2021 was by far the best year to be a digital thief, scammer or out right crook. The FTC (Federal Trade Commission) estimates that in 2021, around $14 billion dollars worth of cryptocurrency was stolen from investors worldwide through a combination of scams and outright digital larceny. This compares to the approximately $7.8 billion of theft that occurred in 2020. Americans alone were fleeced of their cryptocurrency holdings to the tune of $750 million. Better yet, according to early statistics, scammers are well on their way to making another record haul in 2022.
So…..how did we get here? Well as you might of guessed, a confluence of factors have contributed to the recent success of crypto scams. First, the Covid-19 pandemic forced governments to mandate stay-at-home orders; effectively forcing millions of people to interact with their computer screens at far higher rates. Financial uncertainty (and a briefly high savings rate) during this time also made people consider investing in riskier assets; cryptocurrencies being the chief among them.
The Perfect Vehicle for Scamming:
We should also take note that two things make the cryptocurrency space especially attractive to scams and fraudsters. First, while cryptocurrencies like bitcoin, ethereum and ripple are supported by a completely open, transparent and trackable ledger which allows you to trace every single transaction made by a particular cryptocurrency address; it is still very easy for unscrupulous actors to obtain those cryptocurrency addresses anonymously and thus transact money anonymously. Secondly, while great efforts are being made by governments worldwide; cryptocurrencies do not fit neatly into the existing global legal/regulatory framework.
Additionally, our very recent social and geo-political atmosphere gives many the impression that our economic success is built on the lottery-style, get-rich-quick schemes characteristic of our “hype economy.” Speculation in every sector of the economy has produced clear winners (while leaving a lot of misery in its wake). But as a growing number of Americans are facing financial instability in the face of 2 back-to-back recessions and record high inflation……speculation might feel like sweet, sweet relief to many. But anyway, I digress. Let’s start with the basics:
Types of Crypto Scams:
Crypto scams are very much like the multitude of other digital scams that have evolved over the course of the internet’s growth. And yet the opaqueness, newness and hype surrounding crypto make them shockingly effective. Here’s a breakdown of the most dangerous ones to date:
Fraudulent Initial Coin Offerings:
Initial Coin Offerings or ICOs for short are a way for cryptocurrency start-ups to raise money. This money is often raised from future users of the cryptocurrency being funded. For instance, a start-up company will offer people a brand new cryptocurrency that a company has created at what they call a “discounted” rate. In exchange, people will send the company some of the active or more notable cryptocurrencies like bitcoin, ripple, etc. Unfortunately, many ICOs and the companies behind have turned out to be completely fraudulent.
Cloud Mining
Cloud mining is a practice whereby a company rents out coin mining hardware to users in exchange for a fee and a cut of any mining profits that the users obtain. In the early days of the Crypto boom, cloud mining may have been a popular venture. Yet, today many of these firms have proven to be fraudulent. Please approach any of these firms with extreme caution. Furthermore, as the costs of mining have increased for the most valuable currencies, profits from cloud mining have greatly diminished.
Phishing Scams:
Phishing scams are almost as old as the internet itself. These scams usually involve fraudsters using email, text or social media channels to obtain your sensitive/ personal information for the purpose of stealing your money or identity. In the Crypto space, phishing scams generally target the sensitive information surrounding your crypto wallet such as your wallet encryption keys. That being said, you should always be wary or emails, texts or dms that request specific information about your crypto wallet.
Pump & Dump Schemes:
Pump & Dump (aka Pump n’ Dump) is a scamming technique that has roots in stock trading. Fraudsters collaborate to first by large amounts of a cryptocurrency. They then hype it up so that investors buy it in large quantities (the pump). This make the price of the cryptocurrency rise substantially. When the price has risen sufficiently, the fraudsters sell their holdings. This usually causes the price of the cryptocurrency to fall and causes many hapless investors to lose money.
How To Protect Yourself:
Whatever the future may hold, most of us want to be a part of (what may become) the next big transformation in our financial system. But to do so without losing your shirt, we should take precautions. Specifically, at the bare minimum we should take active steps to……
Protect Our Crypto Wallet:
To invest in crypto you will need a wallet that has private keys. If anyone…company, the SEC, Matt Damon himself…..asks you for your private keys in order to participate in a crypto investment; you are almost certainly dealing with a scam. And in fact, you should….
Consider Getting A Cold Wallet:
A cold wallet (aka a hardware wallet or offline wallet) is a crypto wallet that by definition is much harder to compromise because it is generally kept offline on a usb drive or external hard drive. In fact, the biggest danger in using a cold wallet is the fact that you can easily lose the device containing you cold wallet (and thus lose all crypto on said wallet).
Limit Our Crypto Exposure:
As the old adage states…”never risk more than you can afford to lose.” And for now, this should apply to everything in the crypto space. In fact, financial experts recommend that that for most people cryptocurrency should not encompass more than 5% of your total financial holdings.
Report Fraud:
If you have been the victim of a cryptocurrency scam or any other type of financial fraud, there are at least 3 agencies you should contact first. Each one have a convenient website form dedicated to fraud reporting.
The Commodity Futures Trading Commission (CFTC): CFTC.gov/complaint
The Securities Exchange Commission (SEC) : sec.gov/tcr
he Federal Trade Commission (FTC): ReportFraud.ftc.gov
Of course, given how new the crypto space is, you should not expect a quick resolution to any fraud case. For this reason many fraud victims have also turned to support groups on Reddit and Facebook for support and advice.
The Upside:
Of course, not everything is doom and gloom. The basic use the bitcoin ledger framework of crypto regulations are starting to take shape worldwide. This is a major step in the process of getting crypto widely accepted by all parts of society. Moreover, it turns out that even the criminals are having a tough time dealing with the complexities of crypto.
Remember the Colonial Pipeline hack in 2021? Although the hackers received the $2.3 million worth of bitcoin they requested; law enforcement was able to use the bitcoin ledger to trace where the money actually went and retrieve a substantial amount of it. Even better, do you remember Heather Morgan and Ilya Lichtenstein, the young Brooklyn couple who was found in possession of $3.6 billion bitcoin? The only reason they were found out is that they accidentally used some of their stolen tokens, an act which was recorded on the bitcoin ledger which led to their arrest.