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5 Hard Lessons I Learned About Crypto Scams

October 28, 2018
Yuval Halevi


5 Hard Lessons I Learned About Crypto Scams

It’s almost hard to remember the days when bitcoin and other cryptocurrencies were on the sidelines of the financial world. Nowadays, financial mainstays like Bloomberg and Forbes regularly cover the cryptocurrency markets and it seems all but impossible to not hear about the current state of crypto and blockchain technology in the news.

Though bitcoin was once associated with the dark web and The Silk Road with very negative connotations, recent years have given way to CNBC hosts showing viewers how to purchase their very first bitcoin.

Yet, even as cryptocurrencies continue to make a name for themselves and blockchain technology is recognized as a legitimate tool being implemented across various sectors of the economy, there are still some scams to watch out for.

Because the emerging asset class is so new — and so many people are not educated on it — there are opportunists looking to strike and take advantage of newcomers in the industry before more regulatory safeguards are put in place.

Here are 5 lessons I’ve learned along the way that others need to be aware of, even as the industry begins to mature.

Questionable Crypto Exchanges

Coinbase? Great. Binance? No problem. Robinhood Crypto? Sure, let me sign up.

There are plenty of completely legitimate cryptocurrency exchanges out there to choose from and the security standards continue to improve. For American crypto enthusiasts, exchanges like Robinhood and Coinbase have already jumped through all the regulatory hoops required to even allow fiat pairings and provide users with the appropriate tax documents.

However, not all exchanges are created equally.

It’s important to first properly vet a crypto exchange before handing over any of your personal information and transferring funds to an exchange wallet. In the past, there have been exchanges with lax security measures in place that were compromised. Nearly everyone remembers the infamous Mt. Gox hack where $1 billion worth of bitcoin was stolen.

Always do your research ahead of time before using an online exchange and all serious crypto investors should consider the use of a hardware wallet for substantial crypto holdings.

Remember that online exchanges are not banks and that if you don’t own your private keys, you don’t own your crypto.

Ponzi/Pyramid Schemes

The next scam to look out for is often difficult to detect, a Ponzi or pyramid scheme. These types of scams can be difficult for newcomers because the scam isn’t any type of conventional hacking or phishing for your personal information, but rather a group of people looking to take advantage of you, your time, and your money.

A Ponzi scheme is a setup where an individual or group promises investors (read: marks) high rates of return with little risk involved. Rather than invest the money coming into the scheme, the organizer(s) typically pocket the money and use money from new “investors” to pay the older ones. After a while, when there are no new “investors,” the entire scheme comes tumbling down.

Recent crypto history is full of Ponzi and pyramid schemes that real investors can learn from in order to know what to avoid. Here are some you should be familiar with:

Before being later redacted, BitConnect even used an actual graphic of a pyramid on the official site to sell potential “investors” on how they would see returns from inviting more people to join the scheme.

As a general rule of thumb, remember that if something sounds too good to be true (high reward, no risk), then it probably is. Make sure to learn the crypto jargon and be able to recognize pyramid and Ponzi schemes sooner, rather than later.

Bitconnect Pyramid scheme
Before being later redacted, BitConnect even used an actual graphic of a pyramid on the official site to sell potential “investors” on how they would see returns from inviting more people to join the scheme.

Exit Scams and ICOs

Initial coin offerings (ICOs) are essentially the initial public offerings (IPOs) of the cryptocurrency world. We’ve seen a lot of this in Guerilla Buzz’s marketing activities on Telegram and even on Reddit. Although Reddit is good about ousting questionable Redditers.

Like in the traditional equities markets, companies and projects are looking to raise money for their team or project and need to offer something to investors in return. Rather than offer stocks, blockchain-based projects offer coins or tokens that will be usable with their future platforms. There’s nothing wrong with this model, but it’s important to know what to look for when considering investing.

There is a lot of research that should be done when considering participating in an ICO, but that’s an entirely separate post for another time. The biggest factors you need to consider are the use case of a coin or token and the team behind it. Like with pyramid schemes, there are bad actors behind certain ICOs who may never develop the platform or product and immediately disappear at the conclusion of the token sale, thereby stealing all the investors’ money.

Some countries have even banned ICOs altogether, however, there are plenty of legitimate ICOs and other alternatives (like “STOs” and “SAFTs”) going on all the time. Filecoin, for example, has raised a substantial amount of capital from the likes of many respected investors including the Winklevoss brothers. Remember, even Ethereum once held an ICO; now that was a good investment to get in on.

‘Pump and Dump’ Schemes

This point likely won’t require much explaining, but should be mentioned. Of the bad actors in the crypto world, there are some groups looking to take advantage of less informed newcomers and crypto traders. These groups often try to attract unsuspecting traders to their Telegram, Discord, or other social media chat groups to decide on a coin or token to “pump” and subsequently “dump.”

The trick is to get a lot of people to buy the same coin, causing the price to go up (the “pump”), then after they’ve hit a “price target,” they all sell their coins at a higher price than what they bought it at (the “dump”).

However, these groups are always looking to take in newcomers and will “dump” the coins on the exact same traders who actually think they’re ‘in’ on the “pump and dump.”

Also, it should be mentioned that “pump and dumps” are illegal in the US and the Commodity Futures Trading Commission (CFTC) is even offering bounties to anyone who can help them catch culprits.

Get Rich Quick Schemes

As I touched on earlier with Ponzi and pyramid schemes: If it sounds too good to be true, it probably is. Whenever you’re dealing with the financial world — whether crypto-related or not — you should always be on the lookout for schemes that just don’t quite sit right with you. This is especially true with anything claiming incredibly high returns in a short period of time. More often than not, you’re best off to steer clear of these offers and the people behind them.

Are Cryptocurrencies All Bad

So what does all this mean for you? Are cryptocurrencies bad?

Of course they’re not.

However, there are some important factors that you should always consider when looking at making any investment or participating in a startup, especially in the cryptocurrency world. We tend to talk about the negative aspects a lot, but that’s just so newcomers know what to avoid.

There are many fantastic opportunities out there to choose from.

Just remember that you should only be investing with money you can afford to lose and to always do your research before making an investment or participating in a startup, not after you’ve committed.

Yuval Halevi

I'm a traveler turned entrepreneur & marketing freak. In 2017 I founded CryptFlix, an online website helps people to learn about the crypto world by watching videos. The website had a huge success and reached 250,000 visitors within the second month. Since then I founded GuerrillaBuzz, A boutique marketing company that helps ICO's & Blockchain related projects from all over the world to create a real buzz around their brand. We invented a creative marketing approach that so far helped our clients to raise more than $100 Million and to be seen by millions of cryptocurrency enthusiastic and traders across the globe.