How Crypto Scams Works — A Reminder for the Age of FTX

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Written By M2 Monsters

NFT Creator and Innovator

Millions of cryptocurrency investors are being conned out of large sums of money. In 2018, losses from cryptocurrency-related crimes amounted to $1.7 billion. To swindle their victims, the criminals employ both old-fashioned as well as new-technology techniques. They use digital currencies to exchange through online databases called Blockchains.

Researching blockchain, cryptocurrency, and cybercrime has shown me that many cryptocurrency fraudsters use tried-and-true Ponzi schemes to make a profit. They use income from new participants in order to pay returns to investors who were there before them.

Others employ highly automated and complex processes. This includes software that interfaces with Telegram (an internet-based instant messaging system popular among cryptocurrency enthusiasts). Fraudsters can manipulate the price of a cryptocurrency plan, even if it is legal.

A more fundamental question is: How did unsuspecting investors become attracted to crypto frauds?

Swindlers who talk fast

Many cryptocurrency fraudsters make people greedy by promising huge returns. An unknown group of entrepreneurs operates the scam bot iCenter which is a Ponzi scheme to steal Bitcoin and Litecoin. Although it doesn’t offer any information about investment strategies, it promises investors 1.2 percent daily return.

Telegram group chats are the basis of the iCenter scheme. The scammers are a small group that starts the whole thing. They receive a referral code which they can share on blogs and social media with others in hopes of getting them to join the chat. The scammers send encouraging and exhilarating messages to the newcomers once they are logged in. Some people decide to invest and are given a bitcoin wallet in which they can deposit bitcoins. To receive a substantial return, they agree to wait 99 days or 120 days.

The newcomers use social media to share their referral codes with friends and contacts. This helps bring more people into the group chat as well as into the investment scheme. The funds are not actually invested in any legal business. Instead, new recruits get a portion of the new funds. The cycle continues and pays out earlier investors from each round.

As a lure to the scam, some members post tutorial videos and photos of themselves with large sums of money.

More lies and more lies

Scammers are not afraid to deceive. OneCoin, a scam cryptocurrency that robbed investors of $3.8 million, convinced people that their fake cryptocurrency was real. Others scams are designed to convince potential victims by using jargon and claims of specialist knowledge. Global Trading fraudsters claimed that they used price differences on different cryptocurrency exchanges to make a profit. This is known as arbitrage, which involves buying low and selling higher. They took the money of investors.

Global Trading also used Telegram’s bot to answer balance inquiries. Investors could send balance inquiry messages and receive false information. Sometimes, investors saw their balances rise by 1 percent within an hour. People are apt to share the scheme on social media, seeing such high returns.

Friends and family should be tapped

Once a scheme is in place, it can be maintained through social media. One person is lured by the promise of huge returns on cryptocurrency investments, and they spread the word to their friends and family.

Sometimes big names get involved. GainBitcoin, along with other scams in India, was the man behind it all. He convinced many Bollywood stars to promote his book “Cryptocurrency For Beginners”. He tried to become a celebrity by claiming himself to be a “cryptocurrency expert” and leading efforts that cost investors $769 million to $2 billion.

Some celebrities may not be aware of their involvement. One blog post by iCenter showed a video purporting to be Dwayne Johnson’s endorsement. Johnson was holding a sign with iCenter logo. Justin Timberlake and Christopher Walken made videos that appeared to praise iCenter. Dwayne Johnson, also known as “The Rock”, does not endorse the cryptocurrency scam.

Fraudulent initial coin offerings

Another scam is the “initial cryptocurrency offering”. This is a legitimate way for a startup to raise capital from future users. Customers are promised discounts on new cryptocoins in return for sending active currencies like bitcoin or ethereum.

Many initial coin offerings were scams. Organisers used cunning tactics, including renting fake offices, creating fancy-looking marketing materials, and even renting fake office spaces. A lot of media attention and hype about cryptocurrency in 2017 led to a flood of initial coin offering fraud. Around 1,000 initial coin offering attempts failed in 2018, costing backers more than $100 million. Many of these projects were not original — over 15% of them copied ideas from other cryptocurrency efforts or plagiarized supporting documentation.

Blockchains and cryptocurrency are appealing to investors looking for return on their investment in the new technology sector. However, they are complicated systems that can be confusing even for those selling them. Scammers have been a problem for both novices and experts. Potential investors need to be careful in an environment such as the cryptocurrency market. They should research the company and the plan for making money.

This article was republished by The Conversation under Creative Commons License. The original article was written by Nir Kshetri (professor of management, University of North Carolina-Greensboro).

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