How to spot crypto scams and rug pulls

The crypto frontier has opened up new corners of investing, but along with the potential for great returns comes great risk of losing money to crypto scams. One such case is the SQUID cryptocurrency scam, which caused investors to lose $2+ million in a crypto rug pull.

How do intelligent people get suckered into losing their money to illegitimate cryptocurrency investments? Part of the cause is that crypto is still widely misunderstood and volatile. However, investors can increase their portfolios security by avoiding the red flags of crypto scams and rug pulls.

TL;DR

  • Cryptocurrency and other digital assets are prone to fraud and scams that have swindled investors out of large sums of money.
  • The FTC (Federal Trade Commission) reported crypto-related scams totaling $80 million in losses between October 2020 and May 2021.
  • A common scam is the rug pull, which happens when cryptocurrency creators take investors money and then immediately abandon the project, leaving investors with a worthless asset.
  • The biggest cryptocurrency scam on record is OneCoin, which swindled investors in 175 countries out of $4 billion before its creator, a cult-like figure, disappeared.
  • Investors need to watch for common warning signs of crypto scams, such as fake testimonials, unregistered sellers, and guaranteed high returns.

Common types of cryptocurrency scams

The mainstream media often only covers attention-grabbing news like skyrocketing crypto values. This has the potential to feed the hype surrounding cryptocurrency and lead people to invest haphazardly.

Some of the most common cryptocurrency scams today include:

  • Phishing scams: Victims are convinced to click on email and enter private information
  • Cryptocurrency ATMs: A twist on wire fraud
  • Initial Coin Offerings (ICOs): Often an opportunity for a pump-and-dump where the creator hypes up a new token and takes off with the money
  • DeFi rug pulls: Responsible for $113 million lost as of July 2021

Attackers also often use romance scams and giveaway scams to pull off crypto fraud. Plus, in late 2021, Instagram hackers have been convincing users to make hostage-style videos as a way of tricking people to send them bitcoin.

Recent crypto scams and rug pulls

SQUID, a fake cryptocurrency created based on the Netflix series Squid Game, reached over $2 million in market cap before plunging to $0. Those who bought in thought they were investing in a new cryptocurrency but instead lost all their money to the creators.

Investors who bought SQUID could not sell the asset. While people were beginning to realize it was a scam, news channels boasted SQUIDs rise of more than 80,000%, effectively leading more people to invest.

The SQUID debacle is an example of a crypto rug pull, in which the creators of it cashed out their coins for real currency, quickly destroying the value of the so-called coin. That feeling of having the rug pulled out from under you perfectly describes the impact of this scam.

Celebritiesor, more accurately, scammers posing as celebritiesare also cashing in on the cryptocurrency hype. The FTC says over $2 million in cryptocurrency losses reported in a six-month period were from Elon Musk impersonators.

The Musk scams involved social media posts claiming the Tesla founder was giving away cryptocurrency. The catch? Participants first had to send bitcoin to Musk, who would then supposedly double their investment.

Warning signs of cryptocurrency scams or fraud

Experts in cryptocurrency and fraud know that there are certain red flags for investors to watch for when investing in cryptocurrency or other digital assets. Here are a few basic warning signs of a potential cryptocurrency scam:

  • The platform only enables users to buy, not sell, the cryptocurrency.
  • The website or messages have many spelling or grammar errors.
  • They only accept payment in cryptocurrency.
  • They guarantee high returns, often claiming to be low-risk.
  • They depict rapidly increasing investment accounts.
  • Theyre unlicensed or unregistered sellers.
  • There are fake testimonials.
  • If it sounds too good to be true, it probably is.

These red flags are similar to those common to all types of fraud, so investors should be aware of these types of indicators anytime money or personal security is involved.

Checklist: How to know if a cryptocurrency is legitimate

  • Potential crypto buyers need to check into any cryptocurrency to see whether any of the aforementioned red flags pop up. Take any so-called testimonials of massive returns with a healthy dose of skepticism, as they may be completely fake. Even those that are real could be mere paper gains and if liquidity is low on the cryptocurrency, you might not be able to sell at a profit anyway.
  • Before investing in any cryptocurrency, do your research, and dont trust reports of sky-high returns. You can use Investor.gov and other reputable resources to learn about relevant cryptocurrency news, especially news related to a specific coin youre considering.
  • Its also safest to invest only on a reputable crypto exchange. If a coin is difficult to buy or is only available on its own creators platform, you may be better off avoiding it.
  • Another easy tip for avoiding crypto scams? Before buying a new token, do a quick online search for the tokens name + scam to find out if any warnings have been issued. And check on its creator for any current or past investigations of fraud. If the creators information is difficult to find, thats a red flag.
  • Cryptocurrency precautions are largely the same as any other financial security advice. Protect your identity and private information, such as your private keys (the only way to gain access to your cryptocurrency wallet). Always double-check the legitimacy of a cryptocurrency before investing.
  • One more thing: If youve been victimized by a crypto scam, do your fellow investors a favor and report the crime to the FTC, the SEC, and the crypto exchange you used for the investment.

Bottom line

Although cryptocurrency and digital assets are growing in mainstream acceptance, most experts continue to recommend keeping crypto investments at or below 5% of your portfolio (or whatever you can afford to lose). When investing in cryptocurrency, watch out for the warning signs and be certain the coin is legitimate before parting with your cash.

Rachel Curry is Pennsylvania-based content writer and journalist talking all things finance. She likes to give meaning to numbers by humanizing them. You can connect with her on Twitter at @writingsofrach.

The above content provided and paid for by Public and is for general informational purposes only. It is not intended to constitute investment advice or any other kind of professional advice and should not be relied upon as such. Before taking action based on any such information, we encourage you to consult with the appropriate professionals. We do not endorse any third parties referenced within the article. Market and economic views are subject to change without notice and may be untimely when presented here. Do not infer or assume that any securities, sectors or markets described in this article were or will be profitable. Past performance is no guarantee of future results. There is a possibility of loss. Historical or hypothetical performance results are presented for illustrative purposes only.

Tweet