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How to Spot a Crypto Scam (In-Depth Guide)

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In 1872, just as the ferver from the California Gold Rush seemed to fade, two weathered prospectors wandered into San Francisco with a bag full of diamonds.

Charles Tiffany of Tiffany & Co. himself had the diamonds verified, and soon the two lucky prospectors led a group of keen investors out to their miraculous gemstone field south of Rock Springs, CO.

The investors couldn’t believe what they were seeing. Diamonds, rubies, emeralds and sapphires were sprinkled all throughout the territory, right beneath their feet. The prospectors sold the land for $650,000 — about $14 million in 2022 dollars — and promptly disappeared.

That’s when Clarence King, a Yale-educated geologist, pointed out that rubies and sapphires are never found alongside diamonds in nature — and the whole hoax unraveled. The “lucky” prospectors had simply purchased $20,000 worth of gemstones in London and planted them in Colorado ahead of the investors’ visit.

150 years later, the digital gold rush is rife with similar scams. The SQUID crypto, the fake Banksy NFTs, and John McAfee’s pump-and-dump scheme are all sequels to The Great Diamond Hoax of 1872.

Worse still, their victims aren’t hyper-wealthy investors who can otherwise recover. In 2021 alone, crypto scammers stole over $14 billion. And the number of scams is increasing.

For that reason, anyone with even a passing interest in crypto should know about how these scams work, how to spot them and most pertinently, how to avoid them.

Let’s investigate crypto scams.

The Short Version

  • Crypto scams are popular with fraudsters due to the lack of federal legal protections for cryptocurrency transactions and their irreversible nature.
  • A few examples of popular crypto scams include: hacked influencers, fake ICOs, fake dates, phishing scams, and pump and dumps. Keep reading to see a more exhaustive list.
  • Common red flags that could indicate your dealing with a crypto scam include: promises of unrealistic returns, crude websites, the lack of an adequate whitepaper, limited team visibility, requests for private keys, and free crypto giveaways.

What Is a Cryptocurrency Scam?

Crypto scams come in many forms, but they typically involve tricking you into sending the scammer your crypto in exchange for nothing.

Crypto scammers may:

  • Trick you into paying crypto for a service they never provide
  • Hijack a celebrity’s social media account to solicit payments
  • Request a small payment in crypto to prove that you’re real
  • Claim to be a “founder” and sell you crypto that doesn’t exist
  • Promise quick riches or financial freedom without details

It’s all total bunk of course. And we’ll break down some specific examples in a bit.

Why Do Scammers Love Crypto So Much?

Scammers love dealing in crypto because unlike credit card transactions, crypto transactions are irreversible. Once the scammer has your crypto, you’ve pretty much lost it forever.

By contrast, if you’re scammed out of a credit card purchase, you can report the fraud to your bank. And then you have a high chance of getting your money back.

“Cryptocurrency transactions do not come with legal protections,” writes the Federal Trade Commission (FTC) — and that’s just how the baddies like it.

Another key reason scammers love transacting in crypto is due to its pseudo-anonymous nature. To receive crypto, all you have to share is your public key — a long string of upper- and lower-case letters and numbers. There’s no visible name, address or other identifiable information.

Granted, crypto isn’t entirely anonymous — we’ve seen government agencies subpoena the big exchanges to track down tax dodgers — but if you’re scammed, the chances of identifying your scammer are close to nil.

What Are Some Common Crypto Scams to Watch Out For?

Here are some of the more common crypto scams out there. Also, notice that many of them are crypto-themed versions of old school scams.

The Hacked Influencer

Either fake influencer accounts or actual influencer accounts that have been hacked will post the scammer’s public key and solicit donations or payments for new investing opportunities. Fake Elon Musk accounts alone have stolen over $2 million in crypto this way, according to CNBC.

