Most Common Crypto Market Scams and How to Protect Against Them

Disclaimer: The сontent of this article is for informational purposes only, and does not constitute any financial or other advice. You alone assume the sole responsibility of evaluating the merits and risks associated with the use of any information in this material. We strongly advise that you do your own research before making any decisions.

The cryptocurrency market is growing fast, with new exciting projects launching every day. Unfortunately for crypto-lovers, not all of them are destined for growth. Even more dangerous is the fact that due to the anonymity and often ill intentions of project owners, users often come face to face with different scams.

In fact, a recent Chainalysis report revealed that crypto-based crime had hit a new all-time high in 2021 at $14 billion value. Out of the total sum, scams represented the greatest (55.7%) portion, leading to victims losing $7.8 billion throughout the year.

As one of the most high-profile cases in 2021, Thodex's CEO vanished with $2 billion of the exchange's users' digital assets in April, causing nearly as much damage to victims as BitConnect's infamous $2.4 billion Ponzi scheme. We should also remember the SQUID coin scam that leveraged the hype around the Squid Game Netflix show to pull the rug on the fraudulent project.

Forewarned is forearmed; today, we are taking a look at the several ways you can be scammed so you can spot fraudsters in time and keep your funds secure!

1. OTC market fraud

Over-the-Counter (OTC) trades account for a significant portion of the cryptocurrency volume, with many industry service providers featuring them among their offerings. However, while OTC desks provide quick and private transactions for their customers, you should be aware of the scammers targeting this market segment.

For that reason, you should always enlist the help of a guarantor (a party guaranteeing the safety of a transaction between a buyer and a seller) to buy a particular token when you make deals on the OTC market. Work only with trusted guarantors and refuse the proposals of those who take a much lower commission than the average.

Very often, scammers copy the nicknames and avatars of the guarantors with a difference of one letter or number and the same profile picture. For that reason, you should always carefully check the usernames of those with whom you are going to work!

2. Fake projects admins

When you ask a question in the official channel of a crypto project, fake administrators impersonating team members often DM you to supposedly help you solve your problem. They usually ask for your MetaMask or Trust Wallet address to connect your crypto wallet with an unsecured (fraudulent) website.

If you don't want to lose your hard-earned funds, you should never open strange links and always block administrators who send you a direct message.

In most cases, projects clearly highlight in their channels that they would never send DMs before messaging them first. This is a strict internal rule all team members follow. In most cases, admins even use the phrase “Will Never DM You First” in their nicknames.

3. Projects without locked liquidity and smart contract audits

When you are looking for a new DeFi project, always take a careful look at the distribution of the tokens.

By doing so, you can see where the creators have allocated the platform’s native cryptocurrency as well as the portion of the coins that have been locked and the remaining sum that remains unlocked.

The risks of your investment increase when the majority of a very significant part of the tokens are allocated to core team members and their advisors. It’s also a red flag if the creators hold a substantial amount in externally owned accounts (EOA) instead of smart contracts.

In terms of locked liquidity, you should pay attention to the lock period! During this period, project owners can't trade, redeem, or use their LP tokens in any other way, guaranteeing users that the liquidity they supplied to a pool will remain there.

If liquidity has been locked for only a few hours or days, the project is most likely a scam, as short timeframes like these drastically increase the chances of a rug pull.

In addition to the liquidity of a token, you should also pay attention to the smart contract audit report and the auditor's reputation. It's easy to make mistakes in the code. That's why good projects always make several audits with prominent third-party providers to find all the vulnerabilities and fix them.

Furthermore, always avoid dealing with industry projects where creators use pseudonyms instead of their real names. Working exclusively with doxxed creators is a must in DeFi and the broader crypto space. If members expose their identities online, the team becomes accountable for potential issues in the future.

4. Pump and Dump

Very often, users are offered to join a paid group with pump signals that promise mountains of gold. In reality, only the organizers of these schemes make money on this in a scam type called "upload to your own audience."

They stock up on a token in advance, tell their audience to purchase it as well, and immediately sell these tokens after enough people have bought it.

For that reason, you should never pay for signals or participate in pumps. The cryptocurrency market is unpredictable, and even the best experts in technical analysis can only guess where the chart will go.

5. IDO and ICO shilling

While there are many legit thought leaders in crypto, some unscrupulous influencers like Ash WSB shill token sales (e.g., ICOs, IDOs, IEOs), offering victims a way to invest money in a project and make millions in return.

But, in reality, people always lose money with opportunities that sound too good to be true. For that reason, you should always do your own research before investing in a project.

In addition to the core team, study the partners and advisors. And if you spot dubious shillers like Ash VSB or Everse Capital among them, you should avoid the project at all costs.

6. Clones of projects

Scammers often create their own tokens with tickers and names similar to well-known projects. They later start shilling these clone-tokens in Telegram chats and Twitter, so that users buy them. As soon as the liquidity pool reaches a certain amount, the scammers withdraw all the liquidity, and the price of the tokens drops to 0. This scheme is similar to a rug pull, but it’s easier to spot due to the similarity to an existing, usually successful token.

Even experienced users can fall victim to this type of scam, so we have to be always attentive!

Always Remain Vigilant in Crypto

No matter how you trust a person, a project, or a company, you should always remain vigilant in crypto, as the industry has been highly targeted by fraudsters since its early years.

From impersonating team members and fraudulent OTC guarantors to rug pulls, phishing, and other schemes, scammers are continuously searching for ways to lure their victims and steal their hard-earned digital assets.

Fortunately, you can stay safe within the industry by simply following the best practices I explored in this article, as well as doing your own research every time you use a new product, invest in a token, or interact with a crypto project.

Author Bio

Gleb is the CTO and Co-Founder of a smart contract audit company HashEx. He has over 14 years of experience in IT, including over 8+ years in the field of Internet security. At HashEx Gleb leads a team of talented auditors and developers, working with Bitcoin and Ethereum payment solutions, popular open source services.