Crypto Fraud Scams: A Deep Dive

For over two years, the FBI’s Ten Most Wanted Fugitives list has featured a peculiar outlier. Amongst the typical cartel leaders, murderers, and kidnappers sits Ruja Ignatova, better known as the CryptoQueen. She’s wanted for wire fraud, conspiracy to commit money laundering, and securities fraud—all related to her massive cryptocurrency scam, OneCoin.

The charges are consistent with many crypto scams, and so was the massive fraud Ruja pulled off. She launched a new cryptocurrency, built hype around it as the new Bitcoin, and used FOMO to get new investors in droves. But the entire OneCoin value was built on what the company labeled a “multi-level selling approach.” In more accurate terms, it was a pyramid scheme. The coins were worthless and investors lost everything.

You may think you’re savvy enough to spot scams like these. You might even be a crypto-pessimist confident you wouldn’t fall for these scams because you look at the entire industry as a scam itself. But never underestimate the cleverness of crypto fraudsters. In this post, we’ll share the most common crypto scams to watch out for, how to spot them, and how AI is helping us prevent them through better detection.

Common crypto scams to know and how to spot them

Fake exchanges / Fake ICOs

Cryptocurrency exchanges are centralized platforms to buy, sell, and trade crypto. They’re essential not only to match buyers with sellers but for investors to convert their crypto into traditional currency. Initial Coin Offerings (ICOs) happen when a new cryptocurrency hits the market, often driving large initial investments if promoted well.

Fraudsters try to trick crypto users by creating websites that look just like real exchanges. They often have professional-looking interfaces, fake customer testimonials, and trading functionalities to sell the illusion. You can spot fake exchanges by their use of aggressive marketing tactics to increase pressure to use them, like offering unrealistically high returns, low trading fees, or exclusive bonuses.

In fake ICOs, scammers generate hype around a new coin project using misinformation or outright lying about the goals of the coin. They overpromise returns to early investors, offer partnerships for increased investment, and pitch their coin by pretending they will introduce new technological features. In reality, these tokens may not even exist, and once they actually “launch” have no value. The best way to spot fake ICOs is to look at the whitepapers and documentation behind new coins before you invest. Double-check with other investors that the coin is legitimate and be skeptical of “too good to be true” pitches.

Pig butchering scams

The term pig butchering scam comes from the Chinese phrase “Shāz Hū Pán” which is both a translation of the scam and a clue to the idea behind why it’s such a damaging fraud attack.

Pig butchering scams come in a few different forms, but each starts with a different fraud tactic where the scammer first works to quickly gain a victim’s trust. They might reach out first on a dating app and flirt or love bomb the victim before moving the conversation to crypto investing. They could reach out with a fake job offer, or even pretend they have the wrong number when texting or messaging you to start a casual conversation.

After they’ve taken enough time to establish trust and introduce the victim to the crypto investing part of the scam, they will further build trust by showing the victim they will be able to invest and withdraw profits by allowing them to do just that. This, of course, is all part of the scam. After the fraudster has the victim’s full trust, they convince the victim to invest more and more, like a butcher fattening up a pig before slaughter. Once they have gathered a large enough sum from the victim, the fraudster takes everything and disappears.

If you receive “wrong number” text messages calling you by the wrong name or discussing friendly plans (i.e. “It was so nice to see you at Mike’s party!”) this is almost surely a pig butchering scam lure. Another red flag is any stranger or contact you’ve only spoken with online moving the conversation to cryptocurrency investing and promising an exciting opportunity.
They may even call it a “fail-proof” way to make money on investing, taking advantage of victims’ lack of crypto knowledge to run the scam.

Ponzi schemes

Ponzi schemes are a classic financial fraud, but they’re uniquely damaging as crypto scams. Ruja Ignatova’s Ponzi crypto scam we mentioned in the introduction, OneCoin, scammed victims out of more than $4 billion.

A crypto Ponzi scheme works in the same way as a traditional Ponzi scheme and relies in new investors covering payouts to earlier investors. In reality, no profits are actually generated, and the larger this pyramid scam gets the harder it is to maintain. Many crypto Ponzi scams start similar to fake ICOs with grand promises of disruptive technology and massive returns for investors. The dangerous part is that early investors will evangelize for the scam, knowingly or unknowingly, because they have been paid out.

You can spot crypto Ponzi schemes by being skeptical of unrealistic promises, checking that the coin actually has value on legitimate exchanges, and avoiding any not backed by reputable investors in the space.

Rug pull scams

Rug pulls are sudden intentional withdrawals of liquidity from a decentralized financial platform or token, most often by the founders.

They start with the founders creating a large community of investors and building up the financial value of their platform or crypto coin. To attract investors, these scammers initially contribute to the project’s liquidity pool. This gives the appearance of a well-funded and stable project. From there, they build as much hype around the project as possible. They will encourage skeptical investors to ignore the FUD (fear, uncertainty, and doubt) and trust in the project.

Once they’ve built up the liquidity pool, it’s time for the rug pull. The fraudsters withdraw most or all of the liquidity, causing the project’s value to plummet and investors to be left empty-handed

Potential rug pulls usually have anonymous teams and a lack of transparency. They share little information except hype for the project, and of course, promise unrealistic returns. In some cases, founders may rush to launch a coin or project so they can get to the rug pull faster.

