How to avoid the biggest scams in crypto

There are only seven basic plots in all storytelling.

Every story ever told fits into one of these seven moulds, according to journalist Christopher Booker.

He spent 34 years researching and writing his book The Seven Basic Plots. And it has since gone down in history.

Those plots are:

  1. Overcoming the monster – eg, Jaws, War of the Worlds, Beowulf
  2. Rags to riches – eg, Cinderella, Great Expectations, Aladdin
  3. The Quest – eg, The Lord of the Rings, Indiana Jones
  4. Voyage and return – eg, The Odyssey, The Time Machine, The Wizard of Oz
  5. Comedy – eg, Twelfth Night, Much Ado About Nothing, Mr Bean
  6. Tragedy – eg, Macbeth, The Picture of Dorian Grey, Romeo and Juliet
  7. Rebirth – eg, Beauty and the Beast, A Christmas Carol, The Grinch

I thought it was interesting that he classes most romances as comedies. Here’s the description of a comedy from the book’s Wiki page:

Booker makes sure to stress that comedy is more than humor. It refers to a pattern where the conflict becomes more and more confusing, but is at last made plain in a single clarifying event. Most romances fall into this category.

The reason I am bringing it up is because while there may only be seven basic storylines, there are even fewer basic investment scams.

I know it’s a tenuous link, but I just found out about the “seven basic plotlines” idea and thought it was intriguing.

Regarding basic investment scams, I’d say they number three.

  1. You pay first
  2. Pump and dump
  3. Ponzi, or pyramid, scheme

These schemes are nothing new. They have been around for decades. But what is new, is how they are being deployed in the world of crypto.

That’s why today I’m going to go over these three schemes, with examples of how they are – right now – taking money from innocent crypto investors.

Hopefully I can help you to avoid the worst of them.

You pay first: the biggest scam in crypto right now

The first type is used in every type of investment, all over the world. It usually involves some unsolicited communication, promising you untold riches – providing you stump up some money first.

But recently it has become a huge problem in crypto. Many, many people are falling for this because it looks so legitimate.

Here’s how it works over Twitter. I’m going to use a real example from this week, just to show how prevalent this has become.

A reputable account, like Elon Musk or Charlie Lee (Litecoin founder), tweets something (note the blue tick).

Tweet from Charlie Lee official account about Litecoin and Bitcoin Cash

(I’ve used this tweet as an example because, even though he states not to listen to the fake accounts that reply, people still are.)

The scammers make a fake account that looks very similar to the official account and reply to the original tweet with something like this (note the lack of blue tick):

Example of a fake Charlie Lee twitter account

The scammers have thousands of hacked and fake accounts in their possession. So they then retweet, like and reply to this scam tweet, with things like this:

Twitter thread full of face accounts giving credibility to a fake tweet

All looks pretty legitimate, doesn’t it? How can that many people be lying? Very, very easily if the scammer has just bought a few thousand fake accounts.

Even when the original poster complains to Twitter, nothing is done, as you can see from Charlie’s follow up tweet here (note the blue tick).

Tweet from official Charlie Lee complaining about fake accounts

People fall for this scam it because it looks so official. And it is usually “written” by people in the position to give away vast amounts of crypto.

This tweet and scam reply were posted two days ago. Already the address linked to the scam has collected over $32,000 of ether. I know this because, being Ethereum, it’s all on the public ledger.

Here’s what’s in the account at time of writing:

Please don’t fall for this scam. Don’t ever send crypto to someone promising to return more crypto back to you in return. It is a scam. And if you’re on Twitter, always look out for the blue ticks.

Ponzi scheme

Investopedia has a good, concise description of a Ponzi scheme:

A Ponzi scheme is a fraudulent investing scam promising high rates of return with little risk to investors. The Ponzi scheme generates returns for older investors by acquiring new investors. This is similar to a pyramid scheme in that both are based on using new investors’ funds to pay the earlier backers. For both Ponzi schemes and pyramid schemes, eventually there isn’t enough money to go around, and the schemes unravel.

So, basically, if you’re an early investor you make money and if you’re a late investor you will never make money. All the new investment money flows up the chain, back to only a few early investors.

A good example of this in the crypto world is BitConnect.

BitConnect was/is (its token is still somehow alive, although the company is subject to a class action lawsuit) a crypto lending platform.

You could lend your crypto to BitConnect, through its platform and (allegedly) receive 40% returns, per month. Clearly, that is a ridiculous rate and not sustainable.

But it didn’t stop thousands of people from buying in.

Worse still, BitConnect has a multi-level referral scheme, whereby people would get paid – supposedly a lot – for bringing on new members.

This is a classic pyramid scheme and has rightfully been shut down.

If you have a suspicion that any crypto you are thinking of buying into is a scam, I suggest searching reddit/r/cryptocurrency to see if anyone has flagged it.

Pump and dump

Pump and dump scams aren’t a problem in major stockmarkets, but smaller ones are rife with them. And the crypto world has thousands of investor groups dedicated to joining them.

Again, I’ll borrow from Investopedia for the description:

Pump and dump is a scheme that attempts to boost the price of a stock through recommendations based on false, misleading or greatly exaggerated statements. The perpetrators of this scheme, who already have an established position in the company’s stock, sell their positions after the hype has led to a higher share price. This practice is illegal based on securities law and can lead to heavy fines.

So, if a stock is big enough, a few hundred investors putting in a few thousand pound a pop won’t have any effect.

If it is small – like any except the very biggest cryptos – the same few hundred investors can have a massive effect.

A pump and dump always has the same key characteristic. The people behind it already have their money in and will make the most. Everyone else is playing with fire.

Recently I joined a number of Telegram groups dedicated to pump and dumps. I wanted to see for myself if people actually fall for them. And yes. Yes they do.

All these groups claim to be fair, to give everyone a chance to get in on the “pump”. And they all have strict instructions not to buy over their recommended price.

Do not believe them.

Any public pump and dump group will have an inner circle running them, laughing all the way to the bank. You may get lucky and make some money on a pump a couple of times, but you will be burned in the end.

In a regulated market, pump and dump groups are highly illegal. As crypto is unregulated, there are no such laws. That’s how these groups can operate in public with impunity.

If you want to know more about how these pump and dump groups work, and how the inner circle fleeces everyone, have a look at this article.

Dan Denning sent it over to me a while back urging us to highlight these pump and dump scams for what they are.

As you can see, there are a lot of scams in the world of crypto. And they are not always easy to spot. That’s why I can’t recommend enough that you start following a news source you trust.

Exponential Investor is a good start. I’ll keep highlighting these scams for what they are whenever I find them.

But if you really want to get on top of this, you need to start reading my colleague Sam Volkering’s work. He is one of the world’s leading voices in crypto investing.

Any questions I have, he can always answer them. Any new promising cryptos I find, he’s already heard of and fully researched them. Basically, for anything crypto related, he is your man.

If you want to get Sam working for you, and if you want to see his crypto picks and get his advice on not getting scammed, you need to have a look at his latest report.

He’s identified one crypto that could be on the verge of disrupting the multi-trillion securities exchange industry. If he’s right – and he usually is – this crypto will go on to make unprecedented gains. You can read his full report here.

Until next time,

Harry Hamburg
Editor, Exponential Investor

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Category: Cryptocurrency

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