Rug Pulls, Pump-and-Dumps and Fake ICOs: The Hidden Dangers Lurking in the Crypto Market

Vault’s Viewpoint on Cryptocurrency Scams

• Investors have lost billions to crypto scams over the years.
• Some common types of crypto scams include rug pulls, giveaways, and Ponzi schemes.
• Being aware of how these scams work can help investors avoid them.

Types of Cryptocurrency Scams

Crypto scams come in many forms. Some of them use classic scamming tactics like phishing attacks or Ponzi schemes. Others are more unique to crypto and might be harder to spot.

Phishing attacks are among the most common. Many scammers target people who might hold crypto, like those who work in related fields or post about their crypto activities on social media. But anyone can fall victim to these schemes.

Here is an overview of some of the most common types of crypto scams.

Giveaway Scams

Giveaway scams lure victims with offers of free cryptocurrency in exchange for a small initial deposit. Victims deposit money in the hopes that a significant amount of crypto will be added to their wallets. Eventually, the idea is for the crypto to appreciate, offering significant returns.

Unfortunately, once the money is sent, the deposit disappears. Users receive nothing, or they receive worthless memecoins. The scam sometimes includes an AI-generated deepfake of a person like Coinbase CEO Brian Armstrong or MicroStrategy founder Michael Saylor. The image talks about the giveaway, making the scam seem real. To avoid these scams, never send crypto to take part in a so-called “giveaway” program.

Investment Scams

An investment scam offers an “opportunity” to invest in “the next big cryptocurrency” with high returns. These scams may use useless or made-up coins and fake charts to get users to invest.

Scams like these have tricked a lot of victims, but the good news is they can be the easiest to spot. To stay safe from these, avoid anyone promising their tech or investment product to be bigger and better than the rest. Also, be on the alert for someone who tells you that you won’t be able to invest later. Anyone who puts pressure on you to buy immediately or “miss out” is likely getting ready to scam you.

Phishing Scams

Phishing scams mimic real cryptocurrency services and trick individuals into giving up sensitive information, such as private keys or wallet passwords. These scams can be among the hardest to avoid because scammers keep getting better at making their messages look legitimate.

To prevent getting caught up in a phishing scam, avoid making yourself an easy target:

• Always double-check URLs
• Never share your private keys or passwords with anyone
• Avoid clicking links or downloading files from untrusted sources
• Don’t share information about your crypto activities on social media

Pump-and-Dump Scams

In pump-and-dump schemes, scammers pump the price of a cryptocurrency by hyping the token on social media. This then causes the price to rise to record highs. This is the “pump.” Insiders then “dump” their holdings, causing the price to crash. Investors who bought into the hype lose money because they bought in while prices were high, and the crypto is unlikely to recover after the crash.

Pump-and-dump scams aren’t unique to crypto but are more common in crypto markets than elsewhere. That’s likely because these schemes are illegal in regulated stock markets. Plus, it’s harder to track cryptocurrencies, and the newness of the asset class makes it harder to distinguish the value of the investment. To avoid these crypto scams, be wary of sudden price surges and overhyped crypto projects.

Rug Pull Scams

A rug pull scam involves project creators making off with investor funds without warning. This is often done through fake websites or fake crypto projects. A scammer may create a website posing as a crypto wallet or investment scheme, asking users to deposit funds. After some time, the website disappears, while scammers steal the funds that have been deposited. Or, a similar crypto fraud could take the form of an entire project and cryptocurrency, which promises new technology. But in reality, the project is nothing more than a way for scammers to take the crypto that users have invested in.

In decentralized finance (DeFi), rug pull scams occur when developers of a new cryptocurrency project withdraw all funds from the liquidity pool, making the tokens worthless. Investigate the project’s developers and their track record before investing in new tokens.

Bitcoin Investment Scams

These types of scams are designed to take advantage of people who trust the idea of Bitcoin. Because Bitcoin is recognizable, these scams can be hard to detect on the surface level. Fraudsters in this scam pose as investment managers who can help them diversify their portfolios with Bitcoin. They claim to be ready to help you through the “complicated” process of investing in Bitcoin.

Another tactic is to talk about a new mining technique or some other way to get “shares” in a Bitcoin operation and make money that way. Because Bitcoin is one of the best-known cryptocurrencies, there’s an assumption of legitimacy.

Avoid anyone who claims they can provide you with “guaranteed” returns from Bitcoin or those who claim the process of acquiring Bitcoin is difficult. Watch out for “special programs” and avoid those who claim to have “insider” knowledge.

Fake Initial Coin Offerings

An initial coin offering (ICO) is a process by which developers of a crypto project launch their coins. You can buy the coins during the offering in the hopes that the project will be successful, the crypto token will increase in value and you’ll make a tidy profit.

Fake ICO scams purport to have a project launch to raise money. But the project they tout usually doesn’t exist. The scammers take all the money made and either don’t provide coins or offer worthless tokens that never increase in value or that no one will trade for.

Avoid a fake ICO by researching white papers and checking the fine print. If it’s mostly hype, or if the purpose of the project isn’t useful, consider investing your money elsewhere. Watch out for those who claim they’ll “drop” the tokens after the end of the ICO.

Ponzi Schemes

Cryptocurrencies aren’t immune to Ponzi schemes. In these cases, cryptocurrency exchanges or others might take money and prop up the value of their own coins with money from other investors or other areas of the business. The hope is that enough people will buy in to keep the scheme going until it’s actually profitable or until it all collapses. Unfortunately, it all usually collapses, leaving most of the investors stuck with losses.

