Crypto investment scams: common types and how to avoid them

Crypto investment scams come in various forms but work on the same principle – they promise huge returns to entice you into investing, with the intention of stealing your crypto assets. In the end, you lose everything that you put in. To avoid falling victim to such fraudulent schemes, it helps to be aware of the warning signs and patterns of deception.

In this article, InvestmentNews delves deeper into the world of cryptocurrency scams. We will give you an overview of the common types of fraud and the tactics scammers use to lure unsuspecting investors. We also talked to a crypto forensic expert who broke down the red flags and explained what to do if you’ve been scammed.

If you’re looking at cryptocurrency as an investment option, this guide can prove handy. Read on and pick up practical strategies on how to keep your crypto assets safe and secure.

I. Is cryptocurrency a good investment?

Investing in cryptocurrency presents lucrative opportunities but it also comes with inherent risks. While you can make lots of money, especially when there’s a surge in demand, there’s also the possibility of losing everything. As with all risky investments, cryptocurrencies can be a good investment option if you know what you’re doing and if they are a part of a diversified portfolio.

A safer but potentially less profitable alternative is purchasing stocks of companies with exposure to cryptocurrency. Some Bitcoins, for instance, are available as spot-price exchange-traded funds (ETFs), including those from BlackRock, Fidelity, and Invesco.

This beginner’s guide to ETFs can give you an idea if investing in exchange-traded funds is the right move.

II. Why are cryptocurrency investments susceptible to scams?

Investors can find plenty of legitimate opportunities in crypto assets. The digital currency’s profit potential and technological loopholes, however, also attract those with malicious intent. Here are some of the top reasons why crypto investments are vulnerable to scams:

• High return potential: Investors may be drawn to cryptocurrency thinking it’s a get-rich-quick type of investment. This can sometimes cloud their judgement, making them fall for schemes that are too good to be true. 
• Complex technology: The intricacies of blockchain make the technology difficult to understand for many investors. Crypto scammers are taking advantage of this knowledge gap to steal your assets.
• Anonymous transactions: Blockchain transactions are conducted through digital wallets. These can’t easily be traced back to individuals.
• Irreversible deals: Once completed, blockchain transactions can’t be reversed. These include illegitimate ones.
• Lack of regulation: Most jurisdictions don’t impose rules on cryptocurrencies, allowing malicious actors to operate with impunity.
• Fast-emerging industry: With cryptocurrency still rapidly growing as an asset class, keeping tabs on new entrants can be challenging. The situation makes it hard for investors to distinguish between legitimate opportunities and crypto investment scams. 

III. How do crypto investment scams work?

Just like other types of investment fraud, cryptocurrency scams are meant to trick you into parting with your digital assets. They take on different forms and often play on emotions such as greed.

“The most common theme when it comes to crypto investment scams are the perpetrators telling their potential victims that they make a lot of money by investing in a specific platform,” said Joshua Cooper-Duckett, director of investigations at CF Investigators Inc.

He added that scammers would often lure unwitting investors by providing inflated profits supposedly from trading assets and encourage them to do the same. They would also share screenshots as proof and volunteer to guide their victims throughout the investment process.

“There are a few variants, each of them different in a sense and perpetrated by different threat actors, but they all have the same outcome – the victims send a bunch of money, purportedly make profits in most cases, and then when it comes to withdrawing, they’ll be asked to pay taxes or fees.

“The fraudsters will continue to make up more bogus fees to extract more money from the victim. But in reality, the profits never existed, and the taxes and fees are just another way to extract money. The victim will never be able to withdraw their ‘profit’ or initial ‘investment.’”

Common types of crypto investment scams

Cryptocurrency scams share certain similarities, but each has its unique aspects. Here are the five main types of crypto investment scams, according to the crypto forensic expert.

1. Pig butchering

In a pig butchering scam, fraudsters “fatten up” their victims by gaining their trust and encouraging them to invest more crypto assets. Once the victims have made significant investments, the scammers “slaughter” them by disappearing with their money. This scam is also called “sha zhu pan,” a Chinese phrase that literally translates to “killing pig plate.”