Fake ICOs

Scammers claiming to be “founders” of the hottest new crypto will launch an ICO (initial coin offering, like an IPO for crypto), sell millions worth of their new coin and then simply run off with the cash. Following the “rug pull,” the coin crashes to $0 and investors are left penniless.

The Fake Date

Fake dating profiles will solicit cryptocurrency payments for airline tickets, medical bills, etc., then disappear when the payments are received.

Phishing Scams

Scammers posing as government agencies or customer service reps will ask for your account information. They then use that information to access your private keys and empty your accounts.

Fake NFTs

Since you can “mint” and sell NFTs without proving you’re the copyright owner, NFT marketplaces are full of fraudsters selling worthless fakes. A fake Banksy account sold $1 million worth of NFTs before revealing themselves as total fraudsters.

NFT “Wash Trading”

Wash trading occurs when the holder of an NFT sells it to themselves using a separate wallet. They buy and sell their own NFT back and forth to create the illusion of demand. This artificially drives up prices and games the search rankings on popular NFT marketplaces.

Blackmail/Extortion

Scammers will send menacing-sounding emails claiming to have possession of your illicit or sensitive data and demand crypto payments for ransom.

Pump and Dump

This is a modern take on a Wall Street classic. Fraudsters create a swirl of fake hype to “pump” the price of an investment way higher, then “dump” their holdings on naive investors at a profit.

The Fake Exchange

Scammers sometimes create an entire fake exchange to lure buyers in, take their cash and disappear. These sites often look legitimate and even sound like offshoots of trusted exchanges (e.g., the scam site CoinDesk Miners).

The Greedy Mine

Never ever mine crypto with a company or service you don’t fully trust. Fraudulent mining operations have cropped up that will say you’ve mined only $10 today when you’ve really mined $100. The company or service pockets the $90 difference.

This is not an all-inclusive list, but it certainly covers many of the most common scams and schemes you’ll see out there.

What Are Some Early Warning Signs of a Crypto Scam?

If you’re vetting a potential good deal or investing opportunity, what are some early warning signs that you are looking at a scam?

1. A Promise of High Returns, Riches and Financial Independence

Scammers know that if they can turn off the logical part of the brain and excite the emotional part, they’ll trick more people into impulsively sending them crypto.

For that reason, you’ll often see scammers skip the data and analytics for vague hyperbole.

  • “Instant returns!”
  • “Guaranteed 3x your investment!”
  • “Achieve financial independence!”

These are all common lingo among scammers. But bona fide crypto creators don’t make such claims.

2. Sketchy Websites

What did SQUID and CoinDesk Miner have in common?

A sketchy website of course.

Since crypto scam sites have to last only a few weeks, days or even hours to serve their purpose, scammers typically don’t hire a crack team of site designers to make them. They’re filled with typos, broken URLs and fake endorsements from celebrities or reputable investors.

SQUID put up an impressive façade with a nice UI, neat graphics and even a whitepaper, However, the site was (reportedly) ridden with typos.

Squid Game Cryptocurrency Website — SCAM!

CoinDesk Miner’s attempt was a bit less convincing, with an image that wouldn’t have passed fifth-grade Photoshop:

Coindesk Miner Advertisement -- SCAM!
Coindesk Miner Advertisement — SCAM!Source: CoinDesk

In general, if something seems low-rent or sketchy about the opportunity, run for the hills.

3. A Confusing or Nonexistent Whitepaper

All legit cryptos will have a whitepaper written by the founder(s) explaining its purpose and design. Here’s Bitcoin’s [PDF].

As hinted above in the case of SQUID, a fake crypto will have either no whitepaper at all or a vague, confusing one.

If you don’t understand it, don’t invest in it. (That’s just a good principle for investors to follow for all investments.)

4. Faceless Team and Leadership

Another key difference between scammers and legit crypto founders is that the former will never reveal themselves.

If you’re unable to identify a single human being behind the crypto you’re about to invest in, that’s a clear indicator that it’s a scam.

