The cryptocurrency industry might be a little above 10 years old but this doesn’t mean scammers have not popped up yet. Right after Bitcoin was created, it started gaining value, and fraudsters started inventing ways to rob people of their cryptocurrencies. There are many cryptocurrency scams and since the cryptocurrency industry isn’t properly regulated, these scammers flourish. So, it’s up to traders in the cryptocurrency community to spot scams and protect themselves. Recovering your cryptocurrency after it gets to the hands of scammers is always difficult. So, you should be safe than sorry.
Identifying And Avoiding Cryptocurrency Scams
1. Spotting Cryptocurrency Mining Scams
Cryptocurrencies aren’t minted by a central authority like fiat. A new cryptocurrency is added to circulation through a computational process called mining. In the beginning, this mining was done by individuals who had strong mathematical skills. Some mined cryptocurrencies at home. However, Bitcoin mining is capital intensive. Bitcoin mining hardware costs a lot of money and consumes a lot of energy. So, the number of people who mined individually has declined significantly.
Now, miners join mining pools, share the computational power with other miners in the pool and share the proceeds. These mining pools offer cloud mining services to anyone interested. This is where the scammers come in. While there are many legitimate cloud mining companies out there, there are many fake ones as well. Some companies are designed primarily to trick users into paying for server space only to shut them out without any returns. Some others have hidden charges that cut deeply into your profit. At the end of the day, what you earn will be nothing close to what you’ve invested in.
How To Protect Yourself From Cloud Mining Scams
The first thing you need to look out for is the promise of profit with no risk. The cryptocurrency market is highly volatile and unpredictable. When you invest in cloud mining, your returns will depend on several factors including the cost of the cryptocurrency at the time. For example, if you invested in cloud mining at the beginning of 2019 when Bitcoin was trading in the $3500 zone, you would have made a lot of money between then and now since the price of the cryptocurrency has increased significantly since then. So, any provider of cloud mining services that guarantees your profit is most likely trying to scam you.
Before you pay for cloud mining services, research thoroughly. Find out if there are negative or positive reviews about the company, make sure it has a registered domain and make sure you ask for proof of equipment. Some cloud mining sites you should consider using are; CCG Mining, Hashfox, Genesis Mining, NuVoo, Hashing24, and Hashflare.io.
2. Spotting Fake Initial Coin Offerings (ICO)
Cryptocurrency and blockchain-based companies use initial coin offerings to raise funds for their projects. Those who are interested will invest in the ICO and wait for returns when the project starts to yield results and the value of the token increases. Shortly after the 2017 cryptocurrency bull run, however, the United States securities and exchange commission started cracking down on ICOs. This is because many of the ICOs were selling scam tokens with no real-world applications to back them up. So, people will invest thousands of dollars buying a useless token. Without any real value, the price of the token will eventually fall to nothing costing investors millions.
Even with the crackdown from the SEC, ICOs still managed to raise $11.69 billion in 2018. Unfortunately, many of them have nothing to show for it. Most of these investors don’t know much about cryptocurrencies but they keep investing because they are impressed by the price action of Bitcoin and other cryptocurrencies. Unfortunately, most of these ICOs are multi-level marketing and Ponzi schemes. They don’t have the technology required to deliver on their promises. Some others are created with no intention of delivering the promise.
If you’re investing in ICOs because you’re looking for a get rich quick scheme, there is a high chance that you’ll fall victim to scam ICOs. One factor that will contribute most to the success of the ICO is the technology behind the coin. Look out for what the company is offering. Is technology going to solve real-world problems? Is it science fact of science fiction? Are reputable members of the blockchain and cryptocurrency industry interested in the project? What does the whitepaper promise? Is it a cryptocurrency of security? These are some questions you should find answers to before you invest in ICOs.
3. Spotting Fake Cryptocurrency Exchanges, Trading Bots and Wallets
Apart from cryptocurrency mining and ICOs, another great way to make money from cryptocurrencies is by trading on exchanges. Cryptocurrency trading exchanges allow users to buy and sell cryptocurrencies and make a profit. There are manual exchanges and there are trading bots. With the regular exchanges, you need to know how to execute buy and sell orders at strategic times if you want to make a profit. With a trading bot, however, everything is automated. All you have to do is make the deposits and set the parameters. You’ll trade automatically on the go. Cryptocurrency wallets are storage devices or software that you use to save your cryptocurrencies until you need them.
There are several fake trading sites, wallets, and bots. These platforms offer attractive features and gather clients who invest heavily. Eventually, they leave with all your money in an exit scam. Spotting fake exchanges is more difficult than spotting any other cryptocurrency scam because they can be convincing. They offer unbelievable promotions, large deposit bonuses, and cheap withdrawal fees. When they have so many clients, they make withdrawal next to impossible and increase their fees significantly. Before you know what is happening, the exchange shuts down with your funds in it.
How To Protect Yourself From Scam Cryptocurrency Exchanges, Bot and Wallet
If you want to protect yourself from this type of scams, you need to avoid being greedy. It’s this greed that these fake exchanges pry on. Focus on exchanges and bots that have solid reputations in the industry. Their requirements may be hard but you’ll rest assured that your funds are secure. A good trading bot is Bitcoin Code.
There are many other cryptocurrency scams out there like phishing, malware infestation, Ponzi, pump and dump schemes, and many others. The primary way to avoid these scams is to research thoroughly.
Carolyn Coley is a blockchain reporter. She joined Smartereum after graduating from UC Berkeley in 2018.
