The Short History of Crypto Scams

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By A D

Cryptocurrencies have certainly made their mark in the world, disrupting traditional banking systems and paving the way for innovative technologies. Since the introduction of bitcoin, the first and most well-known cryptocurrency in the world, the crypto world has exploded, with almost 20,000 different cryptocurrencies in circulation today. Faster and cheaper transactions, cross-border payments without the need for intermediaries, and giving new dimensions to businesses- these digital assets have offered benefits that simply cannot be overlooked.
Many crypto-based projects have revolutionised the potential of industries and shown new opportunities to the world. Ethereum, the second-largest cryptocurrency by market capitalisation, enables developers to build decentralised applications on its blockhain, offering new ways to create, store and transfer value. The crypto space constantly promotes blockchain-based developments, which have the capacity to change the way the world interacts.

However, it’s not all sunshine and rainbows in the world of crypto. As with any new technology, there have been instances of misuse and abuse. The very feature that has been a key factor in the rise of crypto, its decentralised nature, has also made it a prime target for fraudsters. Scammers are always looking for ways to take advantage of unsuspecting individuals, and the crypto industry has been no exception. From fraudulent ICOs to Ponzi schemes and ransomware attacks, the crypto space has seen some of the biggest and most devastating scams in history.
In 2014, Mt.Gox, a Tokyo-based exchang that once handled over 70% of all Bitcoin trasactions filed for bankruptcy after losing 850,000 BTC worth $450 million at the time. In 2018, the famous BitConnect, a cryptocurrency lending platform, shut down after being accused of running a Ponzi scam, resulting in millions of dollars in losses for investors. Numerous such incidents have followed from time to time, creating a cloud of uncertainty around crypto.

From the aforementioned Ponzi scams to fake ICOs and phishing attacks, the world of crypto scams is unfortunately vast and varied.

  1. Fake Crypto Exchanges and Crypto Wallets

Fake crypto exchanges and wallets are a type of crypto scam where scammers create fraudulent platforms that mimic legitimate exchanges or wallets. These fake platforms may look and operate similarly to the real ones, but they are designed to steal your personal information and cryptocurrency holdings.

In a fake crypto exchange scam, scammers create a website or app that appears to be a legitimate crypto exchange. They may even use a similar name, logo, and website design to deceive users into thinking that they are using the real exchange. The scammer will typically offer enticing deals and promotions to lure users to sign up and deposit their funds. Once the user has deposited their cryptocurrency into the fake exchange, the scammer will disappear with their funds, leaving the user with nothing.

Similarly, in a fake crypto wallet scam, scammers create a fake wallet that appears to be a legitimate one. They may even create a mobile app that is available on app stores, which users can download and install. Once the user has downloaded and installed the fake wallet, they may be prompted to enter their private keys or seed phrase. Once the user provides this information, the scammer can access their cryptocurrency wallet and steal their funds. The most common way scammers execute this is through honeypot contracts. One indentifier for mallicious wallets is little to no selling activity in their token tracker, which indicates that users are being being prevented from selling their funds.

  1. Rug pull scams

Rug pull scams are a type of crypto scam that occur when the creators of a new cryptocurrency project intentionally deceive investors by manipulating the value of the project’s tokens and then suddenly abandoning the project. These scams usually involve a small team of developers who create a new token with the promise of high returns and then launch it on a decentralized exchange (DEX) or a new centralized exchange.

After the token launch, the scammers will use various tactics to manipulate the price of the token, such as fake trading volume, price pumps, and social media hype. Once the price of the token has reached a certain threshold, the scammers will suddenly withdraw all of the liquidity from the exchange, causing the value of the token to plummet. This leaves investors with worthless tokens and no way to recoup their losses.

sharp rise and fall in prices signify manipulation in crypto markets
  1. Phishing scams

Phishing scams are a type of cyber attack where scammers use fraudulent emails, messages, or websites to trick individuals into revealing their personal information or login credentials. In the context of cryptocurrency, phishing scams are often used to steal users’ login information to their crypto wallets or exchanges, allowing the scammers to access and steal the victim’s cryptocurrency holdings.

Phishing scams can take various forms, but they typically involve a message or email that appears to be from a legitimate crypto exchange or wallet provider. The message may ask the recipient to verify their account information or login credentials, often under the pretext of a security check or system upgrade. The message may contain a link to a fake website that looks identical to the real one, where the victim is prompted to enter their login information or other sensitive data.

Once the victim has entered their information, the scammers can use it to access the victim’s crypto wallet or exchange account and steal their funds. In some cases, th scammers may also use the victim’s information to commit identity theft or other fraudulent activities.

  1. Ponzi schemes

The Ponzi scheme will typically pay out high returns to early investors to attract even more investors, using the capital from these new investors to pay the returns. However, as the scheme grows and more and more investors join, it becomes increasingly difficult to sustain the payouts. Eventually, the scheme will collapse, leaving later investors with significant losses and little or no chance of recovering their investments.

The creators of the Ponzi scheme will typically target a specific community, such as a group of cryptocurrency enthusiasts or investors, and use persuasive marketing tactics to lure new investors. They may claim to have access to a secret trading strategy or inside information on a new crypto project that will generate massive returns for investors. They may also use fake social proof, such as fake testimonials or reviews, to make their scheme appear legitimate.

