Cryptocurrency scams explained

Cryptocurrency scams are rising as digital currency becomes more popular among investors. Find out the most common types of cryptocurrency scams and what to do if you think you’ve been affected by one.

Brean Horne Published on 03 August 2021.
Cryptocurrency scams explained

Cryptocurrencies, like bitcoin, are becoming increasingly popular and in the UK around 2.3 million people now hold cryptoassets.

Criminals have tried to capitalise on the rising popularity of cryptocurrency, using sophisticated tactics to trick people out of their money.

Here, we run through how to spot some of the most common cryptocurrency scams and what to do if you think you might have fallen for one.

What is a cryptocurrency scam?

A cryptocurrency scam is a type of investment fraud that involves criminals stealing money from people hoping to invest in the new world of digital currency.

Most cryptoassets and associated services aren’t regulated by the Financial Conduct Authority (FCA) for more than money-laundering purposes, which means they’re not protected by the Financial Services Compensation Scheme.

So it’s unlikely that you’ll be able to recover any money lost to a cryptocurrency scam.

»MORE: Learn more about what a cryptocurrency is and how they work

What are the different types of cryptocurrency scams?

Here are some of the most common cryptocurrency scams:

Celebrity endorsement cryptocurrency scams

Some fraudsters create adverts using images or videos of celebrities to promote their cryptocurrency investments.

They target people on social media platforms and claim that high-profile public figures endorse their investment scheme.

The adverts often link to professional-looking websites where they try to persuade people to buy non-existent investments using cryptocurrency or traditional currencies.

Some fraudsters create fake accounts that they manipulate with software to make it seem as though an investor is making a return, encouraging them to invest more.

Once the investor has increased their investment, their account is closed and the scammers vanish with their money.

In other scams, criminals disappear as soon as they receive the first payment, leaving investors empty-handed.

Phishing cryptocurrency scams

Often scammers will contact people randomly via email, offering an unmissable cryptocurrency investment opportunity.

The emails usually link to a professional-looking website with more information about the fake investment scheme.

Some ask for the investment to be made in cryptocurrency while others request traditional currency.

Once payment is received, the criminals stop communicating with the investor and sometimes take down the website used to trick them.

In other phishing scams, criminals ask investors to share their private keys, which are used to secure their cryptocurrency wallets, so they can access a person’s account and steal their cryptocurrency. Make sure to only download crypto wallets from the official website.

If you are already registered to a site, scammers may also attempt to create clones that look just like ones you are used to logging into. So always check the domain name clearly and make sure it belongs to the site you are trying to access.

Exit scam

An exit scam or, initial coin offering (ICO) scam, is when fraudsters pretend they have created a new type of cryptocurrency coin that promises to be the next big thing and generate huge returns, to then vanish into thin air with investors' funds.

A common exit scam is when scammers launch a new cryptocurrency platform and share convincing marketing materials to raise money from investors usually in the form of an ICO.

Once enough money has been collected, the criminals pocket the investment and vanish with investors funds. These scams are more rife in the crypto space, due to easier listing requirements and the fact that it’s harder to trace the missing funds.

Exit scams are not specific to ICO’s and can also happen after a coin has been around for a while.

These scams are usually a version of a Ponzi scheme where money is generated from new members is used to give the illusion of a profitable investment.

This can go on for an extended period of time however with these types of scams the end result is always the same with the creators of the scheme disappearing with investor funds.

Cryptocurrency cloud mining scam

Some cryptocurrencies are created through a process called mining which involves people solving complex mathematical problems using their computers.

It requires expensive hardware and uses a lot of electricity to mine a single unit of cryptocurrency.

A new wave of cloud mining platforms has emerged which allow people to mine cryptocurrency without the need for expensive computers and running up bills.

However, criminals have tried to capitalise on this and set up fraudulent cloud mining software platforms and apps that steal cryptocurrency from miners instead.

How can you avoid cryptocurrency scams?

Cryptocurrency scams are becoming increasingly sophisticated and convincing but there are ways to avoid being caught out.

  • Protect your wallet: You need a wallet with private keys to invest in cryptocurrencies like bitcoin. If a firm asks you to share your private keys to take part in an investment opportunity, it’s almost certainly a scam.
  • Ignore cold calls: If you’re contacted out of the blue about a cryptocurrency investment opportunity, it’s likely to be a scam. Never give away your personal information or transfer money to the firm if they do.
  • Is it too good to be true?: Cryptocurrency scams often promise to make high returns from your initial investment that are too good to be true. Any company offering get-rich-quick investment opportunities is likely to be fraudulent. Another keyword to watch out for would be if they promise you guaranteed returns on top of high returns.
  • Take your time: If a company tries to pressure you into investing quickly, it’s likely to be fraudulent. Some scammers even offer bonuses or discounts to persuade you to invest right away. Take your time and do your research before investing any money.
  • Avoid social media adverts: Scammers often use social media to advertise fraudulent cryptocurrency investment opportunities. Some also use images of celebrities - often without their consent - and high-profile people to ‘endorse’ their company and make their investment seem legitimate.

» MORE: Protect yourself from online fraud with these simple tips

What to do if you have been scammed

Being caught out by a cryptocurrency scam can be devastating but it’s important to act quickly if you’ve made a payment or shared personal details.

You need to contact your bank as soon as possible if you have:

  • Made a payment using a debit or credit card.
  • Made a payment via bank transfer.
  • Shared personal information.

Fraudsters often retarget victims of cryptocurrency scams or sell their details to other criminals. So, be sure to change your security details and passwords, especially for online banking, if you think you’ve been caught out by a scam.

How to report scammers

Whether you’ve fallen for a cryptocurrency scam or just seen one online, it’s really important to report them as it helps officials investigate fraudulent companies and stop them from targeting other people.

You should report cryptocurrency scams to Action Fraud, the UK’s national reporting centre for fraud and cybercrime.

You can also report a cryptocurrency scam to the FCA by contacting their consumer helpline on 0800 111 6768 or by using their online reporting form.

If you think scammers were able to get in touch with you because of a data breach it’s worth contacting the Information Commissioner’s Office (ICO).

The ICO investigates possible data breaches and can fine companies who aren’t able to protect your data sufficiently.

WARNING: We cannot tell you if any form of investing is right for you. Depending on your choice of investment your capital can be at risk and you may get back less than originally paid in.

Image source: Getty Images



About the author:

Brean is a personal finance writer at NerdWallet. She covers a range of financial topics and has written for consumer titles including Which?, Moneywise and The Motley Fool. Read more

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