Scams in Cryptocurrency
Before you begin investing in cryptocurrencies, You should be aware of the common scam practices scammers use and certain red flags to look out for.
Scams refer to scammers using illegal methods to steal your digital assets through phising, blackmail, Ponzi schemes, and fake exchanges etc.
What are the scam examples?
Spoofing
Creates an illusion of momentum by placing fake buy or sell orders, but cancels the order before they’re filled. By placing large trade orders, investors will think that there is an increase/decrease in demand
Churning
Excessive trading by a broker in a client’s crypto account to generate large commissions. Brokers with bad intentions will abuse a commission-based payment structure to profit off of unaware clients. Investors might even have extra tax liabilities.
Front-running
Making trades based on knowledge of future transactions. Miners or node operators can get insight into pending trades and could use this intel to make profitable trades ahead of major price swings
1.Market Manipulation
Scammers will deliberately try to influence or interfere with cryptocurrencies price. Scammers do that to tip the prices in their favor and make quick returns. These illegal trading activities can be categorized into 3 categories, Spoofing, Churning and Front-running.
Prevention for Market Manipulation:
Trade on larger, reputable exchanges that have established security policies and internal controls.
Research the cryptocurrency you want to invest in, the broker that you are going to hire, and the exchange you plan to use thoroughly before marking financial decisions.
2. Phishing Scams
Scammers will try to target information relating to investor’s online wallets by getting investor’s crypto wallet private keys. Scammers will send emails and messages to an investor to lure them into clicking a link which leads to a fake website where they can steal your account details.Lorem ipsum dolor sit orot alom amet, conse tetur adipiscing elit. Proin rutrum euismod off dolor ultricies aliq luam ekolor tolos alopma.
Preventions
– Never submit or enter secure information from an email link
– Don’t click on suspicious links or reply to suspicious messages
Don't fully trust social media!
3. Pump-and-Dump Schemes
An individual or a group will try to inflate the price of toy so that they than sell their own holdings for a profit. It is similar to marketnipulation but it starts by convincing people to buy the cryptocurrency by spreading false information online. They will try to make it seems like the investment will increase soon which lures them into buying. Afterwards, the schemes will sell the cryptocurrency and make a quick fortune. When investors find out, the price of the cryptocurrency will drop instantly. What you can do to prevent falling for pump-and-dump schemes is not to fully trust the information on social media.
Preventions for rug-pull scams:
- Don’t try to get early access to up-and-coming cryptos
- Remember that “If it sounds too good to be true, it probably is”, from Shaun Heng, VP of Growth & Operations at CoinMarketCap
- Don’t fully trust the information on social media
- Stick to centralized cryptocurrency exchanges as they have stricter oversight and regulations
4. Rug Pull Scams
Crypto developers abandon a project but keeps the funds raised from investors. Scammers will list a new token on a decentralized exchange, pair it with a legitimate cryptocurrency and try to hype up the token on social media to attract investors. Once the money raised meets their expectation, the developers abandon the project and leave with the funds of investors.
5. Initial coin offering (ICO) scams
Companies can raise money to fund a crypto development. Investors will get newly minted coins in return. It is similar to rug pull scams where companies collect the funds and abandon the project afterwards. Before you decide to invest in a crypto project, you should ALWAYS check the company’s whitepaper. The whitepaper includes all the details behind the project and if there isn’t one, it is a REG FLAG!
To prevent falling into these traps, never rush in descion making, always do researches before putting money into an exchange. Also, pick the largest exchanges and always avoid suspcious exchanges that claims to have high returns opportunities.
We hope that you will learn from these cases, understand the risks and spot the red flags when investinig in cryptocurrency!
Case Studies
Disclaimers: The information on this site is for general information purposes only. It is intended to be used by virtual assets investors, but it does not constitute professional advice, whether legal or otherwise, and does not purport to be comprehensive. You should seek legal or other professional advice before acting or relying on any of the content. LITELAB@HKU does not accept responsibility for any loss that may arise from accessing or relying upon the information contained on this site.