Cryptocurrency scams are on the rise. Here’s how to avoid them


There's a significant advantage to getting on the crypto bandwagon early. Source: Unsplash/Jason Briscoe.

There is no denying the growing popularity of cryptocurrency worldwide. Even here in Australia, well-respected institutions like the Commonwealth Bank of Australia are getting in on it. While developments like these are putting the country at the forefront of the blockchain revolution, there is another worrying trend that comes with it: more Australians are falling victim to cryptocurrency scams.

In the first half of 2021, Australians lost $70 million in investment scams, with more than half lost through crypto scams alone. With over 7000 digital currencies in existence, and new coins being created almost daily, we’re seeing a rise of malicious actors looking to capitalise on the inexperience of novice investors.

Unfortunately, crypto scammers are often difficult to catch. With most offenders operating purely online, money lost to scams can also be difficult to recover. However, like most things, prevention is better than the cure.

Education and equipping yourself with knowledge and information is vital to protecting yourself. Below are the three most common types of crypto scams and how you can avoid falling victim to them.

1. Crypto phishing scams

During a phishing scam, a malicious actor impersonates a credible figure or organisation to gain information that will enable them to steal your cryptocurrency. The messaging in a phishing attack usually expresses some form of urgency, either to prompt you to react impulsively to an alleged emergency or to claim a time-sensitive reward.

In the crypto world, you could also run into someone pretending to be part of a crypto exchange’s customer support team. In cases like these, fake support numbers are posted online, which are then found by victims looking for information. During the interaction, the scammer will then instruct the victim to send their cryptocurrency to a “temporary” wallet — one that is actually owned by the scammer. The funds are then never returned.

The most effective way to prevent phishing scams is to be careful about who and what you engage with whenever you’re online. Pause and check the authenticity of every sender’s contact information, and most importantly, never share your personal identifiable information, passwords, or wallet recovery phrase with anyone.

As cybersecurity continues to develop more advanced security solutions, we expect scammers to focus increasingly on human fallibility. Using crypto trading platforms that are proven to be safe, secure and regulated, is the best way to protect yourself and your assets. While you should take advantage of the cybersecurity tools at your disposal, keep in mind that vigilance and caution is your first line of defense.

2. Ponzi schemes (also known as pyramid schemes)  

Ponzi schemes involve tricking people into investing in fraudulent enterprises or crypto, either knowingly or inadvertently. Scammers rely on a continuous stream of new victims, lured in with the promise of easy profits or sizeable returns, to entice participation and prop up the scheme.

Early victims are typically rewarded with the scammers’ initial seed money or the funds from newer victims. Left unchecked, this system typically perpetuates until either the scammers are satisfied with their bounty, or the perpetrators are unable to attract enough new money to cover the earnings earlier victims have come to expect. In both instances, these schemes typically end with the scammers making a quick exit with the funds they’ve accrued. Ponzi schemes are fairly common but also fairly easy to identify. Red flags include promises of high rates of return with minimal risk as well as lack of information about the team behind the coin or the business itself.

All investments within the crypto space come with a certain level of risk. Investments that are marketed as lucrative guarantees should be viewed with a healthy dose of scepticism. Even if an up-and-coming cryptocurrency seems promising or is recommended by a friend, be sure to conduct your own due diligence instead of being swept up in a wave of excitement. To avoid these situations as an investor, make sure to inspect whitepapers closely and verify project team members’ identities and credentials. Always do thorough research before making any investment decisions and don’t invest in something you do not have a clear understanding of.

3. Pump and dumps

A pump and dump scam involves a group of instigators coordinating their efforts to pump up the price of a coin to attract other investors, before dumping their investment at a higher price.

Scammers will often try to garner interest in the crypto they are targeting by shilling (i.e promoting) the coin on multiple social media platforms, forums or messenger apps. If scammers convince enough people to buy in, the surge in demand may spike the coin’s price. Once prices are high enough, scammers will typically sell off all their holdings at the inflated price causing a quick crash and leaving victims with often potentially coins.

Pump and dump schemes fall under market manipulation and are considered illegal under Australian Securities and Investments Commission regulation, with perpetrators facing fines of over $1 million and up to 15 years imprisonment. However, pump and dumps remain rife in the crypto space due to lack of adequate regulation and oversight. The ease of online anonymity in combination with the global nature of crypto also makes it difficult to track down perpetrators to hold them accountable for their actions.

Given how new the crypto space is, it’s not always easy to tell the difference between credible projects that are attracting legitimate interest and a fake coin designed to take advantage of new investors. The best way to avoid falling for a pump and dump is to take a closer look at the projects you’re interested in, rather than basing investment decisions on pure hype. You can also look at the exchange it’s currently listed or available on.

There is an impending transformation in Australia’s crypto landscape, and we can expect the government to establish a proper regulatory framework in the near future to provide protection for all investors. However, until then, it is up to every investor to do their own research before taking part in the new digital economy.


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