The Risks of Crypto Investment Scams: What You Need to Know
Since its meteoric rise, cryptocurrency has transformed how we invest and breakaway from traditional financial systems. However, the industry has also created a rampant playing field for scams and economic downfalls. Understanding the risks associated with digital investments is critical to protecting your assets for newcomers and long-time investors alike.
The Allure of Shitcoins
The term "shitcoin" refers to a cryptocurrency with little to no value, and is often used to describe valueless cryptocurrencies that were developed after Bitcoin became popular. The diminished value of a shitcoin is due to the failure to meet investor or creator expectation or it didn’t deliver on the promise made by its developer. These coins are often fueled by hype, social media campaigns, and influencers promoting the next big opportunity.
Shitcoins follow a pattern starting with a short-term price increase followed by a nosedive caused by investors who unload their investments at a critical price point, hoping to capitalize on short-term gains. Shitcoin examples include DogeCoinDark (DOGED), Bitconnect (BCC), and BitPetite (BPT). Shitcoins serve as a reminder that in an unregulated space such as cryptocurrency, critical thinking and skepticism are necessary for any investor.
The Smelly Inner Workings of Pump-and-Dump Scams
A "pump-and-dump" scam is an illegal act of an investor or group of investors promoting the stock they hold and selling once the price has risen following a surge in interest. Unsuspecting investors are lured in by the promise of massive returns, causing the price to surge (the "pump"). The creators or early investors then sell their holdings at a premium, causing the price to crash (the "dump") and leaving new investors with significant losses.
Promoters of pump-and-dump schemes will coordinate rumors, or misinformation in order to increase interest, driving up its price. Such scams thrive on FOMO (fear of missing out), which can cloud judgment and lead to hasty investment decisions. However, there are ways to sniff out pump-and-dump scams; be on the lookout for any unreasonable sudden price increases, individuals or groups claiming to have insider information, and a lack of transparency about the promoters and basic fundamentals about their cryptocurrency.
The Collapse of Major Exchanges
Even established crypto platforms can collapse overnight, as evidenced by the collapse of FTX, a high-profile cryptocurrency exchange. In 2022, FTX was one of the largest cryptocurrency exchanges in the world, when it went bankrupt; causing a domino effect in the industry and garnered widespread mistrust among the public and services that worked with the exchange. Allegations of embezzlement and the misuse of customers’ funds were made against FTX, and ultimately, CEO Sam Bankman-Fried was sentenced to 25 years in prison and ordered to repay $11 billion.
With the FTX collapse, thousands of users lost access to their funds, perpetuating the risks of trusting centralized platforms with your money. While these exchanges can be convenient, their centralized nature makes them vulnerable to mismanagement, hacking, and bankruptcy. When an exchange goes under, customers often find themselves with slim chances of recovering their funds.
The Danger of Hacked Wallets and SIM Swapping Scams
Online wallets can offer convenience and security but one of their biggest downfalls is their vulnerability to hacking. One of the most common ways hackers gain access is through SIM swapping–when a hacker tricks your mobile carrier into transferring your phone number to a SIM card that they control. Once they gain access to your phone number, they can bypass two-factor authentication (2FA), intercept text messages, and gain access to your funds.
Losing access to your online wallet from SIM swapping not only results in financial loss but also emotional stress, as the recovery process is often complicated or impossible. However, you can protect yourself by setting up a PIN with your mobile carrier, and monitoring your account activity regularly.
Protecting Yourself in the Crypto World
In the crypto world, the risks are real, but there are steps you can take to protect yourself when investing in cryptocurrencies:
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Do Thorough Research: Before investing, evaluate the project’s whitepaper, team, and use case. Avoid projects that lack transparency or seem too good to be true.
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Use Reputable Wallets: Using hardware wallets lessens your vulnerability to hacking due to their offline nature. If you use online wallets, it is crucial to have robust security features.
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Safeguard Your Seed Phrase: Your seed phrase is the master key to accessing your wallet and funds. Store it in a secure, offline location, and never share it with anyone.
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Be Scam-Aware: Be skeptical of unsolicited investment opportunities, especially those promising guaranteed and quick returns. Do not click on unknown links or share sensitive information online.
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Diversify Your Investments: The more the merrier. Diversifying your portfolio can reduce the impact of a single loss.
Conclusion
Cryptocurrency offers exciting opportunities in an ever-changing financial landscape, but it’s not without risks. Shitcoins, pump-and-dump scams, exchange failures, and hacking incidents are common in this unregulated space. By staying informed, exercising caution, and implementing critical security measures, you can navigate the crypto landscape with confidence while protecting your investments.