FTX, one of the world’s largest crypto exchange platforms, was worth about $32 billion in January 2022. Sam Bankman-Fried, the exchange’s founder and CEO, was worth about $26 billion. Today, FTX and Bankman-Fried are the latest and most stunning examples of fraud in the cryptocurrency market, and the story behind it is surprisingly brazen – FTX is no longer operational, and Sam Bankman-Fried is behind bars.
The fall of FTX also demonstrates the prevalence and increase of fraud in the cryptocurrency industry. Here is the story behind the collapse of FTX and an overview of eight common crypto scams to protect yourself against in 2023.
FTX: An Elaborate Crypto Scam
The collapse of FTX took place over ten days. It began with a news article on CoinDesk that revealed that Alameda Research, also owned by Sam Bankman-Fried, held about $5 billion worth of FTX’s native token, FTT. The report also revealed that Alameda Research’s investments were in FTT instead of other cryptocurrencies or securities, such as fiat currencies and commodities.
The revelation sparked concerns about FTX’s and FTT’s undisclosed solvency and leverage details. Essentially, FTX was mostly propped up by Sam Bankman-Fried, instead of ordinary investors.
FTX announced a liquidity crisis on 7th November and started seeking bailouts from venture capitalists. The company even sought help from Binance, one of its main rivals. Binance agreed to buy out FTX’s non-U.S. businesses on 8th November but quickly backed out on 9th, raising further concern about the exchange’s troubles.
What followed was a legal crackdown on FTX and Sam Bankman-Fried. Bahamian securities regulators froze the local FTX subsidiary’s assets on 10th November. Bankman-Fried stepped down as CEO on 11th November and was replaced with a court-appointed CEO. Interestingly, the platform reported an alleged hack in which about $477 million worth of cryptocurrencies were stolen on 12th November. Bahamian authorities arrested Bankman-Fried on 12th December and extradited him to the U.S.
Overall, FTX lost more than $8 billion of its investors’ money. Most of these investors were left helpless, considering that cryptocurrencies are not fully regulated in the U.S., Bahamas, and other countries where FTX operates.
A Notable Uptick in Crypto Scams
The crypto industry is reeling from fraud. Fraud in the crypto markets has steadily increased since Bitcoin launched in 2009. The reported crypto fraud losses rose from $12 million in 2018 to $680 million in 2021 – overall, reported and unreported crypto fraud losses surpassed $14 billion in 2021.
Institutional investors have lost billions to fraudsters and scammers in the crypto market. Individual investors have also incurred significant losses.
A recent study reveals that a group of 46,000 investors lost a combined $1 billion to scammers in 2021. Overall, the average loss per investor in the crypto markets was about $2,600 in 2021, up from about $43 in 2018 – this indicated a 60X rise in fraud in the crypto markets. A recent report by the FTC reveals that Bitcoin, Ether, and Tether are the most targeted cryptocurrencies – unsurprisingly, they are also among the most valuable and popular cryptocurrencies among ordinary investors.
The uptick in fraud in the crypto markets has prompted stern responses from authorities such as the Securities and Exchange Commission (SEC). The SEC is planning crypto regulations and working with Congress to enforce them. It has also started charging fraudulent actors in the crypto markets.
8 Common Crypto Scams to Avoid in 2023
Scammers and fraudsters are coming up with creative ways of stealing cryptocurrencies from ordinary investors. Fortunately, you can protect your cryptocurrency by identifying and avoiding these scams. Here is an overview of nine common cryptocurrency scams in 2023 and tips to avoid them:
1. Rug Pulling
Most cryptocurrencies are based on underlying projects. For example, Ethereum is based on smart contracts, among other projects.
Rug pulling involves using such ambitious projects to scam potential sponsors and investors. Scammers make up ambitious projects and promise to develop them to completion, thereby increasing value and generating profits. The scammers then seek funding for their projects from big sponsors. They also raise capital from ordinary investors by selling native cryptocurrencies. The scammers then withdraw all of the money, drain all of the liquidity, abandon the project, and make away with investors’ money.
The best way to avoid rug-pulling scams is reviewing each project’s white paper thoroughly. It is also advisable to avoid investing in cryptocurrency projects too early.
Phishing is a classic scam tactic that works with most digital assets, including data and cryptocurrency. Scammers using this technique send unsuspecting investors fake emails containing malicious links to look-alike crypto platforms, such as online wallets or exchange platforms. The emails contain urgent messages asking the investors to log into their accounts or wallets to resolve a problem or claim a reward.
The fake platforms are designed to resemble the real ones in every aspect, so the unsuspecting investors don’t hesitate to key in their information, such as their private keys or logins to trading accounts. The fake platforms capture this data, which the scammers then use to log into the investors’ real accounts and wallets.
3. Ponzi Schemes
The profitability of cryptocurrencies such as Bitcoin makes Ponzi scheme scams incredibly effective. Scammers using this technique develop a new cryptocurrency and hype it as having great potential for profit. They then lure in investors, hold their money for short periods, and then use newer investors’ money to pay the old investors. The satisfied investors spread the word, luring in more unsuspecting investors. Ultimately, the scammers withdraw all of the investors’ money and vanish.
4. Investment Schemes
Investment schemes involve using the lure of profiting from crypto trading to defraud investors. The scammers masquerade as professional, experienced, and successful cryptocurrency traders seeking investors. They promise quick profits in return for an upfront investment and account management fee. They then withdraw all of the money and start stalling investors before eventually deleting the fake profiles and starting new ones.
5. Crypto Giveaway Scams
Cryptocurrency giveaway scams usually play out on social media. Scammers offer free cryptocurrency using popular social media channels – they can also use fake or unauthorized endorsements from celebrities and other authorities in the industry to be more convincing. However, they require applicants to pay an upfront fee or verify their crypto information before qualifying for the free cryptocurrency. The scammers eventually steal the money and data.
6. Man-in-the-Middle Attacks
A man-in-the-middle attack targets crypto investors using a public network to access their accounts and make trades. Scammers hack public networks and intercept all transmitted data, including account login information and crypto wallet private keys. They can then use this data to access the investors’ accounts and steal their cryptocurrency. Fortunately, using a Virtual Private Network (VPN) can help encrypt and protect all your data when using a public network.
7. Cloud Mining Scams
Most cryptocurrencies, including Bitcoin, are generated through mining. The process involves using powerful computers to solve cryptographic problems or complete other important processes. In return, the system rewards you with cryptocurrencies. However, mining can be too expensive and time-consuming for most individual investors. Scammers dangle the idea of cloud mining to defraud investors by convincing them to pay upfront fees to buy and maintain the powerful computers required for the fake mining process.
8. Blackmail & Extortion Scams
Blackmail and extortion scams can be simple or sophisticated. They are straightforward – you must pay up to avoid something bad from happening, usually getting private data released to the public. Scammers are usually bluffing, but hackers find this technique effective when they manage to steal a business’s data or cripple its IT systems. Securing your data and digital platforms is the best way to avoid blackmail and extortion scams.
Make Informed Investments
Fraud is rife in the cryptocurrency markets, and scammers are devising new techniques to steal your cryptocurrency. Fortunately, you can now identify and avoid eight of the most common cryptocurrency scams. However, it is also advisable to stay informed on all trends in the crypto industry to avoid other types of scams and take advantage of emerging opportunities. Crypto Signals Hub can help you with the latter by providing accurate crypto trading signals and the latest crypto news.