Navigating the Crypto Space: A Guide to Recognizing and Avoiding Common Crypto Scams

Crypto scams over the years have involved pump and dump schemes, Ponzi schemes such as OneCoin project led by the notorious CryptoQueen Ruja Ignatova, as well as hacks such as Mt Gox, becoming more and more sophisticated.

This article wouldn’t be complete without the mention of Sam Bankman-Fried who was behind the collapse of the cryptocurrency exchange FTX.

Now the question arises: could any of these scams have been prevented? It seems crypto is still very much a nascent asset class that is known to be relatively high risk and volatile. There are many notable scams that have occurred throughout its history.

Being aware of crypto scams is critically important for protecting oneself. Over the years due to the scams there has been increased regulatory scrutiny and oversight of the digital assets sector, potentially impacting the broader cryptocurrency ecosystem. It is important for the crypto community to work together to maintain trust and credibility.

The Biggest Crypto Scams

In 2014, one of the earliest scams involved the cryptocurrency exchange Mt. Gox. This is one of the most infamous incidents. Tokyo-based exchange Mt. Gox filed for bankruptcy in 2014 after claiming to have lost 850,000 Bitcoins (worth over $450 million at that time). This incident significantly impacted the reputation of cryptocurrencies.

Next we have OneCoin – a project that was marketed as a revolutionary cryptocurrency, OneCoin was later revealed to be a Ponzi scheme. OneCoin first began operating in the US in or around 2015. Between the fourth quarter of 2014 and the fourth quarter of 2016. Its founders and promoters faced legal actions in various countries, and the scheme defrauded investors of billions of dollars. CryptoQueen Ruja Ignatova who was behind the project still remains a fugitive after disappearing six years ago. Ignatova is on the FBI’s most wanted list. 

In 2018, we saw Bitconnect operating as a high-yield investment program, it promised investors outsized returns. However, it was eventually exposed as a Ponzi scheme in 2018, leading to its collapse and significant losses for investors.

In the same year, PlusToken was launched – dubbed a multi-level marketing cryptocurrency wallet and exchange. It attracted millions of users and allegedly defrauded investors out of 14.8 billion yuan ($2.25 billion) worth of cryptocurrency in the eastern province of Jiangsu, China in 2020.

In 2019, QuadrigaCX which was Canada’s largest cryptocurrency exchange, collapsed following the sudden death of its founder, Gerald Cotten. It was later revealed that the exchange had lost access to its cold storage wallets containing significant amounts of cryptocurrency, leaving customers unable to access their funds.

Tether Controversy 

Next we have Bitfinex and Tether –  There have been controversies and allegations surrounding the relationship between the cryptocurrency exchange Bitfinex and the stablecoin Tether (USDT). Concerns have arisen regarding the backing of Tether’s reserves and its impact on the broader cryptocurrency market. In 2021, the Commodity Futures Trading Commission (CFTC) fined both of the firms more than $42 million on allegations the USDT stablecoin was not fully backed.

In 2022, the collapse of Terraform Labs’ algorithmic stablecoins wiped out $50 billion in valuation. This was the trigger that started the 2022 crypto winter. In May 2022, TerraUSD and Luna crashed, taking billions of dollars of investor equity with them. Most recently new details have come to the surface regarding the high-profile crypto fraud case between the United States Securities and Exchange Commission (SEC) and Terraform Labs. On December 20, Judge Jed Rakoff of the U.S. District Court for the Southern District of New York approved a protective order that will keep material confidential leading up to the trial.

FTX Collapse 

In 2023, a high profile scam involving Sam Bankman-Fried who dominated mainstream media headlines. He is responsible for the FTX collapse. Bankman-Fried was charged with stealing as much as $10 billion from FTX customers in order to finance his spending activities which included political contributions.

These are just a handful examples, and the cryptocurrency space has seen numerous other scams and fraudulent activities over the years. Investors should exercise caution, conduct thorough research, and be aware of the potential risks associated with cryptocurrencies.

Recognizing Red Flags

Now the adage applies here – “if something sounds too good to be true, then it probably is.” So if you encounter any crypto promotion or offer that will make you rich overnight or seems so good it can’t possibly be true, your instincts will be spot on.

Investors should be aware of major red flags such as unrealistic promises, anonymous teams, lack of transparency, and pressure tactics. Here we talk through these red flags in more detail.

Question Complex Jargon

Crypto can be confusing for many but if a crypto project is throwing complex jargon at you – question it – by using overly complex language or technical jargon without clear explanations they may be trying to confuse or mislead potential investors. There is no such thing as stupid question so ask away and interrogate openly.

Next question to ask yourself before investing –  is there a clear use case for the project? If the project’s whitepaper lacks a clear use case, technical roadmap, or coherent business model, it may be cause for concern. Run for the hills.

Learn Super Sleuth Skills

Become a super sleuth and try to verify information – so any claims that cannot be verified, such as partnerships with reputable companies or endorsements from well-known individuals without evidence, should be approached with skepticism. Do your due diligence on the founders backing the project.

Question any security concerns –  projects with significant security vulnerabilities, past hacks, or a lack of robust security measures are high-risk.

There are still a number of ponzi or pyramid schemes out there in the market – any projects that rely on new investors’ funds to pay existing investors, rather than generating legitimate returns from a sustainable business model, are classic red flags.

Question the project  if it promises unrealistic token distribution – this is when projects allocate a disproportionate amount of tokens to the team or founders, or have unclear token distribution mechanisms, then you may be right to suspect.

When online look for reviews – any negative reviews, reports of suspicious activities, or warnings from trusted community members and experts can indicate potential issues with a project.

It’s essential to conduct thorough due diligence, research the project and team, seek independent opinions, and consult trusted sources or advisors before investing in any cryptocurrency or participating in a crypto project.

Make sure you “DYOR” which is another popular term and stands for Do Your Own Research. This is a  common phrase used by many cryptocurrency enthusiasts.

Protecting Yourself From Crypto Investments

Understanding common scams and fraudulent tactics can educate newcomers and seasoned investors alike, fostering a more informed and resilient community. Large-scale scams such as FTX collapse can have broader economic implications, affecting market dynamics, investor sentiment, and the overall growth and adoption of cryptocurrencies.

It is important to do your research especially when it comes to any exchange before you buy crypto and look into cryptocurrencies before investing. Understand the level of risk you can take.

Please remain vigilant, share this guide with your network, and actively contribute to fostering a safer cryptocurrency community.