How to avoid the crypto scams that take billions each year
Don't get scammed! Follow these simple tips to protect your money from pump and dump schemes.
There's a scam on the rise, costing people billions of euros each year. Unfortunately, it's a new crypto scam and can be very hard to spot. In this post, I'll tell you everything you need to know about this type of scam to avoid them. I'll also give tips on protecting yourself from these tricky pumps and dump schemes. So if you're interested in learning more, keep reading!
Social media is a hub for cryptocurrency scammers.
Social media has become a key gathering place for crypto investors, making it an attractive target for scams known as pump-and-dumps. Also known as "rug pulls," these scams involve artificially inflating the price of a crypto asset to sell it at a profit. In 2021, rug pulls took in more than $2.8 billion worth of crypto and accounted for 37% of the year's crypto scam revenue, up from 1% in 2020, discovered from research by crypto data firm Chainalysis.
Twitter, Reddit, and TikTok have become hotspots for crypto discussion, making them prime targets for these scams. But, again, education is key to protecting yourself from pump-and-dump scams; if you're thinking of investing in a crypto asset, be sure to do your research and only invest what you can afford to lose. Because if you're not careful, that is a distinct possibility.
What is a pump and dump scheme?
Unfortunately, crypto pump-and-dumps are a relatively common occurrence in the world of cryptocurrency. They usually happen when a group of conspirators uses misleading information to pump up the price of a currency. Then, they sell it at a profit, leaving their naive investors out of pocket with no recourse.
A recent cautionary tale follows the experience of some investors with a themed "Squid Game" cryptocurrency. First, the SQUID coin was soaring in value; the next, it was crashing. The coin's creators are alleged to have cashed out and disappeared with the profits, leaving investors holding the bag.
Another example occurred when burned investors filed a class action lawsuit that accused Kim Kardashian and boxer Floyd Mayweather of a pump-and-dump scheme involving the cryptocurrency EthereumMax. According to the suit, the defendants promoted the coin on social media and lured investors with the promise of significant returns. However, once the price of EthereumMax surged, company executives sold their coins for a profit and then left investors holding worthless crypto. The suit is seeking damages for those duped by the defendants' actions.
While pump-and-dump schemes are not illegal in the crypto world, mainly because it is unregulated, unlike the stock market, which is regulated and pump and dump are unlawful, it is considered unethical and deceptive. However, cryptocurrency is still in its infancy and should be likened to the wild wild west for now.
How to spot a pump and dump
These pump-and-dump schemes can be challenging to avoid, but there are a few red flags to watch out for. First, be wary if you see sudden, unexplained spikes in a currency's price. Also, be suspicious of any currency that seems to be hyped up by a small group of people. Pump-and-dump schemes often rely on hype and FOMO (fear of missing out) to drive up prices, so it probably is if something seems too good to be true. Hopefully, you can avoid being caught in one of these schemes with a bit of caution and due diligence.
How to avoid crypto scams online.
Learn from history
Penny stocks were the original pump and dump. Before buying a particular altcoin, learn about a given coin's purpose, history, and community. This is important because there are a lot of crypto scams out there. For example, during the dot-com bubble, penny stocks saw people losing money because they didn't understand what was happening. So, it would be best to educate yourself to understand a coin's purpose and community before investing. If the meaning of the coin does not make sense and the community is small and urgent, then it would be prudent to step well back.
Educate yourself around crypto
When investing in cryptocurrency, it's essential to learn about the asset you're looking at before purchasing. Just because a coin is built on a blockchain or is decentralized doesn't necessarily mean it's a good investment. The markets move based on human psychology – people will always be people. This is why it's essential to understand what you're buying before investing. Do your research, learn about the team behind the project, and read up on the coin's use case. Once you have a firm understanding of the asset, you can decide whether or not to invest.
Understand bitcoin and blockchain
Bitcoin is often thrown around as a buzzword, but few people understand how it works. The Bitcoin white paper is an excellent place to start if you're looking to learn more about Bitcoin. In this paper, you can find a detailed explanation of how Bitcoin works, including how peer-to-peer transactions are conducted. Understanding the technology behind Bitcoin is essential to understanding how individuals can use Bitcoin in different industries. For instance, blockchain technology is being used to create more secure and efficient supply chains. By understanding how Bitcoin works, you can better understand the potential applications of blockchain technology.