Pump and dumps

A “pump and dump” scheme is a market manipulation scam where certain investors or bad actors artificially inflate the price of a coin. They often lie about its potential, it’s tech backing, and invent any other positives they need to in order to drive investment. Think of the scene in Wolf of Wall Street where Jordan Belfort sells pink sheet penny stocks.

Pump and dumpers target investors with little or no education in the crypto space and promise completely unrealistic returns by relying on tech jargon-infused pitches and huge overpromises. After the price surges to a high enough level, the fraudsters who had some holdings in the coin sell off all their shares, or dump them. In many cases, this is a massive sell-off that plummets the coin’s value.

These schemes often target low-liquidity and low-volume cryptocurrencies, making it easier for manipulators to control the market temporarily. Watch out for this, along with sudden price spikes, lack of fundamentals behind the coin, and no clear use or value for the coin.

Phishing attacks

Phishing attacks in the cryptocurrency world involve deceptive attempts to steal login credentials, private keys, or wallet addresses, by posing as a trustworthy entity. They typically follow similar patterns to standard phishing attacks, with fraudsters aiming to trick victims into revealing their confidential information through email, texts, fake websites, and social engineering.

These are more difficult to spot in the cryptocurrency world because many projects and new players are popping up every day. To spot these, make sure you know the exact reason you would be sharing your wallet login, private keys, or any sensitive information before you do so.

Cryptojacking

Cryptojacking, or crypto hijacking, is a cyber attack where fraudsters use the computing resources of others to mine cryptocurrencies without their knowledge or consent. In a cryptojacking attack, the attackers typically exploit vulnerabilities in a computer system, website, or network to secretly install cryptocurrency mining malware. The malware then uses the victim’s computing power to mine cryptocurrencies.

You can spot a cryptojacking attack by flagging sudden noticeable reductions in computer or device performance. Cryptojacking can also lead to device overheating and massive battery drain. You’ll likely also see unexplained spikes in network traffic, as cryptojacking malware often communicates with mining pools or command-and-control servers.

Giveaway scams

Giveaway scams involve fraudsters posing as influential figures or reputable organizations in the cryptocurrency space, promising to distribute free cryptocurrency or tokens to participants. These scams usually leverage the popularity of well-known figures, industry leaders, influencers, or even the official accounts of blockchain projects, to deceive individuals into sending cryptocurrency with the expectation of receiving more in return.

As with many crypto scams, the promise of unrealistically high returns or substantial amounts of cryptocurrency for a small initial investment should be a red flag. If it seems too good to be true, it likely is. Scammers also like to create a sense of urgency, claiming that the giveaway is time-sensitive or that participants need to act quickly to secure their spot. Be cautious of links provided in giveaway announcements. Scammers may use deceptive URLs that resemble the official websites of well-known projects but lead to phishing sites.

AI-powered scams

All crypto scams can become more convincing and dangerous with help from AI. Phishing attacks become more effective with better-written emails and messages using natural language processing (NLP).

AI can analyze vast amounts of data from social media platforms to create detailed profiles of potential targets. Scammers can use that information, along with an army of AI bots, to send tailored scam messages at a mass scale. Deepfakes are a rising concern as fraudsters can use them to impersonate trusted individuals and influencers to more convincingly sell their scams.

Some scams tout “AI-driven algorithmic trading bots” that claim to generate guaranteed profits. These bots may promise automated and high-frequency trading strategies, but in reality, they are designed to lure users into depositing funds, which are then often misappropriated.

As with every scam mentioned above, be extremely careful and cautious with where you invest. Make sure you see sound fundamentals and technological backing behind any new coin or project you invest in.

Why are crypto scams happening so often?

Crypto scams are proliferating at a huge rate thanks to many reasons. One big factor is that there are very few regulations and rules to control the cryptocurrency industry. Cryptocurrencies also use a lot of complicated new technology, a fact scammers take advantage of to trick less-educated victims.

By their decentralized nature, cryptocurrencies offer much more privacy for those who trade them. That makes it easier for scammers to pull off their schemes and disappear completely. AI is helping to scale fraud to unseen rates in crypto just as it has with all other bank frauds. When all these factors combine, it creates a fraud playground for scammers.

How crypto companies are fighting back with AI

The good news is AI is even stronger in the hands of fraud fighters than it is for fraudsters. Unsupervised and supervised machine learning adapts to fraudsters’ schemes while also enforcing rules to prevent existing frauds. Device fingerprinting can see the digital footprint a fraudster thinks they have hidden, meaning fraud prevention solutions can step in and stop them before they attack.

Tools like transaction monitoring and anomaly detection help reveal fraud rings that run pig butchering scams by spotting bad actors among good customer behavior. When all these tools combine into one holistic fraud platform, it gives fraud fighters a central location for all their data sources and orchestrates it to reveal fraud patterns in real time.

Fintechs, cryptocurrencies, and DeFi projects can all benefit from adding a strong layer of security and fraud prevention to protect their customers and banish fraudsters. If you’re curious how DataVisor accomplishes this better than any other platform in the industry, set up a personalized demo with our team.