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Digital Fraud Wiki

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Cryptocurrency Scams: Investment Scams

What is a cryptocurrency investment scam?

A cryptocurrency investment scam is any fraud scheme designed to fool victims into investing their money in fake or malicious cryptocurrency projects. Crypto investment scams take advantage of the relative anonymity, decentralization, and lack of regulation in the cryptocurrency space to exploit unsuspecting investors.

Types of cryptocurrency investment scams

Pig butchering scams

Pig butchering scams are long cons in which fraudsters trick victims into investing their money in cryptocurrency over weeks or even years, only to steal everything from them in the end. These scams begin with clever social engineering tactics. Fraudsters make fake profiles on social media apps, messaging apps, and dating apps to attract victims. They usually will try to lure the victim in through fake affection (in romance scams) or by promising them a unique investing opportunity.

During the scam, the fraudster convinces the victim to invest more and more over time. They will often assure the victim the investment is safe by allowing them to withdraw money from their “investment.” The process of gradually fooling the victim into investing more money, or fattening up the final sum the fraudster will steal, is where the scam gets its name. As the fraud originally gained prominence first in China, it earned the moniker “Shāz Hū Pán,” a Chinese phrase that translates roughly to “pig butchering.”

Fake ICOs and fake exchanges

Initial Coin Offerings (ICOs) are an exciting moment for any fledgling cryptocurrency. Scammers leverage that emotion to create fake ICOs that mimic the fundraising process of legitimate blockchain projects. They promote these fake ICOs through deceptive marketing tactics, promising significant returns to investors who contribute funds. Once they have increased the value enough, the scammers cash out completely and disappear, leaving investors with worthless tokens.

In a similar scam, fraudsters create fake cryptocurrency exchanges that appear legitimate but are designed to steal users’ funds. These exchanges may offer attractive trading conditions and bonuses to entice users to deposit. Once users deposit their funds, the scammers either make withdrawals difficult or disappear with the deposited funds.

Ponzi schemes

Ponzi schemes pay returns to earlier investors using the capital from newer investors, rather than from profit earned by legitimate operation. Cryptocurrency Ponzi schemes work the same, often promising guaranteed or unusually high returns on investment to attract new participants. As long as new investors keep joining, the scheme appears profitable, but it eventually collapses, leaving most participants with losses.

Phishing scams

Scammers use phishing attacks to trick individuals into revealing their private keys, passwords, or other sensitive information. They may create fake websites or send deceptive emails claiming to be from legitimate cryptocurrency platforms, leading users to disclose their credentials unintentionally.
Impersonation scams and romance scams
Scammers may impersonate well-known figures in the cryptocurrency industry, such as influencers, CEOs, or developers to get victims to invest in their fraudulent schemes. They use social media platforms or other communication channels to promote fake investment opportunities, asking users to send funds to a specific wallet address. In the case of romance scams, fraudsters lure in victims looking for romantic connections and con them into a false online romance, all the while convincing them to invest in a cryptocurrency scam.

Blackmail or extortion scams

Using malware or some other type of attack to gain control of sensitive information, fraudsters demand cryptocurrency in exchange for the safe release of the stolen property. Many times fraudsters threaten to leak company or user data which can fuel future frauds by providing scammers with synthetic information to use.

How do cryptocurrency investment scams work?

Each cryptocurrency scam has its own unique tweaks and intricacies, but they all will generally follow a similar overarching pattern:

  • Step 1: The Outreach – Fraudsters initiate contact by impersonating a potential love interest, a famous investor, a personal friend, or even one of your co-workers. They do not always start their pitch right away, instead they will try to get friendly and overly-familiar quickly.
  • Step 2: The Sell – Once the fraudster has gained enough initial trust, they will push the crypto investment “opportunity.” They often make large promises of unrealistic returns, “zero-risk” investments, or promise love and other favors in return for the victim’s investment.
  • Step 3: Securing Investment – This is a crucial step, as the fraudster needs to ensure the victim pays them to a wallet the fraudster controls. In some cases, fraudsters will bypass the victim investing altogether and trick them into handing over their wallet.
  • Step 4: Disappearing – The fraudster leaves without a trace, making sure that the victim can’t contact them or retrieve their wallet or funds. In fake ICOs and fake exchange scams, the project or service usually shuts down altogether at this point.

How to spot a cryptocurrency investment scam

  1. If it sounds too good to be true—it is. Don’t trust pitches about getting rich quick, “zero-risk’ investment opportunities, or guaranteed returns.
  2. Scammers love aggressive marketing tactics. If you are being lovebombed by a new romantic acquaintance, pressured to join a “can’t miss” opportunity before it’s too late, or have to act now to save your spot in an ICO or DeFI project, it’s likely a scam.
  3. People who reach out via wrong number texts are not real investors. This is almost universally the beginning of a pig butchering scam.
  4. Lack of transparency = likely scam. Real DeFi projects, exchanges, and cryptocurrencies will be transparent with investors through white papers on their technology, clear views of the liquidity pool, and up front communication about the plans for their project.
  5. Sudden support for a low-volume, low-liquidity coin is fishy. This is most likely either and ICO scam or a pump and dump scheme.
  6. Fraudsters want to get you to share your wallet information without good reason. Never share your wallet information or private key with anyone unless you absolutely trust them and know they will not steal your wallet.

Who is responsible for financial losses in a cryptocurrency investment scam?

Who ultimately ends up bearing the cost of financial losses from cryptocurrency investment scams can depends on what specifically happened in the scam. If the fraudster can be identified and tied to the crime with evidence, then they can be charged by law enforcement for financial fraud charges specific to their scam, usually wire fraud, money laundering, securities fraud, or other common fincrime charges. If early investors are aware of the scam at any point and remain involved, they can be named as responsible parties as well in any potential criminal charges.

In the case that the fraud is prosecuted and the fraudsters lose in court, the legal proceedings will determine how much, if any, funds are repaid to the victims. Often times, fraudsters are not caught or are unable to be prosecuted due to lack of regulation around cryptocurrency trading. Many crypto investment scams are forms of authorized payment fraud, meaning that technically because the victim authorized the transfers to the fraudster, the victim is on the hook for all losses.

How to prevent cryptocurrency investment scams with AI

Using the real-time capabilities of leading AI-powered platforms, fintechs and cryptocurrency projects can adapt dynamically to fraudsters’ evolving tactics. Unsupervised machine learning unveils patterns of fraudulent behavior, making real-time decisioning faster. Generative AI assists with rule writing and tuning, making fraud defense teams more efficient than ever.

Transaction monitoring and anomaly detection uncover actions from coordinated fraud rings engaged in cryptocurrency scams. These tools, when combined into a centralized, holistic, data-focused platform, give fraud fighters a proactive defense against fraud attacks.

Whether you’re navigating the fintech landscape, delving into cryptocurrencies, or exploring the realms of DeFi projects, establishing modern, AI-powered fraud prevention is paramount. To see firsthand how DataVisor leads the way as an award-winning fraud and risk platform, schedule a personalized demo with our expert team.