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The universally recognized advantage of digital assets is their resilience and high resistance to fraudulent actions, which, combined with anonymity, has led to the popularity of crypto. The foundation of cryptocurrency security is built on the concept of blockchain technology, which provides multi-layered protection for financial operations.
Firstly, it is the end-to-end encryption of transactions, which ensures that only the sender and the recipient have access to the data. Secondly, the anonymity of operations, which reduces the possibility of tracking them to zero. Thirdly, the absence of a single server for data storage.
Information about all cryptocurrency transactions is presented in the form of separate blocks, which, like pieces of a puzzle, are scattered across the blockchain network. And to steal this information, the perpetrator needs to assemble these blocks together. This is practically an unsolvable task, which is why blockchain has received the status of an extremely reliable technology.
Almost.
According to the analytical company Chainalysis, in 2021, the total amount of cryptocurrency fraud worldwide reached $14 billion. This is 79% more than in 2020. At the same time, about half of this amount was obtained as a result of direct theft of digital assets.
Mind explains in which cases you can lose money invested in cryptocurrency and how to recognize potential fraudsters.
Additional security recommendations.
Anonymity: Use a separate email and social accounts for participating in airdrops. This will help protect your main information from potential threats.
Phishing, or Fishing by Livelihood
Some manipulations with digital assets have migrated from the financial market. In the banking sector, one of the most common types of fraud has been and remains phishing – tricking the cardholder into revealing card details.
In the cryptocurrency segment, phishing also works. The classic scheme involves receiving a message from the exchange where a cryptocurrency wallet is opened – a message in one of the messengers (Viber, Telegram, etc.) or by email. The message contains a call to action – to clarify personal data, check the wallet balance, participate in a promotion, etc. – for which you need to click on a link and perform certain manipulations.
The link is fake, but if the user does not suspect a catch, he enters his login and password to access his personal account. In this way, the account data ends up in the hands of the criminals.
In more 'advanced' cases, it seems that a live person, a real exchange employee, has come into contact: the fraudster poses as a support service employee, but the essence does not change. The main goal: to gain access to the personal information of the cryptocurrency owner.
Fake airdrops, or There is no such thing as free cheese.
In simplified terms, the term airdrop means the distribution of coins and tokens. Usually, this occurs during the launch of new cryptocurrencies – this way, developers try to attract new participants to their project and increase its popularity.
To receive coins, certain conditions must be met. Usually, this includes subscribing to social media pages, commenting, reposting, inviting friends, etc.
The opportunity to receive 10–20 coins tempts many, but the pleasure may turn out to be not free. Under real crypto projects, fraudsters often disguise themselves, spreading advertisements on profile resources, in cryptocurrency communities about the next generous airdrop, and luring a trusting audience.
After the airdrop, the user gets an offer to immediately exchange the coins issued to him for something more liquid and popular, Bitcoin or Ethereum. For this, fraudsters send him to a transaction page, creating the illusion of an exchange. But since the cryptocurrency itself is fake, no actual exchange takes place. Instead, wallet data and its unique key are stolen, after which access to the cryptocurrency wallet is blocked, and all funds that were there flow into the pockets of the perpetrators.
Something similar happened in the summer of 2022 when hackers sent 74,000 owners of cryptocurrency wallets operating on the Uniswap blockchain an offer to receive fake coins. About $4.7 million was stolen in this way.
Phishing attacks: Be cautious with links and emails you receive. Ensure that you interact only with the official sources of the project.
Pump and dump, or A bubble that will definitely burst.
This scheme is more aimed at those who buy cryptocurrencies hoping to profit from their price increase. The primary target is people who buy little-known currencies with low liquidity.
The scam looks like this. Criminals start inflating the coin's rate by buying it at a frantic pace. This is called a pump. This process is accompanied by hype in the cryptocurrency community. Sometimes they involve various authoritative figures (bloggers, experts) who enthusiastically talk about how they invested in a new breakthrough and promising asset.
There is also dusting (from the English word: dust). Fraudsters send a small amount of tokens to your wallet address and then demand that you cancel the transaction, paying a gas fee. When a person clicks on confirmation, the fraudsters gain access to all information related to your wallets, addresses, and transactions. Be careful!
The value of cryptocurrency skyrockets – and inexperienced investors fall for this hype, often buying it at the peak of the rate. At a certain moment, the holders of the main volume of coins begin to sell them off, provoking a price collapse – dump. As a result, a small group of people becomes rich, while the rest are left with losses.
As an example – the collapse of the LUNA currency. From January 2021 to January 2022, its value increased by 5500%. But in May, literally within a few days, the token lost almost 100% of its value, and its capitalization decreased almost 21 times due to a mass 'dump' of coins. As a result, LUNA owners suffered losses amounting to about $28 billion.
Regular checks: Check the status of your wallets and accounts to timely detect any suspicious activity.
