Out of all use cases, yield farming is the most popular DeFi application. There are over 2,000 dApps in this space today, most of which support some sort of interest-earning feature. Why sell your crypto when you can earn while holding?
New economy, new risks. Ever since Bitcoin became popular, scammers have taken advantage of this massive opportunity. They’ve also closely followed every other innovation that followed, such as DeFi protocols, NFT marketplaces, and Play-to-Earn metaverse.
The blockchain space changes rapidly. That’s why it’s hard for people to catch up, why there are such great business opportunities, and why scammers succeed. Among other reasons, because life-changing returns in crypto investments are the norm (if you’re early).
When something too good to be true is actually true, how do you know the difference between what is and what’s not?
Simple. Most crypto scams you see are the same ones we’ve seen online for decades (while all the rest are just bad projects). There’s nothing new in phishing, identity theft, payment fraud, securities fraud, fake websites, pyramid schemes, advanced fees, and price manipulation. If you know how to recognize these schemes in this new space, crypto scams are easier to avoid than you think.
The common ways of losing money are:
As you go through the list, you’ll find that investing and social media are closely tied together when it comes to fraud.
Here they are from most to least likely to happen to you:
Probability: Very high
Risk: Very low
Crypto identity fraud refers to all possible tricks scammers use to make you think they’re someone else. That someone might be your favorite crypto influencer, a popular exchange, or even Elon Musk. To fabricate this image, scammers do:
Chances are you’ve seen them a million times. These bots flood social media comments as soon as someone becomes popular. Fortunately, almost no one falls for these, because trusted people never reach out directly nor ask you to message them, call their phone number, join their investment program, or visit their website (hence why they send so many).
Identity fraud is the foundation for most other types of crypto scams.
Probability: Very High
The goal of crypto phishing scams is to get access information to your wallets or devices. After you share the address, the thief can lock you out, withdraw your funds, or wait until you deposit enough crypto to steal. A less common method is to install malware and spy until they get that information.
Since we only share this data on trusted platforms (exchanges, Web3 wallets), identity fraud is essential for phishing. The strategy varies with the bait used:
Two common ways people lose money:
Users should be careful with external links and always check the website domain name. Skilled fraudsters can fake profiles, wallet apps, browser extensions, DEXs, tokens, and even blockchains. For optimal security, you should use different passwords, 2FA codes, and many wallets to distribute your cryptocurrency.
Probability: Very high
One reason DYOR (Do Your Own Research) is so hard is scam projects. These coins are the majority of the cryptocurrency list, have no intrinsic value, and copy other projects. They’re often called meme-coins and Shitcoins, driven only by speculation and hype.
They’re dangerous because they copy legit projects and look as promising as the real ones. It’s hard to tell the difference in a bull market when almost every coin goes up. That’s why so many appeared after Bitcoin’s boom in 2018, followed by a crash that wiped out over a thousand projects.
Fake ICOs can be:
The faulty logic is that if a tiny project looks like a Top 10 coin, it’s going to get attention. And if it just gets 1% of the funding, it will massively increase its price. The truth of fundamental analysis is: Most me-too projects won’t even take off (either because of low value or the “founders” dumping it).
Probability: Very high
Risk: Very high
If DeFi is trustless and self-custodial, Ponzi schemes are the opposite. The goal is to create greed, so you feel confident about trusting big money for long periods of time. You might trust the investment model because it works, and everyone makes money. Oftentimes, it’s your friends who recommend it with good intentions.
Is it sustainable? Probably not.
The red flags of a crypto Ponzi are:
It’s never been harder to recognize Ponzi schemes now that DeFi has appeared. But make no mistake: DeFi is all about giving users control over their money and financial tools. Investment profits are the consequence, not the cause or the primary purpose.
Unlike traditional pyramid schemes, crypto Ponzis will deliver their promises always. But by the time they do, tokens might be worthless. If you didn’t find the project but the project found you, it’s already late.
Probability: Very High
If you prefer to regularly trade rather than hold, chances are you follow traders on social media. You look for clues on what big names think and maybe follow signals from technical analysts. Some of them are so successful they sometimes become advisors or create their own projects.
That’s when conflicts of interests start.
Shilling is about making money by selling a crypto asset rather than investing in it. Because selling is about perceived value, sellers can promote anything regardless of its worth. They often have a large community and funds to fabricate that perception.
Since large crypto influencers often befriend each other, they might coordinate their news to manipulate prices on bigger coins.