Cooper-Duckett describes these scams as brutal as they tend to last months or even years. Here’s an overview of how this type of crypto investment scam works:

• The scammer sends a message via SMS or a social media platform, pretending to have the wrong number, but continues with the conversation.
• In some cases, scammers seek victims using dating apps and move the conversation to other messaging apps.
• The crypto scammer tries to build a relationship with the victim and gain their trust. It’s not uncommon for these relationships to turn romantic, even the ones that didn’t start on dating apps. 
• Once trust has been established – often after several weeks or months – the scammers introduce a fraudulent cryptocurrency exchange or trading platform and convince the victim to invest. 
• The victim starts investing small amounts and sees fabricated returns. Often, the scammers will let the victim withdraw small amounts to convince them that the exchange is legitimate. 
• But when the victim tries to withdraw the purported profit, they will be asked to pay fees, taxes, or commissions to complete the transaction.
• Often, there will be a separate line of communication with fake customer support in an attempt to separate the host from the scam and maintain the victim’s trust. The host may also volunteer to lend money to the victim to cover part of the fees, while the victim pays for the rest.
• In the end, the scammer disappears with the victim’s crypto assets.

Learn more about how investment scams work in this guide.

2. Token rug pulls

A rug pull scam occurs when developers withdraw support for a cryptocurrency project, leaving investors with worthless tokens.

“This is where somebody creates a new token to take advantage of some sort of hype and coins it a new ‘meme token,’” Cooper-Duckett said. “They then add some liquidity to a liquidity pool – essentially on a decentralized exchange – to enable people to purchase the tokens.

“When the token price is inflated, the creator will essentially ‘rug’ the protocol by withdrawing the liquidity and dumping their own tokens on the new investors. They basically pull the rug from under the victims; hence the term rug pull.”

This type of crypto investment scam often rides on the hype train and is heavily marketed on social media to reach as many people as possible. A recent example is the Squid Game token rug pull, which cost investors millions worth of cryptocurrency.

3. Trading signals

In this type of crypto investment scam, the perpetrators use YouTube and social media group chats like Telegram to share purported profitable trades they have pulled off, coupled with screenshots of the fake deals. They then try to scam potential victims in a few ways:

• encouraging people to purchase their mentorship program, which will supposedly teach them how to do the same
• volunteering to manage a person’s investments, promising huge returns
• urging people to “get in on the next trade” by sending funds to a specific wallet address under their control

Once the scammers have secured the funds, they remove the victim from the group and keep their digital assets. Scammers rotate groups every so often and use bots to make it seem like there are many participants to gain a potential victim’s confidence.

4. Ponzi scheme

Ponzi schemes work with organizers paying existing investors with money collected from new investors. A popular form of investment fraud, Ponzi schemes are not common in the cryptocurrency world, but they can be successful once they take off.

Among the most notable are Bitconnect and OneCoin. These crypto Ponzi schemes defrauded investors out of an estimated $2.4 billion and $4 billion, respectively.

5. Rip deals

Rip deals target companies, venture capitalists, and startups rather than general consumers and have been gaining traction recently, according to Cooper-Duckett. 

“We’ve seen a few different spin offs of this type of scam,” he said. “Some involve companies that offer a specific service or product, others involve start-up companies themselves that may be looking funding.”

He then breaks down how this type of crypto investment scam works:

• Scammers ask potential victims if they are looking for financing or if they can fulfill a large order through email or other social media channels.
• Scammers arrange video calls to discuss the details of the deal. During these calls, they ask potential victims to provide proof of funds to “collateralize” the deal. The funds must be in cryptocurrency. If the company doesn’t have digital assets, the scammers will guide them to acquiring one. 
• The fraudsters ask to meet the victims in person. The meeting often happens in a public setting, such as a restaurant or hotel. Here, the scammers ask the victim to create a cryptocurrency wallet for storing the funds.
• Once the digital assets are stored, the scammers, who have access to the crypto wallet, steal the funds.

“The method of compromise has not been fully identified,” the crypto forensic expert explained. “But there is speculation that the perpetrators had possession of victims’ devices even for just a few seconds in which they were able to compromise the credentials, or that there are cameras somewhere at the location in which they meet.”

Curious about the biggest investment fraud in recent history? We have them ranked in this guide.

IV. How can you avoid a crypto investment scam?

One of the best ways to avoid falling victim to a crypto investment scam is identifying the warning signs. Here’s a checklist:

It also pays to perform due diligence. A simple internet search often yields eye-opening results.