The Most Common Cryptocurrency Fraud Schemes

January 25, 2022

Cryptocurrency Scams and How to Avoid Them


The surge in fraud activity observed recently is attributed to the heightened emphasis on cryptocurrencies. Furthermore, the decentralization of Bitcoin renders crypto traders and investors nearly entirely anonymous, enhancing the significance of immediate granimator. This underscores why nations worldwide are actively engaged in formulating suitable regulatory and law enforcement frameworks.

Today, there are a lot of crypto scams worth paying attention to, but some of them are more common than others: investment frauds, phishing scams and cryptocurrency pyramid schemes.

Why Cryptocurrency Fraud Occurs

According to Time, between March 2020 and August 2021, fraudsters managed to steal about $80m using scams. Over 7,000 users have complained about the actions of criminals in the cryptocurrency industry over the past year. The activity of fraudsters will only increase, as there are currently no effective methods to track them down. This is largely due to the anonymity of transactions within the blockchain network.

Of course, traditional currencies also bear the risk of fraud. However, there are certain differences between fiat money and cryptocurrency that have a direct impact on their susceptibility to scams:

  • Unlike bank transfers, where sending funds to another person would require proof of identity and multiple identification options, the blockchain system does not store data on network users and does not require proof of identity when sending digital coins. Many blockchains now support the function of anonymous transfers, where it’s not possible to trace the sender’s address. Thus, cryptocurrencies can provide complete anonymity to the user, unlike fiat transfers, where some proof of identity is required.
  • A distinctive feature of cryptocurrency transactions is the lack of a transaction cancellation function. Having made any transfer, you will not be able to cancel it and return the funds. In the case of fiat money transfer, it’s possible to demand from the organization that made the transfer to return the payment.
  • When you keep your savings on bank cards or in some payment systems, you can always restore access to your accounts. Losing your bank card or account access does not mean losing your funds. In the world of cryptocurrencies, it’s different. If a user loses a private key, all cryptocurrencies will be lost forever – it’s simply impossible to restore the key or access your crypto-assets without it.

Now let’s talk about the top common cryptocurrency frauds.

Top Common Cryptocurrency Fraud Schemes

In 2021, the amount of fraud increased compared to the previous year. There are many different ways that scammers use to get hold of your money. We will consider the most common among them: investment frauds, phishing scam and cryptocurrency pyramid schemes.

Investment Fraud

Sometimes a fraudulent company launches a new cryptocurrency coin or token claiming that it addresses some critical needs in the market. Then it launches an ICO (an initial coin offering). It is a simple scheme built on advertising the high profitability of investing in the new cryptocurrency.

Fraudsters create a website and social media accounts of an apparently very promising blockchain project that does not have sufficient funding to develop further. They announce an ICO. Users buy up tokens, hoping for a quick 700-1,200% profit. And then the project’s organisers disappear without a trace, having taken all of the invested funds with them. People realise the uselessness of the purchased tokens, but there is nothing that can be done to remedy the situation.

It is possible to profit from funds invested in an ICO but you need specific skills and knowledge to develop competitive strategies. A full analysis of an ICO project is necessary. There is a 15% chance of investing capital in a failed or fraudulent idea. So, it’s better to invest in ethereum or any other time-tested cryptocurrency to get profit.

Phishing Scam

Undoubtedly, one of the leading ways to cheat is phishing. Attackers create fake exchanges and cryptocurrency wallets. On the outside, they look like the original websites, but their goal is to steal the money of the users. Well-known services such as Binance or are often targeted. In 2019 alone, more than $4bn-worth of cryptocurrencies were stolen.

The most common mistakes of newcomers are:

  • Absence of anti-virus protection
  • Following links in messages from unknown people
  • Absence of address bar check
  • Usage of the same card for all payments.

If you know you’re guilty of some of these frequent user errors, make sure to take measures to protect your funds further.

Cryptocurrency Pyramid Scheme

No less popular are pyramid schemes, also known as Ponzi schemes. Their essence is that funds are paid to the first investors to “feed them” through new investments. Such schemes have become popular again amid growing interest in staking and yield farming. These are methods of cryptocurrency mining that are often used to disguise pyramid schemes.

A prime example is SharkTron, a crypto pyramid scheme that looked like a regular DeFi platform. Users steamed TRX tokens and farmed “funnies”, the rate of which was maintained at the expense of the depositors themselves. Later, the founder of the pyramid made an exit scam and stole more than $7m worth of TRON cryptocurrency.

Final Thought: How to Protect Your Money

It is extremely difficult to prevent crypto fraud legally due to the peculiarities of the crypto industry. Decentralized services operate autonomously, and it’s impossible to prevent suspicious transactions. The only thing regulators can do is freeze accounts when someone is trying to exchange stolen cryptocurrency through centralised exchanges. However, this is not easy to do, as various elements help fraudsters cover their tracks.

Prohibiting people from investing in cryptocurrency and using DeFi-applications would be too radical. One way to protect people from crypto fraud is not to prohibit the use of cryptocurrency by law, but to provide education and teach crypto holders to recognize scams.

DeFi platforms should cooperate with regulators. This is the only way they can protect users. In addition, the lack of regulation of the crypto market is detrimental to the very ecosystem of decentralised finance. Much of the liquidity is laundered money, because of which users have additional losses or receive less profit from the pool of liquidity.

Unfortunately, users often fall victim to the most obvious ways of deception, and the main weapon against it is a strong knowledge base.

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