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Although the cryptocurrency market is evolving, there is still some of the investor world’s wild west. Even the largest and oldest cryptocurrencies, such as Bitcoin and Ethereum, are notoriously volatile.
Bitcoin, for example, has fallen about 70% from the highest level ever, reached in November 2021.
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But things get even crazier once you dig under the cryptocurrencies that are often quoted in the financial press. In fact, according to CNBC, there are over 19,000 cryptocurrencies, with names that most people have never heard of. How do you know in this type of environment which cryptocurrencies are legal and which ones can be scams?
Here are some things you need to know to protect yourself from illegitimate cryptocurrencies.
Pump and dump diagrams
In a pump and dump scheme, fraudsters first load an unnamed cryptocurrency – one that flies under the radar. Then they start an aggressive marketing program using a combination of social media posts, blog posts and financial “press” to draw attention to crypto.
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As more buyers notice it and start pushing the price up, the scammers get carried away and advertise the price gains in every possible way to entice more and more investors to buy. . of their coins on the open market, leaving ignorant investors to hold the bag when the crypto inevitably crashes thereafter.
Needless to say, if you get contacted to buy an unnamed crypto that suddenly rises in price, beware.
One of the ways scammers cheat unsuspecting crypto investors is through the use of fake websites. It works best with cryptos that have made headlines but are still not widely known.
Scammers will create sites that look legitimate and trick buyers into making a purchase there. Some scams mimic individual cryptocurrency developer sites, while others appear as legitimate cryptocurrency exchanges.
One way to avoid being scammed is to make sure you only use sites that are secure with “https” in their name and the locked padlock icon in the address bar.
Another common scam involves hyping a coin that realistically has no chance of becoming mainstream. Scammers will market and hype a coin and say it is “the next xyz” or “bitcoin killer”, or another grandiose wording. In fact, these parts exist only to enrich the villains, as pumping and dumping systems.
Once enough investors have bought in, the hypesters will blow their positions out and take their profits, leaving investors in the dark with crypto that is essentially worthless.
Fraudulent initial coin offer
Some scams are so daring that they are almost hard to believe. Initial scams borrow from the principles of pump and dump systems and hyped coins, but take these ideas a step further by offering unregistered cryptocurrencies for sale directly to the public. At best, these fraudulent coins simply have little value or utility. In some cases, however, general investors are sold coins that do not even exist. The money they put back into these fraudulent “IPOs” is simply tucked in the pocket of the scammers, who then disappear.
The SEC has begun taking steps against these fraudulent unregistered coin deals, but that does not mean they no longer exist. Make sure the crypto you invest in has legitimate backers and is sold by reputable companies before handing over your hard earned money.
No matter where there is hype or money to be made in the investment world, scammers will definitely keep up. As cryptocurrency is one of the most unregulated and volatile investment opportunities in the world, it is a mature field of opportunities for fraudsters.
Especially if you are just starting out, stick to the most liquid and well-known cryptocurrencies that have real utility and that you can track accurately. Bitcoin is a good example. Although not yet widely accepted by its followers, it is used as a real currency by legitimate businesses, perhaps even your local coffee shop.
As long as you trade Bitcoin on a legal exchange, the risk of fraud is low. But the deeper you dive into the unregulated pool of unknown cryptocurrencies, the more you expose your investment to the risk of fraud.
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