Why Investors Lose Money to Crypto Fraud and How to Detect a Fraudulent Crypto Investment
Cryptocurrency has altered the world’s financial view dynamically since its creation in 2009. Crypto offers a decentralized, borderless means of exchanging value. Cryptocurrency has proven to be perfect for value storage or exchange since its creation. However, this same innovation has also attracted numerous fraudsters ready to exploit the unregulated crypto market.
Despite the potential for notable and significant gains, many investors have continuously lost money to crypto frauds. Potential risk exists in every business, but losing money to fraudsters in crypto investment is a risk that can be avoided if detected early. Understanding the reasons why losses are made and learning to detect fraudulent crypto investments are crucial to prevent investing in a rug investment.
Why Do Investors Lose Money to Crypto Fraud?
Lack of Understanding and Knowledge About Crypto Assets
Although the crypto space can be a lucrative region for asset discovery and investments, it is imperative for investors to understand the blockchain technology before investments are made. Many people invest because of the fear of missing out (FOMO) and this makes them dive into projects limited understanding on market offerings and implications of bad investments. Having a grasp of the upsides and downsides equips investors with the foresight to detect unrealistic investments.
In 2018, a cryptocurrency exchange named Bitconnect promised investors up to 1% daily returns through its lending platform. The scheme later collapsed after regulators warned investors about the Bitconnect’s Ponzi scheme operations mechanism. Many investors lost their savings through participation in the unrealistic returns structure. With blockchains technology developing at a rapid pace, it is important to update one’s knowledge base with useful information on regular updates. Zero knowledge about crypto assets makes investors easy prey for scammers looking to exploit their ignorance.
Greed and High Returns
Many investors are lured by the promise of high and quick returns which fraudsters commonly use as baits. Cryptocurrency’s volatility often leads to significant gains, which also marks an equal potential loss for investors. Fraudsters often capitalize on the allure of overnight wealth by offering investment opportunities that attracts investors towards potential fortunes. The lure of wealth and in spite of its unrealistic approaches often lead to trappings in such projects. Ruja Ignatova’s OneCoin projects stands as notable example of platforms offering high expectations with little or no legitimate fundamentals supporting the project.
Anonymous and Unregulated Nature of Cryptocurrencies.
Decentralized assets due to its anonymous nature, attracts investors willing to maintain privacy of assets. Which is also a characteristic exhibit of fraudsters whose fraudulent activities prioritizes anonymity. Traditional third-party financial systems involve protecting the investor through visibility of parties involved. A feature that could be bypassed in the decentralized mediums.
In 2019, Canadian cryptocurrency exchange QuadrigaCX collapsed following the sudden death of its founder, Gerald Cotten, who took the private keys to wallets worth $190 million of investors’ funds to his grave. The opaque practice of the exchange resulted in loss of inventors’ funds on massive scale. Because of its anonymity and zero regulation, the crypto space can sometimes be a breeding ground for exploitation, which gives fraudsters the power to disappear without a trace with investors’ funds.
Phishing
Phishing is a common tactic used by cybercriminals to steal cryptocurrency. These attacks are done by tricking investors into giving away their private keys or login credentials through fake websites, emails, or social media accounts that appear legitimate. Investors should beware of phishing scams targeting Ledger wallet users. Messages like fake emails asking for security updates, wallet information are often malware in disguise. They are designed to steal their cryptocurrency. Many investors lost their cryptocurrency to phishing. In 2020, investors targeted several ledger wallet users by sending fake emails claiming to be Ledger requesting a new security update. This download installed malware that stole people’s investment.
Pump-and-Dump Schemes
Pump-and-dump schemes are quite common in the crypto space. It is done by the artificial raising of a price of a crypto through the spread of false information. False and misleading information is utilized through the hype of a crypto asset. This hype is traps investors into entry to increase asset value. With a quick dump following the prices surge as promoters sell off their holdings.
Same techniques is common in tokens not renounced in ownership, leading potential investors to a rugpull trap as project owners exit liquidity in large bags. Leaving the investors with worthless coins. Shitcoin with no use case are often considered in this light, because of the ease with which prices can drop when its rides on hype drops. SafeMoon was one of the biggest coins in 2021, with the price pushed by means of social media hype and endorsement by influencers. Hype from influencers helped in boosting the price of SafeMoon. However, several hodlers have been unable to recover their position due to its substantial loss in value, leaving many buyers with large losses.
How to Detect a Fraudulent Crypto Investment
- Unrealistic Promises of High Returns
The adage “if it sounds too good to be true, it probably is” holds in the world of cryptocurrency. Scammers are known for their enticing and “too good to be true” offers. Investment offerings with guarantees of high returns should be properly researched and questioned. Investors should embrace research to understand a project before investing to prevent losing money. Cryptocurrencies are certainly profitable but promises of consistent high returns can sometimes be unrealistic and may often lead to losses. - Lack of Transparency
Legitimate crypto projects are transparent about their operations, team members, and technology. Projects that are vague about its team, technology, or business model should be avoided at all costs. These are mostly fraudulent investments. Always research the people and technology behind a project before investments. Investors can never be too cautious. - Pressure to Invest Quickly
Projects that are created with a sense of urgency to pressure investors into making hasty decisions should be avoided when answers gathered from project research isn’t satisfactory. Such projects often make use of limited-time offers, countdown timers and a few other derivatives which are used to create FOMO for investors. Be wary of any investment opportunity that pressures you to invest quickly without giving you adequate time to do your research. - Complicated and Confusing Business Model
Scammers frequently use jargon and complicated reasons to confuse potential buyers. If you don’t recognize how a task makes money or what hassle it solves, it’s a red flag. If a task’s enterprise model is overly complex or difficult to apprehend, it is probably trying to obscure its authentic intentions. - History of Scams or Controversies
Research for any history of scandals or controversies involving the business and its team members. If the group has done questionable things in the past, it is a strong indicator that they may not be trustworthy. A team with a history of failed projects, scandals, or lawsuits should be avoided.
Watch Out for Red Flags
Investing in cryptocurrency offers potentially high returns and there are also risks involved due to the continued schemes that fraudsters invent to defraud unsuspicious investors. Knowing what common tactics, they use and looking out for red flags would save you from falling victim and losing money. Before investing, a great deal of research and a healthy dose of skepticism will turn out to be two of the finest tools that will help you navigate through the volatile and sometimes murky waters of cryptocurrency investment.