Crypto scams are a real and present threat, with millions of dollars lost every year. Governments around the world have warned consumers to be vigilant and fraudsters are becoming more and more sophisticated.

What is a crypto scam?

One of the biggest cryptocurrency scams of late was in 2020 on Twitter, when accounts belonging to a whole host of high-profile individuals (including Joe Biden, Barack Obama and Elon Musk) were taken over.

Millions of their followers were then told that, if they sent bitcoin to a certain address, they would receive twice as much back. It’s estimated that victims lost more than $100,000 as a result, and several young people in the UK and the US have been arrested in connection with this incident.

Here, we’re going to look at how cryptocurrency scams work – and explore five common tactics that criminals use to try and steal hard-earned cash.

1. Fake crypto exchanges

Sometimes, it’s difficult to detect cryptocurrency investment scams. We’ve seen a rise in the number of fraudsters who set up seemingly legitimate exchanges where bitcoin and other digital assets can be bought and sold.

Victims end up transferring their money to this platform, only to have difficulties withdrawing their funds later on. In many cases, they’ll never see this cash again.

2. Bogus investment schemes

One of the most common cryptocurrency trading scams focuses on investment opportunities that promise extraordinary gains – often extending into double or triple figures.

In some cases, victims even get small amounts of money returned to their account, duping them into thinking that they’re making a profit. It’s also common for victims to be pressured into depositing more and more money, only to have difficulties withdrawing it.

These crypto scams are often publicised through adverts that mimic news articles written by credible publications. In the past, these ads have even popped up on social media platforms such as Facebook and Instagram. Fraudsters often include a picture of well-known celebrities and entrepreneurs, claiming that they are among the investors.

‘Pump and dump’ scams also fall into this category, where the price of digital assets is artificially inflated, encouraging investors to get involved for fear of missing out. Then they’re left holding cryptocurrency that’s worthless when the price suddenly falls.

3. Ponzi schemes

Cryptocurrency scams often use the same tactics that have been relied upon for decades. Ponzi schemes date back to the mid-to-late 1800s – and remain just as prolific now in the digital age.

Ponzi schemes promise big gains if someone gets involved, but a crucial part of their reward involves recruiting their friends and family to sign up as well. In fact, money from new members is used to pay off older members. Eventually, when the scheme reaches a saturation point, it collapses.

There have been a number of high-profile incidents over the years. One of the most prolific was OneCoin, which claimed to have invented a cryptocurrency that would become more valuable than bitcoin. It’s estimated that more than £2bn was invested in the scam, with some victims losing their entire life savings.

Due diligence and plenty of research are essential before financially committing to a project. There are many impartial websites that alert people to scams and offer independent reviews of legitimate projects.

4. Impersonation

This can take multiple forms. It might be the case that someone creates a website or a social media account imitating a high-profile exchange, with a subtle typo in the URL. Spoofing is another common tactic, where someone manipulates a phone number to make the victim believe that they are being called by a crypto exchange they use.

We’ve also seen a rise in the number of scams where victims are contacted out of the blue by people claiming to be from official organisations such as the Internal Revenue Service and HM Revenue and Customs.

Here, the victim is often told that they owe a substantial amount of back taxes and could face high fines or even imprisonment if bitcoin isn’t sent immediately.

5. Malware

Last but not least, malicious actors are increasingly gaining access to people’s computers – or locking them out of files altogether. Malware can allow scammers to steal confidential information such as credit card details, and even drain bitcoin addresses. PCs can become infected if the victim inadvertently clicks on a suspect download link included in an email or on a website.

Ransomware takes a slightly different approach. Here, the computer is effectively locked until the victim pays a fee – often in the form of bitcoin or the privacy coin monero.

Generally, large organisations have been targeted in these attacks, including hospitals, local authorities and businesses. They tend to be blackmailed, too, and told that sensitive files could be released to the public if they fail to pay.

It’s difficult to know what to do in this situation. Generally, law enforcement agencies recommend that victims don’t pay the ransom for several reasons: there’s no guarantee that the computer will be unlocked, ransomware gangs will be encouraged to continue operating and could use the proceeds for criminal activity, and those who pay up are more likely to be targeted again in the future.

All of this can seem incredibly scary, but taking basic precautions can go a long way. Make sure that your passwords are secure and that you always check that you’re logging in to a legitimate website.

Treat investment opportunities with scepticism too, and always proceed with caution if you’re contacted by someone claiming to be from an exchange – especially if they say you’ve been locked out of your account.

Generally, the best thing to do is to go to the company’s official website, email or phone them directly, and find out whether the issue is real.

Further reading

How do crypto exchanges work?

How many Bitcoins are there?