Cryptocurrencies are slowly becoming mainstream and with the increased investor participation, the crypto platforms have also become a favourite for scamsters to make easy money by exploiting hodlers.

Frauds are very common in the financial industry right from the banking industry to investments and insurance. Scams are also a good example of how fraudsters play with people who are not much aware and often give in to the fear of missing out.

To steer clear of such frauds it is important to know the warning signs especially if you are a beginner in the crypto space. Doing extensive research is a good idea before investing in a new coin. Moreover, looking for the past history of a project is a good idea before jumping into a new project.

Here are the top 5 red flags that you should watch out for: 

1. Sudden Increase in Prices

When coins without any track record show a significant price increase suddenly, it can be a warning sign. For example, the squid token, which was inspired by the Netflix series Squid Game, lost almost all of its value and was apparently a scam.

2. Promises That are Too Good to be True

Fancy promises of a high investment return with little to no risk are a clear red flag in cryptocurrency investments. Fraudsters may try to lure investors who are new to the crypto space with advertisements of high returns. While there are cryptocurrencies that have yielded a high return, the volatility of crypto ensures that there is no guarantee of returns. Cryptocurrencies are only for those who can handle the risk. If you feel like a project is too good to be true, then it probably is!

3. Social Media Crypto Giveaway Scams

There are several fraudulent posts on social media that promise Bitcoin giveaways. Some of these scams also have fake celebrity accounts that promote the giveaway for luring people in. However, when somebody clicks on the giveaway they are taken to a fraudulent site that asks for verification for receiving the Bitcoin. The verification process would then include making a payment for proving that the account is legitimate. The victim can lose the payment or even worse, click on a malicious link and get their cryptocurrency, as well as personal information, stolen.

4. Fake Cryptocurrency Exchanges

Scammers often lure investors in with a promise of a great cryptocurrency exchange - maybe even some additional Bitcoin. But in reality, there is no exchange and the investor doesn’t know if its fake until after losing their deposit. Therefore, it is best to stick to known crypto exchange markets - for avoiding unfamiliar exchanges. Do some research and also check the industry sites for details about the exchange’s legitimacy and reputation before you enter any personal information.

5. Demanding Crypto-Only Payments

If a seemingly legitimate person or retail establishment claims that they cannot accept any form of currency other than Ethereum or Bitcoin it’s likely a scam. Anyone demanding you to pay them in crypto might simply be trying to hoard it and capitalize on the increasing value of the coin. Unlike banks, blockchain don’t have the know-your-customer (KYC) protocols. This means that people can open wallets without presenting valid identification, address, social security number and contact information. Although blockchain is public and creates permanent records that are open to access, people can transact on blockchain anonymously - making it easy to take your money, trick you and escape.

In Conclusion

Thus, the above-mentioned warning signs should help you identify cryptocurrency scams and protect your valuable crypto assets and personal information. Scammers often try to hurry their clients and not give them time to understand what is happening. Do your research, find the white paper for the project and read through it. The document should lay out the financial models, legal concerns, backgrounds and roadmap of implementation too.

Likewise, the initial coin offering (ICO) could also be an opportunity for scams. An individual or company may say that they have a unique opportunity to invest in a new form of crypto with guaranteed returns. They may also pressure you into depositing a bunch of new coins in a digital wallet that is compromised or through “pump and dump” by buying up the coin and selling when the prices explode.

Note: The information shared in this article is not financial advice and investors should do their own research before investing in a coin.