Cryptocurrency scams are still rampant: New tips to avoid them

Dubai: Over the past few years, cryptocurrency trading has skyrocketed in popularity, with many seizing the opportunity to make additional profits. Crypto is renowned for its significant price volatility, which presents opportunities for traders to make substantial profits in a relatively short period.

However, this also means that crypto trading carries its share of risks. With investors eager to get in early on new cryptocurrency projects, some unscrupulous developers have attracted investments, then walked away before building what they promised - leaving their supporters with worthless holdings.

Crypto scams still rampant

A few scams have emerged in the hype-filled world of cryptocurrency, namely, ‘rug pull’, ‘initial coin offering’ (ICO), or ‘airdrop’ scams – which operate along the same principles. This is part of a long history of investment schemes seen rampant worldwide.

The ‘rug pull’ scam, which gets its name from the expression ‘pulling the rug out’, involves a developer attracting investors to a new crypto project, then pulling out before the project is built, leaving investors with a worthless currency.

Similarly, initial coin offering (ICO) scams involve people creating fraudulent cryptocurrencies, and scammers enticing customers by making false promises, such as offering buyers the chance to sign up for an ‘early release’ of an ICO that will grow in value.

Scammers will then collect funds from investors during the ICO phase but will never deliver on their promises. While these scams have become less common, similar scams are still circulating under different names, such as Initial Exchange Offerings (IEOs) or Initial DEX Offerings (IDOs).

Like the ‘rug pull’ and ‘initial coin offering’ scams, ‘airdrop’ scams involve fake giveaways in which scammers promise free cryptocurrency tokens to investors. They often rise in popularity during the release of new investment projects.

Scammers may create phony airdrop campaigns, asking participants to send a small amount of cryptocurrency or provide private keys to receive the airdrop. Once the scammer has received the funds or personal information, they will disappear.

Scams aren't a crypto-only phenomenon. This is a people phenomenon. Crypto is just a new way to do it

- Akhbar Kharbekh

Not a crypto-only phenomenon

“This isn't a crypto-only phenomenon. This is a people phenomenon. Crypto is just a new way to do it,” said Akhbar Kharbekh, a Dubai-based cryptocurrency analyst. “But cryptocurrencies have risks due to weak regulations for fundraising

“Crypto projects often use ‘smart contracts’, agreements that are governed by computer software, not the legal system practised globally. This setup can be a benefit when it reduces transaction costs, but it also leaves little recourse if things don't work out or the project turns down to be a sham.”

The above scams (i.e. ‘rug pulls’, ‘ICOs’, ‘airdrop’ scams) have been common in decentralised finance, or DeFi, projects that aim to disrupt services such as banking and insurance. NFTs, or non-fungible tokens, that provide digital ownership of art and other content, have also been involved in such scams.

Andre Witzel, a trading expert at Singapore-based trading training website BinaryOptions.com, said: “Ultimately, social media has been both a blessing and a curse in the world of crypto trading. While it’s beneficial in spreading the word about potential investment opportunities, it has also become a means by which to promote harmful scams.

“Scams are an increasing concern when it comes to crypto trading. Over the past few years, a staggering number of people have lost both money and personal information to cryptocurrency scams. Because of this, it’s essential to be educated about the latest scams and report any suspicious activity as soon as possible."

How do you avoid crypto trading scams?

“Investors can protect themselves by choosing established cryptocurrency projects, making sure the code of any new project has been reviewed and verifying the developers' identities. Also, it’s essential to research sources thoroughly to verify potential investment opportunities,” he added.

“You should also research the team behind the projects to ensure that they are legitimate. If the projects involve a website, which most often is the case, always check URLs to identify fake airdrop websites and do your own research to verify the information source.”

Safety tip #1: Pick established products

These scams are most common with new projects that haven't gotten the same scrutiny as more established cryptocurrencies. Bitcoin has its risks, but countless people worldwide have used it and reviewed its inner workings, which are readily available online.

Newer projects don't have such a track record, which means there may be vulnerabilities that make it possible for their organisers to siphon value away from investors and keep it for themselves. One way to find established projects is to look at centralised exchanges such as Binance, Coinbase and FTX.

“While the presence of a cryptocurrency on a large exchange is by no means a guarantee of its quality or investment potential, these businesses often will review assets before listing them for sale,” explained Brody Dunn, an investment manager at a UAE-based asset advisory firm.

“The trade-off of investing primarily in more established assets: While cryptocurrency, in general, has seen periods of rapid price appreciation, the highest rewards may come from new projects where the risk is also higher. These are often listed on 'decentralised (unregulated or unlicensed) exchanges', which don't rely on any centralised authority that would prevent unproven projects from joining.”

Safety tip #2: Know the code behind it

The fate of any investment in cryptocurrency or blockchain projects rests on the integrity of the project's computer code. You may not be a computer programmer, but you should at least understand how a product works before investing in it.

One way to evaluate a potential investment without going under the hood yourself is to see if it's been audited by a professional organization that is respected in the industry. Projects that have gotten good marks from auditors will often promote the results themselves.

Safety tip #3: Research the people that run it

Some of the biggest red flags in the cryptocurrency world come down to human factors. While it's not unheard of for people to use pseudonyms in cryptocurrency, reputable developers often have websites and references that can establish their credentials.

But even if you do your homework, there's no guarantee of success. For example, the founder of Rugdoc.io, a global service that reviews new projects, says she wound up getting scammed herself on an NFT that was supposed to be a ticket for an event.

Diversification is as important in cryptocurrency as anywhere else in finance. Projects can fail due to technical glitches or business blunders, even without malicious intent.

"As well as thoroughly researching any potential investment opportunities, it’s also vital to be conscious of any ‘too good to be true’ offers and stick to reliable platforms,” added Witzel.