Cryptocurrency has long been able to escape the grip of regulators, and even with numerous entities threatening to crack down, the decentralized ecosystem will always find a way to stay just out of reach. Although many tout this as a positive attribute, it tends to open up the market to scammers willing to take advantage of the uninformed and unaware. Due to its unregulated nature, the cryptocurrency industry contains numerous bad actors who are able to dupe others with little to no repercussions. Because of this, it’s important to be cautious when operating in the blockchain space. We’re here to help you understand some of the most common cryptocurrency scams and make sure you don’t get bamboozled yourself.
Lately, the most common (and frankly, laziest) attempt to swindle investors has infiltrated Twitter. Bots and fake accounts posing as well-known icons have begun bombarding tweets with promises of bringing 10x returns. Here’s how it works:
Although this may seem like an obvious scam, people have fallen for it time and time again. It’s never wise to send any amount of money to someone who promises any type of return. If it’s too good to be true, it usually is.
*cough* Bitconnect *cough*
Some regulation can be a good thing, especially when it protects the average joe. Typical trading regulations prevent whales with large bankrolls from controlling the market and tricking normal investors to open/close positions that they normally wouldn’t. Without these regulations in place, there are a few common market manipulations that you want to be on the lookout for.
Unless you consistently base your trades on chart analysis, buy/sell walls may not affect you. You can recognize a wall when looking at the depth chart of an order book. Just as the name implies, a wall appears as a high wall on one side of the order book oftentimes 2-5x larger than the other side.
When seeing a sell wall, your first thought may be to panic sell because it looks as if that’s what the rest of the market is doing. On the contrary, though, that usually isn’t the case. Sell walls, like the one pictured above, are usually put up by just one, or a few, individuals. They put up these walls in order to suppress the price and dupe investors into selling. Then, they buy up those coins at the lower price.
If the buy orders begin chipping away at the sell wall, they simply drop the wall. The opposite holds true for artificial buy walls. Understand that these fake walls can disappear at any time.
In an industry where 50% gains in a month are entirely possible, it’s amazing that pump and dump (P&D) groups even exist. Pump and dump groups are coordinated efforts to artificially pump the price of a coin before dumping it on the fooled investors who thought they were catching a rocketship to the moon.
A pump and dump actually cons two separate parties and usually goes something like this:
But, not exactly. Most, if not all, pump and dump groups con the members of the group as well. Insiders and group leaders usually buy the coin before the pump and sell before the announced dump price. Most pump and dumps never reach the stated sell price leaving out-of-the-loop members holding bags as well.
You should avoid pump and dump groups at all costs. On one side, you’re participating in something that’s unethical and soon to be illegal. On the other side, you’re being gotten by a group of immoral insiders.
As an outside investor, be wary of coins that suddenly surge in price. One quick way to determine if the coin is part of a pump and dump scheme is to look at its trading volume. If it’s significantly lower than other coins, there’s a good chance that you’re being swindled.
In the below chart, U.CASH showed a brief 400% pump but only had a trading volume of a little over $25,000. This is a great example of how even a small group or one person can quickly pump and dump a low market cap coin.
Although it may seem like every celebrity has your best interest at heart, many prominent figures in the crypto space are paid to promote coins. Ethically, these endorsers should disclose whenever they’re paid to promote a project. However, there’s currently no law forcing them to do so and they rarely do.
Even forums like Reddit and Facebook can become breeding grounds for people who get paid to promote certain coins.
Take every recommendation with a grain of salt, and as the kids say, DYOR (Do Your Own Research).
Keeping your digital assets on exchanges is incredibly risky. They’re susceptible to hacks, some have questionable management practices, and many have security flaws that have been exposed by the recent influx of new investors. For those reasons, we recommend that you keep your coins in a wallet, preferably a hardware wallet like the Trezor or Ledger Nano S.
Even when storing your funds in a wallet, you should be careful when trading on exchanges.
Phishing attacks are one of the most common cryptocurrency scams. Phishers commonly purchase domains and Google ads imitating popular exchanges. Even the ‘fake’ website looks almost identical to the real thing. Once you enter your credentials, the fake site redirects you to the correct platform, and the thieves empty your account.
To prevent this, make sure you always type the exchange URL directly into the address bar. More importantly, you should have some type of 2-factor authentication enabled for all of your accounts as well.
Be safe out there. The cryptocurrency industry is ripe with nefarious players who have no reservations about taking your money in the blink of an eye. Although there’s no possible way to avoid all cryptocurrency scams, following the above tips and staying vigilant will do a lot of good. Don’t end up as the dummy who lost it all in an attempt for some easy gains just because Elon Musk guaranteed it.
Steven Buchko
Steven is a managing editor at Coin Central and a blockchain investor. He’s also the co-founder of Coin Clear, a mobile app that automatically turns your daily spending habits into cryptocurrency investments.