ever, and the FBI is dedicated to using its skills to track down the culprits and stop scams before they start.”

Scams usually consist of a fraudulent scheme in which the principal or “scammer” is seeking a quick profit, typically by misrepresenting themself as someone with prodigious skills or clout. In the world of crypto, this could mean a CEO, investor, and/or developer. If conducted properly, the scam can be run under the guise of a deceptive, interactive website, which may or may not include a makeshift white paper to support its legitimacy. Four notorious types of scams are Ponzi schemes, pump and dump, phishing, and bait and switch.

Ponzi Schemes

According to the SEC:

“A Ponzi scheme is an investment fraud that involves the payment of purported returns to existing investors from funds contributed by new investors. Ponzi scheme organizers often solicit new investors by promising to invest funds in opportunities claimed to generate high returns with little or no risk.”

Despite the exuberant promises of high rates of return and low risk, most make little or no money at all. As a result, those already invested are required to increase their recruitment of new investors. This is usually handled through some type of multi-level marketing scheme that the scammer has created in order to separate their victims into classes. A majority of Ponzi schemes eventually flop once it becomes too difficult to enroll new investors or when a majority of those already involved ask for returns.  

Pump and Dump

“Pump and dump” is another type of defrauding scheme that has roots in the stock market. The theory is traditionally applied to penny stocks, but the concept can be easily introduced to the cryptocurrency community due to similarities of the markets. Generally, the pump-and-dump scheme will consist of fraudsters posing as cheerleaders who distribute false, misleading, and/or exaggerated claims about the investment. This typically includes the use of powerful marketing terms such as “hot item” or “the next big thing” in order to attract interest. Usually, the creators of the scam hold ownership in the purported investment opportunity, so once the scammers have swindled enough support for the flamboyant con and boosted the value to a higher share price, they quickly sell their stock (or tokens). As per the SEC: 

 “Pump-and-dump schemes often occur on the Internet where it is common to see messages posted that urge readers to buy a stock quickly or to sell before the price goes down, or a telemarketer will call using the same sort of pitch. Often the promoters will claim to have ‘inside’ information about an impending development or to use an ‘infallible’ combination of economic and stock market data to pick stocks.”


With phishing, a fraudster seeks to gain access to confidential information by utilizing deception. Generally, the scam is facilitated in the form of some type of electronic communication such as email, phone call, text message, or social media. Personalization is what makes this scam so powerful, as it usually involves the victim confirming private information details. For example, a scammer may contact a victim by phone or from an email address that is very similar to one the victim is used to, under the pretense of a trustworthy entity seeking to recover and/or verify customer information due to a technical mishap. Alternatively, the scammer may claim to be conducting an audit due to suspicious or unauthorized activity occurring on the victim’s account. It can even be as simple as a fake login page, where a user relinquishes their username and password. In any case, once the victim’s credentials are obtained, they are used to facilitate even more fraudulent activities, like identity theft and credit card fraud.

Bait and Switch

Similar to the concept of “phishing,” bait and switch scams are commonly carried out in the digital world. Most bait and switch operations involve the scam masquerading as some type of legitimate service, product, and/or website. As a result, users are drawn to lavish aesthetics, promises, and/or threats and inadvertently release their personal information to the fraudsters. However, once the victim inquiries into specifics or becomes suspicious, the promised payoff evaporates. In the cryptocurrency world, this is typically the “scam of all scams,” as the con could give scammers access to confidential information like private keys, and ultimately control of e-wallets and cryptocurrency holdings.

Preventative Measures

Ultimately, it’s the responsibility of the investor to do their homework because no matter how legitimate the venture is perceived to be, it’s always important to conduct extensive research into any potential investment opportunity.

Below is a list of “red flags” that a typical scam might possess. Sometimes these flags are more pronounced than others.

  1. Too good to be true.
  2. Promotes making lots of money fast.
  3. The company operates in a foreign country.
  4. Places importance on actively recruiting more investors.
  5. The company’s general information, such as street address or names of owners, is absent.
  6. No exchange for the token or cryptocurrency being offered; you can’t convert the cryptocurrency or token into cash.
  7. There is some type of “compensation plan” that promises the investor a steady residual income stream after obtaining enough influence.
  8. The service isn’t verified – meaning there is a lack of online/social media presence and support for the investment opportunity.

In addition, within the cryptocurrency industry, there are a number of tools one can utilize in order to safeguard against becoming a victim of fraud. Sites like Smith and Crown and TokenMarket offer tools in which investors can conduct detailed analyses of token offerings and other investment opportunities within the cryptocurrency market. Social media platforms like reddit can be assets, as they offer the ability for investors to receive feedback on even the most arcane and vague investment opportunities in question.

Given the increasing amount of investors entering into the cryptocurrency market, there will always be a small community of bad actors looking to capitalize upon human error. As a result, it’s highly suggested that those actively participating in cryptocurrency investment opportunities be aware of qualities that are associated with scams, and share them with the community. Ultimately, a little knowledge could save not just yourself, but confidence in the cryptocurrency industry as a whole.  

Dan Cummings

Dan is a Los Angeles-based musician, writer, and veteran passionate about science and technology, current events, human rights, economic impacts, and strategic calculus.

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