How to avoid common types of crypto fraud? What should I know about them?

As public interest in cryptocurrency investing has soared so have cryptocurrency scams and bitcoin fraud.

Around £146m was lost to crypto fraud in the first nine months of 2021 as investor “fear of missing out” on this hot new sector has attracted scammers large and small.

Is investing in crypto safe?

Just as with any other popular investment, there are always thieves looking to profit from investors’ eagerness to earn and their lack of expertise.

Cryptocurrencies – particularly bitcoin – have produced returns that FTSE investors can only dream of. But this naturally attracts fraudsters who are keen to capitalise on the high investment returns coupled with people’s lack of knowledge.

This is because cryptocurrency is a complicated idea and much of the industry sits in a regulatory grey area.

Cryptocurrency is probably secure, mathematically. Transactions involving digital currencies are stored in blocks that are linked together in a chain. Once a block has been added to the end of the chain, it can’t be removed or undone.

All the computers that secure the network share a golden copy of the correct ledger of transactions. They are rewarded in a blockchain’s internal currency, such as bitcoin or ether, for keeping it safe and up to date.

But that’s not the question that most investors are asking. Crypto has been widely used as a payment method for scams, misdeeds and ransom demands.

The most notorious example is the NHS ransomware hack of 2017. This led to the UK’s emergency health services being downed as part of a global cyber attack.

Clearly there are risks and dangers for the uninitiated.

Spotting a cryptocurrency scam

As with any investment decision, the best way to protect yourself is to look out for the red flags. The following list covers the main types of crypto investment scams:

  • Never take any information at face value
  • Remain curious and double check everything
  • Always do your own research before making any financial transactions

Remember: If it sounds too good to be true, it probably is!

1. Coinbase scams

Trading venue Coinbase* is one of the world’s most recognised cryptocurrency brands. The exchange went public on the Nasdaq stock exchange in America in April 2021.

But its popularity led to it being used in SMS and email phishing scams.

These types of fraud aim to get the potential victim to click on a dodgy link. Visiting that shady website lets thieves plant malware or other computer nasties on their target’s mobile or PC, to harvest their data or steal other personal information.

It’s a low-tech scam, but effective.

2. Technical-support scams

When there is money involved, we often want to defer to someone who knows more than us. And this is where the crypto technical-support scam comes in.

The FBI warned in 2018 of scammers posing as support staff from cryptocurrency exchanges, gaining the trust of victims and then parting them with their digital currency investments.

A scammer’s aim in this case is to get you to share your private key that unlocks your cryptocurrency digital wallet. This allows them to steal that crypto by sending it to another wallet.

The most secure crypto wallet is a matter for debate. Software wallets such as MetaMask are extremely popular, this one boasting five million monthly active users.

It is always internet-connected and typically comes as a browser extension for Google Chrome or Mozilla Firefox, or as a mobile app.

Others swear by hardware (offline) wallets like the market leaders Trezor Model One and Ledger Nano.

3. Giveaway scams

We all love getting something for nothing. And that’s what makes giveaways one of the more successful methods of theft in cryptocurrency scams.

In one common ruse, victims are told they will double their crypto if they send it to a celebrity — faked, of course. In May 2021, the US Federal Trade Commission told Reuters that $2m (£1.45m) had been sent to Elon Musk impersonators in just six months.

Telegram and Twitter are infamous for hosting known scammers that promise crypto in “airdrops” — in essence, free coins sent to your cryptocurrency wallet.

The kicker is usually that victims are forced to divulge sensitive personal information or scammed out of their own crypto.

4. Employment scams

Students and job-seekers can be roped into employment scams. They are offered bitcoin for carrying out tasks, then told they now owe their new boss money.

Anyone who has grown up in the gig economy will recognise this.

Criminals may also pose as recruiters, and social media is thick with complaints of thieves offering high-profile opportunities as a way to steal data — for example, in these Coinbase scams.

5. Crypto phishing scams

Crypto phishing scams are much the same as faked emails, SMS texts from an unknown number, or any other irritating con attempt. They are depressingly common.

6. Cryptocurrency Ponzi and pyramid schemes

Reports of people gaining great riches from cryptocurrency naturally pull other investors in.

But there are opportunists out there ready to steal your crypto by pulling a classic Ponzi scam.

A Ponzi scam is where, instead of being invested in assets to generate returns, the money from new investors is used to pay earlier investors what they assume to be big returns — so enticing more backers.

In the process, the fraudsters siphon off some of the cash for themselves.

Interested in bitcoin? This reader explains how he taught herself about cryptocurrency and made £8,500 from bitcoin.

How do I recover my crypto scam?

Cryptocurrencies are not regulated in the UK. This means you are unlikely to get your money back if something goes wrong.

However, it’s still worth reporting the firm to Financial Conduct Authority (FCA) so the organisation can take steps to have the company potentially shut down. You can call the FCA on 0800 111 6768.

To find other ways to recover scammed bitcoin or stolen crypto, here are some tips:

  • File a claim at Broker Complaint Alert. The service claims to help thousands of people every year.
  • Request a chargeback from your bank. If you paid for crypto using your debit card or credit card, you should contact your provider immediately to see if you can reclaim the money using chargeback of section 75.
  • Hire a bitcoin recovery service. As well as Broker Complaint Alert, there are several other services that can help you get your money back. Examples include Atrium Forensics and Reclaim Crypto.

What is the most secure cryptocurrency?

Few have had no history of ever being successfully hacked.

And there are just a handful of cryptos that meet this criteria for more than five years: bitcoin, ether and litecoin.