The year 2022 was particularly difficult for cryptocurrencies as the market remained unreliable and gave rise to the “crypto winter.” The collapse of the cryptocurrency exchange FTX and its linked trading company Alameda Research at the end of the year raised questions about the business practises of the two companies, which eventually gave rise to several fraud accusations against founder Bankman-Fried. Regulators already appear to be on a crypto crackdown mission three months into 2023. Together with a crackdown on cryptocurrency businesses, two significant banks that provided services to the sector—Signature Bank and Silvergate Bank—were shut down. It is evident that lawmakers and regulators are closely watching the cryptocurrency industry, as seen by exchanges closing their doors and lawsuits filed for breaking rules.

Although there is a relatively short history, the world of crypto currency has seen some high-profile scams. Some of the biggest scams in history have involved well-known figures in the industry, resulting in millions of dollars in losses and and a broken public trust in the crypto industry.

sam bankman-fried's nam has become synonymous with crypto scams asof late, owing to the FTX debacle
Sam Bankman-Fried’s found himself in unending trouble, as the FTX debacle continued to get worse. Image courtesy:foxbusiness
  1. The FTX Collapse
    The FTX crisis shocked the cryptocurrency industry as a whole. In the space of a few seconds, FTX moved from having a market value of about $32 billion to declaring bankruptcy. Customers started requesting withdrawals due to the lack of liquidity, and Binance ended their non-binding acquisition deal with FTX. Due to poor money management, a lack of liquidity, and a high volume of withdrawals, the FTX exchange was forced to declare bankruptcy on November 11, 2022. Bitcoin and the rest of the cryptocurrency market fell as investors scrambled to understand the effects of the terrible sequence of events. Founder Sam Bankman-Fried admitted that the exchange had been insolvent since its inception.
  2. OneCoin Crypto Scam
    OneCoin was a high-profile Ponzi scheme that operated between 2014 and 2018, with estimated revenues of up to $15 billion. The scheme was founded by Bulgarian entrepreneur Ruja Ignatova, who promised investors huge returns by investing in OneCoin, a new cryptocurrency that she claimed was the next big thing in the industry. There was no blockchain or technology behind it. Instead, it was a centralized database of user accounts that Ignatova and her team could manipulate at will. In 2017, investigations began into OneCoin’s activities, and Ignatova was eventually charged with multiple counts of fraud and money laundering. After scamming investors out of $4 billion, she disappeared in 2017, never to be seen again. Currently, she’s on the FBI’s most wanted list and there’s a $100,000 reward to help find her.
  3. Wintermute
    Wintermute Trading is a cryptocurrency trading firm that was founded in 2017. The firm quickly became popular due to its use of algorithmic trading strategies to generate profits in the highly volatile cryptocurrency market. However, in 2020, it was revealed that Wintermute had been involved in a large-scale market manipulation scheme. The firm had allegedly been using its advanced trading algorithms to manipulate prices and create false liquidity on various cryptocurrency exchanges.The market manipulation scheme was uncovered by the research firm Coin Metrics, which analyzed trading data from various cryptocurrency exchanges. Coin Metrics reported that Wintermute had been responsible for a significant amount of fake trading activity on several exchanges, including Bitfinex and Binance. Wintermute has denied any wrongdoing and stated that it has always operated within the bounds of the law.
  4. SushiSwap Exit Scam
    SushiSwap was a decentralized cryptocurrency exchange that was created in August 2020 as a fork of the popular Uniswap platform. The platform’s token, SUSHI, quickly became popular among investors due to its high returns and unique features. In September 2020, the anonymous founder of SushiSwap, known only by the pseudonym Chef Nomi, suddenly sold all of his SUSHI tokens on the open market for approximately $13 million worth of Ethereum. This caused the price of SUSHI to plummet, and many investors accused Chef Nomi of an exit scam. Chef Nomi eventually handed control of the project over to the former CEO of the FTX exchange, Sam Bankman-Fried. Despite the controversy, SushiSwap has continued to operate and has even launched several new products and features.
  5. QuadrigaCX
    QuadrigaCX was a Canadian cryptocurrency exchange that was founded in 2013 by Gerald Cotten. The exchange was once considered to be one of the largest and most reputable in Canada, with over 115,000 customers and $200 million in assets. However, in late 2018, QuadrigaCX announced that its founder and CEO, Gerald Cotten, had died unexpectedly while on a trip to India. Cotten was reportedly the only person with access to the exchange’s cold wallets, which contained the majority of customers’ cryptocurrency holdings. As a result, customers were unable to access their funds. In total, it is estimated that QuadrigaCX lost $190 million in customer funds. The scandal has led to ongoing investigations by Canadian authorities and a class-action lawsuit filed by affected customers.

The rise of cryptocurrencies has brought about many positive changes to the financial landscape, from faster and cheaper transactions to increased financial inclusion for underserved populations. However, it has also brought with it a new wave of scams and frauds that have cost investors billions of dollars.

From Ponzi schemes to fake exchanges and phishing scams, the crypto industry has seen it all. While some scams have been more sophisticated and elaborate than others, they all prey on the same basic human desire for quick profits and easy money.

It’s important to remember that investing in cryptocurrencies can be a risky endeavor, and it’s essential to exercise caution and conduct thorough research before investing in any project or platform. Additionally, it’s vital to stay vigilant and aware of the latest scams and frauds and to always report any suspicious activity to the relevant authorities. As the crypto industry continues to evolve and mature, one can hope that regulatory measures and increased transparency will help to weed out the bad actors and prevent future scams.

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