Romance Scams

Romance scams involve fraudsters creating fake online profiles to form romantic relationships. They eventually coax victims into making cryptocurrency investments or direct transfers. In some cases, the fraudster will walk the victim through the steps of setting up a wallet, buying crypto, and then transferring the crypto to them. Once the crypto’s been transferred the scammer can convert it to their currency.

The funds are often irretrievable even if other payment methods are used because victims willingly send their money to the other party. Protect yourself by never sending money or crypto to someone you’ve only met online.

Fake Job Listing Scams

Fake job listings may promise payment in cryptocurrency for completing tasks or recruiting others to a scheme. These jobs often involve transferring stolen funds. Or the method could be more subtle, like asking applicants to download a PDF file that contains a job description. Embedded in the file will be some kind of malware that infects a user’s device and collects information such as login credentials or private keys.

Verify job offers with reputable sources and be cautious of jobs requiring upfront payments in crypto. Avoid downloading files from unknown sources.

Biggest Cryptocurrency Scams

Of all the Bitcoin scams that have taken place over the years, a few stand out. Learning about these can help make it easier to spot crypto fraud.

FTX

FTX was one of the biggest players in the crypto exchange market. But it created what became the largest crypto fraud in history. FTX’s founder lost customer funds deposited on its platform. Anyone who had deposited crypto on the exchange lost it all, resulting in massive losses for countless investors. The collapse of FTX can be compared to some of the most well-known scams in finance history, like those of Enron and Bernie Madoff’s Ponzi scheme. After FTX’s collapse, the need for crypto regulation became a hot topic.

Bitconnect

Promising high returns through what was supposed to be a lending program, Bitconnect attracted quite a few investors. While it promised ways of generating cryptocurrency profits, Bitconnect was just a classic Ponzi with a cryptocurrency behind it. The platform’s native token, BCC, became more valuable, making the scam seem legitimate. But in 2018, the scam collapsed, revealing a Ponzi scheme that resulted in investors losing $2.6 billion.

OneCoin

OneCoin branded itself as a revolutionary new type of cryptocurrency. Marketing itself through a network of promoters, OneCoin managed to steal $4 billion. At the top of the project was a woman named Ruta Ignatova, or the “crypto queen.” After disappearing in October 2017, she remains a fugitive to this day and is currently the only female on the FBI’s 10 Most Wanted list.

Ignatova and her co-conspirator marketed OneCoin as a rival to Bitcoin. It turned out the entire thing was nothing more than a Ponzi. The scheme’s eventual unraveling in 2017 exposed the potential for any new cryptocurrency project to be a scam. Over 3 million people bought into the scam, making it one of the largest global frauds ever.

PlusToken

PlusToken ended up being a Ponzi scheme that stole an estimated $2 billion from unsuspecting victims by 2019. The project claimed to be an investment opportunity that would provide investors with large returns on their cryptocurrency. Similar to the previous two examples, PlusToken was a Ponzi scheme disguised as a crypto project.

Mt. Gox

Mt. Gox’s was a large cryptocurrency exchange that failed. At the time, the exchange handled over 70% of all Bitcoin transactions. After MT Gox’s failure, it was revealed that 850,000 bitcoins, worth around $450 million at the time, had gone missing. The collapse of Mt. Gox highlighted the importance of self-custody for cryptocurrencies, which were only 5 years old at the time.

Bitpetite

Bitpetite claimed to be a cryptocurrency-tumbling service that promised investors both anonymity and profits. But it wasn’t clear how these profits were being generated. The service claimed to need “dynamic funding” to function and said it would return profits to investors. No clear details were ever given regarding where the profits were coming from. This is a red flag. It could mean there is a scam present. In 2017, investors’ funds disappeared with the platform, leading many to believe the project was just a high-yield investment scam.

How to Spot a Cryptocurrency Scam

To help prevent falling prey to cryptocurrency and Bitcoin scams, consider looking up a Bitcoin scammer list like the one provided by the Department of Financial Protection and Innovation (DFPI) in California. The list details individual scams and what was reported by victims at the time. By reading such reports, you can learn what these scams look like.

Here are a few red flags that often appear when it comes to crypto frauds like Bitcoin mining scams, cash app Bitcoin scams, and investment scams in general:

• Guaranteed high returns: Be wary of any crypto investment promising guaranteed high returns with no risk. High returns typically come with high risk.
• Unverified team: Research the project team’s background. Scams often have anonymous or non-existent team members.
• Poor communication: Legitimate projects have clear, consistent communication. Scammers often use vague language and avoid answering questions directly.
• Pressure tactics: Scammers may pressure you to invest quickly. Take your time to research and never invest under pressure.
• Unregistered investments: Check if the investment is registered with financial authorities. Unregistered offerings might be fraudulent. In crypto, projects are generally not required to register with regulatory agencies, so it can be more difficult to track.
• Isn’t listed on main exchanges: While there are some legitimate tokens traded directly and not listed on main exchanges, you can still weed out a lot of scams with the help of a major cryptocurrency exchange. If you’re just looking for something to diversify your portfolio, something that’s not listed on a major exchange like Coinbase can be a red flag.
• Restrictions and lock-up periods: One famous fraudulent rug pull scam was the Squid Coin scam of 2021. In this scam, fraudsters promised a crypto project based on the popular Squid Game series. They told investors that they wouldn’t be able to sell their coins and locked them up. After raising millions of dollars, the founders took off with the funds while leaving worthless tokens. If a project won’t let you sell tokens on the market, that can be a red flag.