As cryptocurrency becomes more popular, more and more scammers come out of the woodwork.
Scams often revolve around ICOs (new coins that offer a chance to buy in early at a discount). However, there are other types of scams to watch out for.
In a very general sense one should watch out for:
Anything that isn’t buying crypto directly: If there is an opportunity to give money to someone to invest for you, or to follow a trader… its probably a bad move. If you don’t hold your private keys directly, or if you don’t otherwise use a trusted custodial source like Coinbase (a hybrid wallet-broker), you are playing with fire. Not saying there isn’t opportunities like crypto hedge funds or the GBTC trust on the stock market, but in general the idea that you’ll give someone a bunch of money and they will turn it into more money and give it back to you is shady.
Ponzi schemes: Any coin or coin-like gambit where getting other people to buy in results in you moving up a tier and getting more coins (for example lending systems like Bitconnect). The more complicated the structure, the more likely it is that it is a scam. Not everything that works this way is a scam… but if something says “this isn’t a pyramid scheme,” as a rule of thumb, RUN. If a coin isn’t listed on major exchanges, RUN.
NOTE: OneCoin, Bitpetite, and REcoin have all been essentially been shown to be scams. Bitconnect is the latest odd cryptocurrency gambit in question (the verdict is still out on that one). These are just some examples of things that are Ponzi-like and in cases don’t involve investing in crypto directly. UPDATE 2019: I wrote this in mid-2017, the verdict is in on Bitconnect, it was a pyramid scheme and scam like everyone had feared.
“Fake ICOs”: The SEC recently warned against scam ICOs. This was a wise warning. Speaking in loose terms, let’s say that for every 10 ICOs, 1 will be a scam, 8 won’t be successful, and 1 will do well. If you were a venture capitalist, you might invest in 10 companies with the hopes that one does well. This is reasonable with ICOs too, but you need to vet the ICO. If you are unsure, wait until the coin is released on the open market to buy. ICOs can get hyped hard online, and it can be easy to get overly excited.
Scam Forks: Bitcoin Cash ended up being an excellent investment for Bitcoin holders who got free BCH. Bitcoin Gold was a little shady, but it was worth holding BTC during the Bitcoin Gold fork for free coins. However, many projects that bill themselves as a fork of an existing coin end up being scams including but in no way limited to Bitcoin Platinum, Ethereum Nowa, and Cardano Classic. Sometimes the fork is real, but it is an unsupported and pre-mined cash grab. Sometimes a fork is real, but a lack of replay protection and other choices made by developers can lead to users losing coins. Sometimes the “fork” is actually a complete scam with malware designed to steal coins piggybacking on the good name of an existing project. Suffice to say, not every hard fork is created equally. In general, as a rule of thumb, one shouldn’t chase “free coins” created by hard forks. If they do, they have to be ready for anything after the fork. Even a legitimate fork like Bitcoin SV can result in major drama and price drops for holders, so be careful.
Paid Groups Run by Conmen: You can find Gurus everywhere you look today, many jumped on the bandwagon in 2013, many more jumped on in 2017. There are countless paid groups. Some are run by upstanding figures who put the work in. Others are run by scam artists. If you aren’t careful you can end up in a pump and dump group that is feeding you bottom of the barrel signals and having you participate in grey area actions, or you can end up paying for information that is either bunk or coming from somewhere else. Many will be eager to take your money in the crypto space, you have to be discerning.
“Fake News” or “Real FUD”: Sometimes the talking point of the day revolves around how exciting it is that Bitcoin is doing so well. Sometimes it is about how neat ICOs are. Sometimes it’s about this giant tulip bubble where everyone is going to lose their shirts. Sometimes it’s about state-level bans. Sometimes it’s about states embracing crypto. Good news and bad news can come at you like a ton of bricks and distort the markets. When that news is fake, it can be really frustrating. Watch the news. Not only does it have an organic effect, but it also offers up a reason for manipulators to push the price up or down.
“Fake Prices”… That is, Bots and Whales Manipulating Prices: Some people say, “there are some whales (people with many coins and fiats) manipulating the crypto market.” Like, say, someone with crazy capital using spoofing bots to push up BTC and suppress alts during the months of Sept – Nov (exaggerating the trends in those months). Or, like, a group of investors with deep pockets coordinating a pump and dump of your favorite rando alt at the expense of the inevitable bag holder (person who holds past the dump). When people don’t know a ton about crypto, or when they have a case of the crypto-mania, they look at Bitcoin’s price and exclaim “**bullish**.” That is reasonable. However, if you discount manipulators and think all action is organic action, you could be in for some pain when the next correction comes. If a whale is propping up weak knees, or if a whale is suppressing organic growth, or if a whale is creating artificial growth, what looks one way today, could really be another in reality. $5k Bitcoins seem reasonable when we are there, but I mean, why then was China panic selling $3.2k bitcoins in September? What I am dancing around here is this concept: “be aware of your environment and protect your internet money from robo-whales?” The future is awesome, but it can also be a little like a bizarro version of the Wild Wild West filled with robots (see: that Will Smith movie with robots).
“Fake Wallets” (Malware Wallets): There are fake wallets out there that steal your coins. They act like a wallet, but they are actually malware! When a coin forks or a new coin comes out and people are confused, it isn’t uncommon to see fake wallets pop up. Make sure to use wallets officially endorsed by the entity or community behind the coin. If you are unsure, do more research. Following random online instructions can be a really bad move.
Those are just some, not all, of the scams out there. Not everything we noted above is equally scammy, but they are all things to watch out for.