Introduction to Crypto: The Most Common Scams

The aim of a cryptocurrency scam is to steal investors’ money, which ends with the fraudulent owner fleeing and shutting down the business. Digital currency scams are usually characterized by the creation of low-effort projects to build the image of a promising project. In reality, it turns out to be a shell corporation and there is no real value behind such a project and no way to make money from the investment.

The world of cryptocurrencies is vulnerable to extortion due to the lax regulation of its operations. Due to decentralized control, project management is concentrated in private hands which attracts all sorts of fraudsters and hackers to the industry. Projects set up to scam money often closely resemble those of honest investments and initially see increases in value, which is a magnet for new investors. Eventually, the money invested disappears in thin air along with the project owners.


Liquidity theft
This is the most common cryptocurrency scam. How does the fraud mechanism work? The originator of the project lists the Altcoin on a decentralized exchange, linking it to a best-selling cryptocurrency such as Ethereum (ETH). To make sure that the project is successful, a liquid currency must be provided and enough currency must be listed on the exchange. The next step is to promote heavily the digital currency on the Web and social media to stir investors’ interest. This results in large token sales and thus a significant increase in the value of the digital currency which attracts new investors. At the peak of the token price hike, the founder withdraws all ETH from the liquidity pool, leaving investors stripped of their worthless tokens. In this manner, the founder deprives the currency of all the value contributed to it by investors, which leads to the price falling to zero and the founder disappears with the ETH tokens.

Technical manipulation
The second flagship type of scam is technical manipulation which involves blocking the ability to sell investors’ tokens immediately after purchasing them. Thus, the investor is deprived of the basic rights, i.e. to buy, sell, convert or spend tokens in any way he or she wishes. Sometimes these operations are only possible against the currency founder, an entity or a person of his or her choice. The dishonest founder waits until the value of the token has peaked and then sells all the tokens, disappearing once and for all from investors’ sight along with all the money.

Cash withdrawals by owners
Cash withdrawal by owners is a perfectly legal practice. However, if a digital currency has been created to defraud investors, cashing out then qualifies as a criminal offence. In this type of scam, the owner lures the investors with the benefits of the platform under construction, promising attractive functionalities that will enable them to make handsome profits in the future. Investors are fooled by the platform’s marketing, investing their funds into digital currency. This boosts the value of the venture, and the founder monetizes the shares or funds (either one-off or gradually), leaving investors with worthless tokens.

Dumping is the economic policy of selling products at prices lower than the cost of production or selling abroad at prices lower than in the domestic market. In relation to cryptocurrencies, this phenomenon involves the rapid sell-off of large quantities of tokens by owners of a digital currency leading to a coin price plunge. As a result, investors are left in possession of worthless tokens. Dumping is preceded by an intensive advertising campaign on the Web or social media channels. The mere buying and selling of one’s own digital currency is neither prohibited nor unethical, being of a lower caliber practice than liquidity theft or technical manipulation.

Read more in my book ‘Second Crypto Revolution: Build Generational Wealth With Richard Heart’s Crypto Ecosystem“.

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