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New Year, new crypto scams? Watch out for these signs

By Joyanta Acharjee

15:55, 13 January 2022

A hooded crypto scammer
Crypto-related crime reached record levels with $14bn in digital currencies stolen – Photo: Shutterstock

As we enter a new trading year, one investment industry body is warning investors about cryptocurrency scams and has suggested tips to help identify and avoid them.

Last year crypto-related crime reached record levels with $14bn (£10bn) in digital currencies stolen worldwide in scams, according to blockchain analytics firm Chainalysis.

Stolen crypto value over the last 5 years – Credit: ChainalysisChainalysis

The North American Securities Administrators Association (NASAA) - a non-profit association representing securities regulators - sees investments related to cryptocurrencies and digital assets as a "top investor threat" and advises caution for investors seeking opportunities to make money in that space.

Crypto millionaires

"Stories of 'crypto millionaires' attracted some investors to try their hand at investing in cryptocurrencies or crypto-related investments in 2021, and with them, many stories of those who bet big and lost big began appearing, and they will continue to appear in 2022," NASAA Enforcement committee co-chair and Director of the Alabama Securities Commission Joseph P. Borg said.

NASAA offers information for investors to help guard against losing money in crypto scams. The most common crypto-related fraud schemes the NASAA identified were fake digital wallets, “pump-and-dumps” as well as multi-level marketing platforms.

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Fake wallets

Digital wallets are used to store, send and receive cryptocurrencies. Fraudsters often design a fake digital wallet to lure users into disclosing the code that opens the wallet. Once the code is received, the fraudster can steal all the cryptocurrency held in the wallet.

Also seen in conventional securities markets, pump-and-dumps involve the coordinated purchase of a thinly-traded cryptocurrency by groups of individuals who promote that specific cryptocurrency on social media.

This pushes up demand and price, followed by a massive coordinated sale, resulting in a huge price drop. Those unaware of the scheme are left “holding the bag” with a devalued cryptocurrency.

Rug Pull

Top rug pulls of 2021 – Credit: ShutterstockChainalysis

A newer version of pump and dump is a rug pull, which happens when a developer suddenly abandons a crypto token, typically on the decentralised finance (DeFi) network, and takes all attached funds with them.

Chainalysis estimated that $2.8bn was lost to rug pulls last year, 90% of which was down to the Theodex Exchange rug pull which saw the CEO of a Turkish crypto exchange disappear after a trading halt.

Another 2021 rug pull was the SQUID crypto token - which borrowed its name from the hit Netflix show. Chainalysis estimates SQUID losses at $12m after developers of the crypto token disappeared.

Multi-level marketing

Finally, multi-level marketing platforms lure investors through the promise of high interest with low risk. These investors are then incentivized to recruit more members.

XRP/USD

0.60 Price
+3.190% 1D Chg, %
Long position overnight fee -0.0753%
Short position overnight fee 0.0069%
Overnight fee time 21:00 (UTC)
Spread 0.01168

SOL/USD

171.52 Price
+0.660% 1D Chg, %
Long position overnight fee -0.0753%
Short position overnight fee 0.0069%
Overnight fee time 21:00 (UTC)
Spread 2.2652

ETH/USD

3,512.09 Price
+0.070% 1D Chg, %
Long position overnight fee -0.0616%
Short position overnight fee 0.0137%
Overnight fee time 21:00 (UTC)
Spread 6.00

DOGE/USD

0.13 Price
+1.000% 1D Chg, %
Long position overnight fee -0.0753%
Short position overnight fee 0.0069%
Overnight fee time 21:00 (UTC)
Spread 0.0012872

This investment methodology was famously employed by a 20th-century fraudster whose name remains forever attached: the Ponzi scheme.

"Before you jump into the crypto craze, be mindful that cryptocurrencies and related financial products may be nothing more than public facing fronts for Ponzi schemes and other frauds," tNASAA’s Joseph Rotunda said.

"Investments in cryptocurrency trading programs, interests in crypto mining pools, crypto depository accounts and securitized tokens should be seen for what they are: extremely risky speculation with a high risk of loss."

Rotunda serves as the Director of the Enforcement Division at the Texas State Securities Board.

Tips

Advice from NASAA on crypto and other investments is the warning: “if it sounds too good to be true, it probably is.”

The promise of guaranteed returns over very short terms - sometimes hours or days - instead of months or years are often a red flag.

NASAA urged iinvestors to beware of fake client reviews as “anyone can be anyone on the Internet.”

Online accounts

Investors should take steps to identify phony accounts by paying careful attention to domain names, looking closely at content and considering the quality of engagement as scammers often spoof websites and use fake social media accounts to obscure their identities.

“It is important for investors to understand what they are investing in and with whom they are investing,” NASAA President and Maryland Securities Commissioner Melanie Senter Lubin concluded.

“Education and information are an investor’s best defence against investment fraud.”

Read more: Crypto fraudsters took .7bn last year

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The difference between trading assets and CFDs
The main difference between CFD trading and trading assets, such as commodities and stocks, is that you don’t own the underlying asset when you trade on a CFD.
You can still benefit if the market moves in your favour, or make a loss if it moves against you. However, with traditional trading you enter a contract to exchange the legal ownership of the individual shares or the commodities for money, and you own this until you sell it again.
CFDs are leveraged products, which means that you only need to deposit a percentage of the full value of the CFD trade in order to open a position. But with traditional trading, you buy the assets for the full amount. In the UK, there is no stamp duty on CFD trading, but there is when you buy stocks, for example.
CFDs attract overnight costs to hold the trades (unless you use 1-1 leverage), which makes them more suited to short-term trading opportunities. Stocks and commodities are more normally bought and held for longer. You might also pay a broker commission or fees when buying and selling assets direct and you’d need somewhere to store them safely.
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