5 signs of scams to watch out for while trading crypto

The crypto market these days is known as the wild west of finance. And it can certainly be exciting to trade there, with the possibility of cashing out quickly. However, it is also very dangerous to do so if you are not aware of the ways in which conmen in the space operate. In the article below, we would like to give you information on them. So here are the five most obvious signs you are dealing with a digital asset scam. Before we take a closer look into them however, we would like to underline just how much money is lost due to these and other schemes:

The massive scale of crypto fraud 

2022 has not been a kind year to the digital asset markets in general.  The companies defaulting, the crashes in prices and so on, dubbed the “crypto winter” by most enthusiasts, have wiped out billions. Yet, a significant amount of the money that was lost is owed to scams in particular. Now, it is very difficult to estimate just how much that is. Victims of scams are usually not too forthcoming with their stories and underreport how much was taken from them. However, the US Federal Trade Commission has published a report in June 2022, alleging that more than a billion was lost due to scams between January of 2021 and June 2022. A more recent report will certainly reveal a higher number as well. 

Why is the crypto trader so vulnerable to scams? There are many reasons, the lack of centralization, the trustless and highly anonymous nature of the assets and so on. Furthermore, the jargon around the assets is complex and few people understand it, or what they are actually trading. So, a very fertile space is created for conmen, where they can easily do as they please with little risk of any consequences. This means the best way to protect yourself is to make sure you are aware of the tactics they use. Without further ado, here are the most common ones:

1.High ROIs 

One of the most popular ways to engage with the crypto market for traders is to stake assets. That is done by them simply buying a certain coin on an exchange and receiving rewards from holding it. But there are many fraudulent exchanges and it can be difficult to tell them apart from legitimate ones. And even higher profile companies have turned out to be fraudulent and simply steal your funds. This is known as a rug-pull. 

So how can you distinguish between these two kinds of crypto companies? Well, the best way to do so is to look out for promises of sky-high return rates. Sometimes scammers promise ones of several hundred times what you have deposited with them. There are also sometimes other incentives – trading bonuses, cashbacks on deposits and so on. The higher the return the more obvious you are not dealing with a legitimate company. Of course, it could also be rather difficult to tell them apart when the returns they promise are more realistic. Be vigilant for the other signs below as well:

2. Shady CFDs 

When you buy crypto from exchanges and brokers you hold a certain amount of the asset, or sell it. That way, your losses are limited to the amount you have. However, there is also another mode of trading that is popular – Contracts for Difference, or CFDs. When trading them, you are actually not buying or selling the assets, just agreeing that you will either receive money if the trade goes your way, or that you will lose it if it does not. The amount you lose is not limited because you do not hold any of the financial instruments.

As you can imagine, this business model requires very strict regulation to be safe to the retail client. And there is such in place – when it comes to more traditional assets. But CFDs on crypto are not regulated at all – and they are actually banned in many places. For instance, FCA UK has completely prohibited them. 

There is a good reason for that – it is very easy for, say, MT5 brokers with darker motives to manipulate their trading platforms in malicious ways. They can delay the execution of trades, for instance, or even fix prices on less liquid assets. This is exactly why the MT5 app was banned from the Apple AppStore though it is still available at Google Play. Crypto is a market which is known for its lack of liquidity, and for its high volatility. Unless you are a very experienced trader who is dealing with an impeccable broker, we would recommend you stay away from CFD trading, given its high potential for abuse!

3. Social engineering tactics, phishing

One of the most unique aspects of trading crypto is holding the assets in your own custody, or being your own bank, as the community calls it. However, this actually makes you vulnerable to another of the dirty tricks of scammers. This is social engineering – the idea that, in order to steal your money, the conmen will simply target you personally. 

That can be done via a variety of means, each scarier than the last. First, there is the ability for phishing attacks. These are attempts to get your data via a certain kind of fake website. If you see an email from your crypto broker, for instance, which contains a link, beware! Most of these are not from your company, and most lead to such fraudulent pages. Once there, you will be asked to enter your personal information, the kind which would compromise the safety of your account. In general, always make sure the URL you are logging in is the one of your real financial service provider. 

4. Pig-Butchering  

Of course, there are far more malicious ways for these  social engineering schemes to be operated. You can find social engineering scams on dating websites as well. This is a different scheme, called pig-butchering. Behind this gruesome name is an equally gruesome con. The conmen approach their victims on websites unrelated with trading crypto and gain their trust. This scam takes a while to develop. 

Suddenly, they will present themselves as some kind of profitable and successful trader. They will lead you to a shady company and will encourage you to invest. Sometimes, they can pretend they are managing your accounts. In reality, they will simply be stealing from you. The danger of this romance fraud comes from the close relationship the victim develops with the scammer and how that is then exploited. The losses can be a lot higher for defrauded individuals and usually run in the high thousands! 

5. Offshore, non-transparent firms 

It is very possible for some of the signs we elaborated on above to be present in multiple firms. This last one can be seen in almost all of them. There are several offshore jurisdictions which do not regulate their financial markets at all. So it could be easier for these offshore firms to simply conceal who is behind them. Also, it makes it easier for them to do rug-pulls in particular. Due to the fact crypto transfers are not eligible for a chargeback, you will likely be unable to recover money. It is also easier to launder money via digital assets from such exotic destinations. Therefore, it is likely that the vast majority of victims will not be able to track down whoever took their money and prosecute them in a court of law either.

Last Updated on December 15th, 2023