Buyers can also shill NFTs and tokens:
These are ready to sell as soon as you buy, which is a variation of pyramid schemes. Again, users might buy in anyway and hope to dump on later suckers, which doesn’t end well for them either.
Social media and investing go together, and so often do relationships. As the name suggests, crypto romance scams use love to manipulate your financial decisions. But it’s not limited to lovers only: anyone creating a relationship with you for this purpose falls under romance and affinity frauds:
Now that cryptocurrencies are mainstream, there’s nothing strange (nor wrong) about investing in them. But just like DeFi shouldn’t be only about getting rich, that shouldn’t be the center of friendships or love relationships.
If the first common step is identity fraud, the last one is the rug pull or exit strategy. Similar to social media shilling, the goal is to increase the perceived value. Except there’s no real one whatsoever: all money goes to marketing and making it look like a full-fledged project:
When investors’ confidence is the highest, founders sell everything, dump prices, abandon the project, and you never hear from them again. The risk is the highest when the founders receive most of the token allocation. It might be a smart-contract wallet with admin keys or hundreds of alt accounts created the same day. These projects banish for the same reasons Ponzis and fake ICOs do: they’re unsustainable and there’s no innovation behind them.
These risks don’t mean much to value investors, as they’ll probably buy blue-chip coins and not look into newer ones.
Giveaway scams didn’t exist before 2018, and when they first appeared on YouTube, they became the simplest most profitable scams in crypto. It’s inspired by the classic Nigerian prince scams where you have to pay upfront for the promise of getting more money. Why did so many fall for it? Because it’s crypto, and because they pose as wealthy influencers.
Even though they’re less common now, you might still find a few during market rallies. All scammers need is:
The text shown in the interview looks like this:
There’s no giveaway. It’s more of a money printer, except it doesn’t print. The money doesn’t go to Elon Musk but to an identity thief. You just start a live stream, get 10K likes and spectators with bots, disable the comments, and loop the same interview until YouTube takes it down. Then create another fake account to do it again.
Similar ones ran on Twitter, mostly fake NFT airdrops.
Pump and dumps are the price manipulation of tokens with low liquidity or market cap. Users think a whale will pump them when it’s really other users buying it and the whale selling. These “whales” are the admins of the group who give signals of when to buy what. It’s like a mini bull trap.
They operate on Telegram/Discord. Once they have enough followers, they profit like this:
The truth is that most people lose because there’s no reaction time. Admins were able to buy weeks in advance, and sometimes they have paid sub-groups for early investors. For example, if you want to know the coin before everyone else, it might cost $100 for every 10 seconds in advance.
Obviously, no value is created in such a short time. It’s a zero-sum game of reflexes where someone always loses. Winning is addicting, which motivates greed and increases the risk of losing big.
Yet, people join pump-and-dumps knowing they’re scams. Because it’s easy money and is legal. For now.
Besides impersonation, scammers sometimes build fake platforms to promote their own “utility tokens”. It could be a mobile app, browser extension, or a website with suspicious smart contracts. Apps can be used to steal information, gather funds for rug pulls, or gain device control for crypto mining (also known as Crypto-jacking).
Users can recognize these by looking for these signs:
Watch these before you deposit on new apps. Most applications today are decentralized and connect to WEB3 wallets, so you don’t need to download anything else.
On peer-to-peer transfers, crypto buyers and sellers agree to trade directly. You choose whoever has the best rating, lowest rates, and most payment methods. Problems appear when you’re the one selling cryptocurrency.
When trading crypto for fiat, you should trade with escrow parties and double-check received payments:
P2P crypto payments are becoming common payment methods outside financial sectors.
As rare as some crypto scams might sound, they’re out there because they work. Cryptocurrencies and DeFi are so groundbreaking that even the most ridiculous investing scams are believable. Especially with social media.
Thankfully, blockchains are becoming safer to prevent these types of scams. Not as a technology to trust, but one that removes trust from the equation.
“If you have to be persuaded, reminded, pressured, lied to, incentivized, coerced, bullied, socially shamed, guilt-tripped, threatened, punished and criminalized… If all of this is considered necessary to gain your compliance – you can be absolutely certain that what is being promoted is not in your best interest.” – Ian Watson
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Max is a European based crypto specialist, marketer, and all-around writer. He brings an original and practical approach for timeless blockchain knowledge such as: in-depth guides on crypto 101, blockchain analysis, dApp reviews, and DeFi risk management. Max also wrote for news outlets, saas entrepreneurs, crypto exchanges, fintech B2B agencies, Metaverse game studios, trading coaches, and Web3 leaders like Enjin.
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