Identifying Four Kind of Cryptocurrency Scam
Interest in cryptocurrencies as an investment instrument continues to exhibit a growth trend. The ease of transactions and the potential for high profits are attractive features of crypto assets. However, this profit potential is also accompanied by significant risk. Beyond price volatility, one crucial risk in the crypto asset space is the threat of fraud, which demands vigilance.
Notably, the threat of fraud does not discriminate against novice investors; even experienced individuals can fall victim to sophisticated schemes. There are at least four prevalent types of crypto asset fraud. The following article will discuss how to identify and avoid these potential scams.
Ponzi Scheme
The first common scam is the Ponzi scheme. This fraudulent model promises investors who join and transact high and rapid returns. After investing a certain sum, participants are led to believe they will receive the promised profits.
However, these so-called profits are not generated from legitimate crypto transactions but from the funds contributed by new investors. Therefore, when there are no more new investors or funds coming in, the scheme will collapse and make investors lose their funds.
Ponzi schemes can be identified through advertisements or online posts that guarantee unrealistically high returns, a fixed amount of profit, and promises of quick payouts. It is crucial to disregard any offers that appear too good to be true.
Furthermore, ensure that you trade crypto on platforms that are members of the PT Central Financial X (CFX) and have obtained a Digital Financial Asset Trader (PAKD) license from the Otoritas Jasa Keuangan (OJK). This is because their operations are always monitored and comply with applicable regulations.
Phishing
Another frequently encountered scam in the crypto asset industry is phishing. This mode lures victims into provide sensitive data, such as passwords and private keys. Typically, they create fake websites to steal user credentials.
In practice, scammers will spread fake links designed to mimic authentic website URLs. These malicious links are commonly distributed via email, social media platforms, and private messages. When a victim clicks the link and input their data, the scammer gains access to this information and can use it to take over the victim’s account.
In some cases, merely clicking on a phishing link can enable the scammer to immediately take control of the victim’s account.
To identify phishing, we must double-checking of every website URL before entering personal data. Verify that the link is genuine and not a deceptive clone. Also, ignore messages that instruct you to go to a certain website and never click on suspicious links.
Rug Pull
Another prevalent scam is the rug pull, where the cryptocurrency development team abandons their project and takes away all the investors’ money. This scenario is akin to suddenly pulling a rug from under someone, causing them to fall.
Rug pull scams are particularly rampant among newly launched tokens on decentralized exchanges (DEXs). A notable example is the SQUID token case in 2021. This token emerged, drawing inspiration from the widely popular Squid Game series.
After experiencing price surges up to hundreds of thousands of percent, on November 1, 2021, the SQUID development team executed a rug pull. The following day, the SQUID token, which had peaked at $2,861, plummeted to $0. SQUID holders suffered significant losses, while the SQUID development team reportedly made off with $3.36 million, according to Gizmodo.
The most effective strategies for identifying and avoiding rug pulls involve conducting thorough research on the project’s whitepaper, social media presence, and website. Additionally, scrutinize the amount of locked liquidity and the distribution of tokens held by the development team.
Any anomalous findings should serve as a red flag, prompting you to avoid the token. It is also crucial to resist the Fear Of Missing Out (FOMO) when evaluating new and unproven projects.
Pump and Dump
Finally, the pump and dump scheme involves a group or individuals artificially inflating the price of a crypto asset through coordinated hype on social media and other manipulative tactics. Once the price has been sufficiently elevated and a significant number of unsuspecting investors have bought in, these orchestrators then sell off their holdings in large quantities.
Investors who purchase the crypto asset when its price is already artificially inflated are then left “holding the bag” as the price collapses rapidly due to the massive sell-off, often incurring substantial financial losses. The speed of the price drop makes it difficult for these later investors to react in time to mitigate their losses.
Pump and dump schemes are most prevalent in cryptocurrencies with low liquidity, as their price movements are easier for unscrupulous individuals or groups to control.
To identify a crypto asset potentially involved in a pump and dump scheme, determine whether the generated hype appears organic or artificially manufactured. Furthermore, avoid purchasing crypto assets solely based on trending popularity. Instead, rely on fundamental and use-case based metrics to conduct a more objective assessment of the asset’s true value and potential.