By participating in airdrops, you can start your journey into the world of cryptocurrencies. This is a great opportunity to learn basic skills such as registering on crypto platforms, making transfers and transactions, gaining practical experience in using wallets, understanding blockchains, and interacting with decentralized finance (DeFi).
This experience will help you better navigate the cryptocurrency environment and develop your skills for future investments and projects.
Unfavorable exchange, or Games with the rate
Digital currency can not only be bought or sold on exchanges, but it can also be exchanged for other currencies, including fiat ones – euro, dollar, hryvnia.
Such operations are carried out by numerous exchange points. However, they do not exist in the form of familiar currency exchange points near metro stations or shopping centers, but conduct their activities online. The risk of fraud in such operations is very high.
What could be the catch? An overly favorable exchange rate. For example, if the Bitcoin exchange rate was around $17,200, while the exchange point offers to buy this currency for $17,500, which means a loss for themselves, clearly indicating fraud. Typically, in exchange points, the rate is, on the contrary, 2–3% 'worse' than the market rate.
The exchange may also require too much information from the user, including bank account details. This should raise suspicions.
In general, one should approach the choice of an exchange point carefully. If transactions go through an unsecured channel (when the protocol is secure and encrypted, the browser's address bar starts with https://), fraudsters can intercept data and substitute the recipient's wallet address using spyware. As a result, the user will send his currency not to the exchange point, but directly into the pockets of the criminals.
Golden mountains, or How not to become a millionaire.
Some crypto investors claim that they earn millions. And a 100% profit per month is not the limit. Such figures are certainly impressive and seem attractive, but not everyone is ready to spend their time and effort studying the crypto market, trading basics, and technical analysis.
That is why beginner investors, in order not to risk alone, entrust their money to an experienced trader who tries to squeeze maximum profit from them. This is successfully exploited by fraudsters. They pose as crypto market gurus and collect money from unsuspecting neophytes.
For this, old but effective methods are used: beautiful profiles on social media, photos in offices with panoramic views of metropolises or seaside, expensive suits, elite cars, and other attributes of a luxurious life.
Moreover, a person posing as a pro of the cryptocurrency world can be an outright front, behind which is an organized group of criminals. After all, the main goal is to create an image and gain trust. And a bright picture is a tool to achieve that.
One of the illustrative precedents occurred in May 2021 when several fraudsters impersonated Elon Musk and, using his name, tricked social media users out of over $2 million.
It all ends with the deceived investor sending his cryptocurrency to the 'star trader's' wallet, so that he can turn a modest starting capital into millions – and that's where the business ends. In this case, the anonymity of cryptocurrency transactions is more of a disadvantage than an advantage: it will not be possible to recover the funds, and there is no one to hold accountable.
Although the crypto market itself is still quite young, it employs old as the world techniques. The activities of unscrupulous 'crypto-activists' resemble a classic fraudulent scheme from the fiat world: withdrawing money through related parties – distorting financial statements to hide 'traces' – lending to related parties to enhance their liquidity and create the appearance of success – withdrawing money from related companies to personal accounts," explains auditor Artem Kovbel.
How to protect yourself from fraud?
There is no universal recipe. But it is quite realistic to protect oneself from fraud related to cryptocurrencies.
Here are the top unbreakable principles:
1. Be careful with personal data, especially those that provide access to your cryptocurrency wallet and bank account, and do not share them with anyone. Any messages and notifications from exchanges should be carefully checked for phishing.
2. Conduct cryptocurrency transactions on verified platforms – major exchanges that have been operating for several years and have not compromised themselves. Although in light of the recent bankruptcy of FTX, this is still not a panacea.
3. Before purchasing little-known coins or participating in an airdrop, thoroughly study all the secrets related to those projects and the biographies of those behind the creation of the cryptocurrency or token.
4. Do not be tempted by easy profits. Any promises of guaranteed income in a speculative market (and the cryptocurrency market is just that) are already a sign of fraud and deception.
5. Whenever possible, do not engage with online cryptocurrency exchanges and P2P (exchange of coins between ordinary users). If you need to convert crypto assets into 'real' money, it is better to use specialized services at exchanges. They provide protection and transaction integrity.
6. Do not unconditionally trust loud advertisements for high-profit cryptocurrency projects involving famous people. Practice shows: intentionally involving celebrities often indicates that the project is, if not a scam, then a one-day affair.
Signs of fraudulent operations and actions in the cryptocurrency market.
Cryptocurrency phishing Tricking users into revealing cryptocurrency wallet and exchange account information.
Fake airdrops Free distribution of coins by projects with unclear history and dubious reputation.
Artificially inflating the price of a coin A sharp increase in the cryptocurrency exchange rate over a short period, which is not substantiated.
Fraud during exchange operations Overstating the exchange rate when buying and selling cryptocurrency on the over-the-counter market.
Theft of money in trust management Transferring crypto assets to self-proclaimed traders under a 'gentleman's agreement.'