Understand the playground rules before you pay in
Bitcoin is the leading player in cryptocurrencies and is still the gold standard by which all other coins are measured. Bitcoin is also the most well-known and has the largest market cap. Bitcoin is seen as digital gold - a store of value that will appreciate (or appreciate in purchasing power) over time. Bitcoin is censorship resistant, permissionless, and decentralized. These characteristics make Bitcoin a haven asset in times of global uncertainty (like we are seeing now with Covid-19). Bitcoin is also scarce, with a finite supply of 21 million BTC that will ever be mined. Bitcoin is divisible down to 8 decimal places (0.00000001 BTC), so it can be used for micro-transactions or large purchases.
Bitcoin is fast and secure with near-instant settlement. Bitcoin is also widely accepted with growing merchant adoption. You can buy anything from coffee to a new car with Bitcoin. IN saying this, if you are considering getting into crypto, start small with Bitcoin. Get a sense of how things work before investing in riskier altcoins ( anything that is not bitcoin is dubbed an altcoin, they are also mined slightly differently from bitcoin). Also, be careful who you trust in this trustless system. There are many scams and bad actors in crypto. I cannot emphasize enough, do your research!
Start small with Bitcoin. Lose a button, not your shirt.
The value of Bitcoin is very volatile, and it can go up or down a lot in a short period. So, if you invest all of your money in Bitcoin, you could lose everything overnight. That's why it's essential to start small. For example, if you invest €20 in Bitcoin and the value decreases, you haven't lost much. But if you invest €20 and the value increases, you've made money. So, starting small is a good way to minimize your risk.
Start small with a known entity before diving into altcoins' murky waters.
Find your rinse and repeat crypto strategy and stick to it.
Make a crypto plan and stick to it.
There's no shortage of dodgy investment opportunities from crypto to penny stocks. But with the potential for high rewards comes the higher risk of scams. That's why it's crucial to have a strategy and stick to it. By knowing your risk tolerance and researching, you can avoid falling for scams. And when it comes to crypto, I always stick to my strategy. Don't look for trends on Twitter or try to time the market. Instead, invest in quality projects you believe in and hold them long-term.
Be wary of celebrity promotions. Their motivations are not always in your best interest.
When a celebrity starts talking about crypto, getting excited is easy. After all, if they're investing in something, it must be worth something, right? Wrong! Someone famous promoting a particular currency doesn't mean it's a good investment.
More often than not, celebrities and influencers promote cryptocurrency for their gain, not yours. They may be getting paid as a spokesperson or own the coin and want to increase its value. They may believe in crypto but how educated or unbiased is their opinion? Whatever the reason, it's almost certainly not because they're trying to help you get rich quick.
So before you start buying crypto based on celebrity endorsements, please research to ensure it's a good investment.
Don't automatically trust the 'Trusted Influencer'.
It's no secret that crypto scams are ubiquitous on social media. But what you may not know is that scammers can also reach out to you personally and pretend they're a trusted influencer. This is a common problem for credible personal finance experts who have built engaged communities on Instagram, so dig in if someone you follow appears to send you a message. The scammer will likely try to get you to invest in a crypto scheme or send them money directly.
They may even promise to pay you back double or triple what you invest. But of course, once you send them money, they'll disappear, and you'll never hear from them again. So if someone you follow suddenly starts DM'ing you about crypto, be cautious and do your due diligence before investing anything.
Altcoin investors - get in early!
When investing in crypto, it's essential to have an open but sceptical mind. If you see other investors talking about how they're "so early" to a given new coin, try to find out why there's reason to think anyone else is coming later to invest more money. Is the team working on something unique that has the potential to bring in new users? Is the project backed by a well-known, credible figure in the crypto space? Is there a sizeable strong community behind the coin? These are all critical factors to consider before putting any money down. And remember, just because a project grows doesn't mean you should automatically invest. Be sure to learn as much as you can before taking any risks.
It's not personal. It's business
A total stranger rarely thinks enough of you to want to make you an overnight millionaire. It's sad but true; ulterior motives are potent drivers and rarely in your best interest.
If someone reaches out to you claiming to have some great advice or free coins, you should first Google the person's handle and see if it matches the verified handle of the person they claim to be. If it doesn't, they're trying to scam you. So please don't respond to anybody unless you've done your research online and verified that they're the real deal. If it feels like a scam, it probably is.
While there are many different types of scams, one that has been on the rise in recent months is crypto pump-and-dump schemes. These schemes are often hard to spot, but you can avoid them if you know what to look for. As with any other investment, it's essential to do your homework before investing in cryptocurrencies and be especially wary of schemes that promise significant returns without any risk.
Thanks for reading!