Cryptocurrency scams are on the rise. As a result, the government is bringing in new rules to help tackle this growing problem. Financial promotions advertising crypto schemes on platforms such as social media will soon be regulated by the Financial Conduct Authority (FCA). But how do you avoid falling for a crypto scam, and what should you look out for?
Around 2.3 million people in the UK have crypto assets, however, research suggests that the understanding of cryptocurrency is on the decline. And as people don’t appear to know exactly what they are investing into, it poses a risk of mis-selling and falling victim to a crypto scam.
What is cryptocurrency?
Cryptocurrency is an encrypted peer-to-peer electronic cash system that uses blockchain technology to validate transactions rather than a central bank. Simply put, it’s a database with limited entries confirmed by others in the network, instead of relying on a bank; it’s therefore known as decentralised. As well as being ungoverned, they are also unregulated, high risk, and volatile. Bitcoin was the first cryptocurrency founded in 2009 after the financial crisis, but there are other types, including Ethereum, Cardano, XRP, and BNB.
Initial Coin Offerings (ICOs) raise public funds using cryptocurrency, for example, to support a start-up business. Investors can buy into the ICO in exchange for a new crypto token, known as a “coin sale” or a “token sale”, and like crowdfunding, it’s an unregulated initial public offering (IPO). Unfortunately, there are an increasing number of scams involving general cryptocurrency and ICO investments.
Sadly, people have lost great sums of money by investing in cryptocurrency over the years. A key factor to consider is the volatility of the crypto market; unlike government-backed investments, cryptocurrency is entirely driven by supply and demand. And recently, there was a crypto crash in December 2021, which resulted in bitcoin losing a third of its value.
The Russian-Ukrainian conflict has dramatically affected the crypto exchange, including a surge in bitcoin donations to support Ukraine. There have also been calls upon the crypto exchanges to follow the imposed sanctions. And this is why we always recommend a long-term strategy using safer and regulated forms of investing – read our blog, Investor Insights: Russia & Ukraine Conflict.
What are the different types of crypto scams?
Let’s start with the first rule of investing (or most things in life!); not to be pessimistic, but if something sounds too good to be true, then it probably is. Below is a list of the most common crypto scams:
- Social media – are you following a celebrity who’s suddenly recommending a crypto scheme? Are you sure this is the celebrity’s real account? You could be looking at a malicious impersonating bot. Don’t trust offers from social media, especially when it comes to investing. If they ask you for even a small amount of money, think twice before making a payment.
- Scam emails – known as ‘phishing’ you may receive an email alerting you to a “fantastic opportunity”, but you must “invest today”. If you’re holding cryptocurrency, you might be encouraged to invest this into a fake ICO (Initial Coin Offering), which is a way of stealing your funds. Check the email address is legitimate and connected to a real company. Never click on a link within an email unless you’re 100% sure.
- Imposter websites – you might be following someone who appears to have a lot of crypto expertise. But you’re taken to a fake website and a transaction platform, which has been designed to look like a real crypto business. Always carefully check the URL – Is there a small padlock? Usually, ‘HTTPS’ also shows a level of security. A URL can look almost identical p the legitimate one, but subtle swaps like an “o” instead of zero can be easy to miss.
- Fake mobile apps – you might have downloaded an app advertising easy cryptocurrency investing on your smartphone. Although Apple App Store and Google Play regularly try to weed out and remove rogue apps, there’s still a chance you could be conned into transferring money – over 10,000 people downloaded fake crypto apps.
A common crypto scam is someone falsely advertising that they have made millions by investing into this digital currency on social media. Often, this is a pyramid or Ponzi scheme whereby cryptocurrencies are sold to different investors. Someone promises you that your bitcoins will be worth more in the future. But after you have invested in the scheme, you could discover that you cannot find anyone to buy coins/tokens at a higher price, and without buyers, the scheme could crash.
Fraudsters are increasingly leveraging these schemes, openly promoting through advertising channels. According to the FCA, 39% of people saw adverts for crypto investing schemes on social media platforms, such as Facebook or Instagram. Compared to just 13% of crypto ads being viewed via traditional TV or newspaper adverts, it’s understandable why the government is bringing in new rules to regulate misleading crypto ads.
Although the Advertising Standards Agency has banned numerous crypto ads over recent years, the new move for the FCA to regulate adverts should lead to tighter control in the long run, which should help reduce the number of misleading crypto ads and scams.
Have you recently invested in cryptocurrency, and you’re unsure if you have made the right choice? Are you worried you might have fallen victim to a crypto scam? Before making any decisions about your money, it’s advisable to seek professional advice and build a long-term plan which incorporates a diverse range of funds and a measured level of risk. Our team is here to help should you want to talk about cryptocurrency, but please note we cannot advise you on this.
For advice on any investment, please get in touch with our independent financial planners.
Please note: This article doesn’t constitute personal advice; if you’re unsure if an investment’s right for you, you should seek advice.