Similarly, if you can’t find the founders anywhere — not on LinkedIn, not in crypto media outlets — that’s also a big red flag.

5. Asking for Your Private Keys

Remember, your private key is the crypto equivalent of your bank account’s username and passcode rolled into one. Share that, and your money is as good as gone.

A legitimate founder, broker or exchange will never ask for your private key.

6. Free Crypto Giveaways

Any opportunity that offers free crypto should be approached with extreme skepticism.

All that someone needs to send you crypto is your public key. And you can share this anytime with anyone without fear of losing your crypto. It’s just an address to which others can send you crypto.

However, someone who’s trying to pull a crypto scam will always ask for more than that. In order to send you free crypto, a scammer may ask for:

  • Your personal information
  • Your bank information
  • Your private key

Or more.

But they do not need any of this to send you crypto. All they need is your public key.

A scammer may even ask you to send them a small amount of cryptocurrency to “verify your account,” which of course is total bologna.

On a happier note, there are times when you can genuinely and safely score free crypto. Coinbase for example will credit your account with free crypto just for taking micro-lessons about crypto.

Coinbase Learn and Earn
Coinbase’s Learn and Earn

Founders of new cryptos may also give away small amounts of their creation on Reddit or other social media sites to promote their upcoming ICO.

But one thing these free giveaways have in common is that they’re almost always in altcoins — not bitcoin or ethereum. There’s very little reason for a stranger to give away the two most popular cryptocurrencies unless they have a malevolent endgame.

What Are Some Useful Tools for Spotting Scams?

Here’s a suite of detective tools you can use to identify a potential scam:

    1. Google “[name of site or crypto] scam” — Sometimes, scams continue to dupe investors even after they’re called out. For that reason, a quick Google search will reveal if the jig is already up.
Coinbase Notice of Crypto Scam
Coinbase Notice of Crypto Scam
  1. Reverse Google image search — Scammers typically steal graphics and stock photos from other, more reputable sites. Same goes for their team’s headshots. See if a reverse image search shows the original source.
  2. Reddit — Redditors are pretty good at sniffing out scams and warning the rest of the crypto community if they themselves fall prey. See if anyone’s discussing the potential scam on r/CryptoCurrency.
  3. Your gut instinct — As general investing advice, it helps to turn off all emotions (hope, excitement, FOMO [fear of missing out]) and ask yourself, “Does this seem legit?” Or better yet, “Could I convince someone else that this is legit?” If you have doubts, don’t let hope override them; follow your gut.

What Should You Do if You’ve Already Been the Victim of a Crypto Scam?

If you’ve been the victim of a scam or fraud, there’s not a whole lot you can do besides alert the authorities and notify the rest of the community.

To help fight fraudsters, the FTC requests that you report the scam (or even suspected scam) to:

  • The FTC at ReportFraud.ftc.gov
  • The Commodity Futures Trading Commission (CTFC) at cftc.gov/complaint
  • The Securities and Exchange Commission (SEC) at sec.gov/tcr
  • The crypto exchange you used for sending the money
  • The FBI also wants to know. You can file a report with the FBI at ic3.gov.

Also, you should consider warning the community as a whole by exposing the crypto scam on medium.com or in a simple post on Reddit.

If enough victims come forward, the FBI might investigate, publish a bulletin warning other investors and even shut down the fraudsters. So while you may never get your money back, you may save countless other investors from losing theirs.

Conclusion

The meteoric rise of cryptocurrency and the lack of consumer protection surrounding it have created a fertile breeding ground for fraud. Scammers traditionally prey on hope and FOMO, but they’re getting smarter. Heck, even the BBC, Business Insider and CNBC all fell for the SQUID scam.

That’s why it (literally) pays to be vigilant as a crypto investor. If you start seeing diamonds and rubies beneath your feet, don’t get excited — get skeptical.

For more on how to safely invest in crypto, check out our guide on How To Invest In Cryptocurrency: A Beginner’s Guide.



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