Scam Spotting

If you’re up to date with what happens in the crypto scene, the name “Bitconnect” might ring a bell, or remind you of the scream: “Hey, hey, hey!”. Apparently, even after the clamorous finding that the company was just a Pyramid scheme, the founders are not giving up and are launching “Bitconnect 2.0” this July.

This not only raises questions of the trustworthiness of the new business but also calls for more knowledge on scams to be shared. In addition to this, a recent report from Action Fraud (a UK national fraud reporting office) showed that the “number of crypto and forex fraud claims had jumped from 530 to 1,834 in the 2018/19 financial year to early April”.

The situation is critical and is not helping the already flawed reputation of the crypto world. It’s a discourse that needs to be tackled to protect and inform investors from future “Bitconnect” look-alikes. This article is going to discuss the different types of scams and to outline the common features that can be used to recognise them beforehand.

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What makes the cryptocurrency environment particularly ripe for criminals?

‍Bitcoin made it easy for some people to become rich very fast. The majority of those who entered the crypto arena afterward were thus (wrongfully) guided by the belief that they would make an insane amount of money as well. This, coupled with the general ignorance of how the crypto space functioned, made them the perfect prey for cunning criminals. It is reported that in 2018 alone, $1.7 billion was stolen from investors.

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Types of Scams

Social Media Scams

‍A considerable number of scams happen via social media. Scammers approach their victims via private message asking if they have any cryptocurrency and if they want to double it overnight. The fact that this is done via social media is already fishy, but the promise that those hard-earned crypto coins are going to double in a day is even fishier. The Financial Conduct Authority (FCA) reported that “fraudsters were increasingly using social media to promote their “get rich quick” schemes, often using fake celebrity endorsements and images of expensive cars and watches.” It’s easier to get involved in a business when there is a public figure, like Paris Hilton, who supports it. One would never think that a so-called “VIP” would risk his/her face in illegal activities. The problem is that most of the time these celebrities don’t even know themselves that they’re part of a scheme.

Another type of “get rich fast” scam via social media are “giveaways”. If a post says “send us one ETH and you’ll get two tomorrow!” it’s clearly a trap. These people normally set up fake accounts and disappear shortly after (with the loot). Cryptocurrency is money, and no one gives money away for free.

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Ponzi and Pyramid Schemes

‍These types of scams are more complex than the simple one-step social media approach. People tend to fall more into these traps, thinking that a slow gain promise is somehow more trustworthy. It’s not.

The Ponzi scheme takes its name from Charles Ponzi, an Italian immigrant to the USA in the early 20s. He raked more than a million dollars with his con. The scheme consists of a fake investment offer.

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The scammer promises to double the revenue at the end of the month if one invests in his project now. He collects the money from his new “victims” and uses it to pay off other people he has tricked before, so he keeps his promise to them. The initial investors are happy with their investment and speak highly about it, so other people get involved in the process. This new round of investors gives money to the scammers, so he pays the previous investors with it, and so on. It’s an ever-growing network of people who get scammed.

One of the most famous Ponzi schemes in the crypto scene is Bitcoin Savings and Trust (BTCST). The ideator, Trendon Shavers, raked in almost $97 million, which corresponded to 146,000 bitcoin in 2014. He convinced investors to store their money in his company and promised 7% gains each week. Once he had new cash, he paid off the previous investors he tricked. Then, in August 2012 he disappeared, leaving people wondering whether his company was real or a joke. Classic Ponzi scheme, but in the form of “High Yield Investment Programs” (HYIP). Shavers was sentenced to 18 months in prison in 2016, and had to return millions to the people he scammed. Fair enough.

The Ponzi scheme has some common features with the Pyramid scheme, but they are two different scams. The first one implies that people invest their own money and when the whole scheme falls apart, the last entrants lose everything they put in. In a Pyramid scheme the “victims” have to participate more actively because they have to recruit new people as part of their obligations, as well as to get a cut from the new members’ earnings. Because this scam relies on people, it ends up involving a large number of victims who then turn into criminals themselves. The latest Pyramid scheme was discovered in Brazil, and it involved 55,000 people who were defrauded of $200 million. The con artists “lured victims with the promise of a 15% payout in the first month after investment in the crypto scheme”, reported Cointelegraph.

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Common patterns of behavior and prevention

‍Being directly contacted by an unknown person who thinks that one should immediately invest before the offer is given to someone else, is already a major sign of a scam. Inciting FOMO (fear of missing out) is one of the most frequently used techniques to get money fast. In addition to this, these companies act via social media or via phone calls, which a respected businessman would probably never do.

Moreover, pay attention to the language used. If the wording used to describe the investment strategy is too complex, or the strategy is not even explained, then it’s better to avoid putting money at risk. In addition, words like “guaranteed return” and “risk-free” are big red flags. Con artists know that using superlative expressions is key to convince their victims, especially if they’re new to the crypto world.

As a matter of fact, the majority of people who got tricked report to have fallen into scams because they weren’t well informed. In order to avoid temptation, “newcomers” need to forget that the crypto world is a place to get rich fast. If it sounds “too good to be true” it’s probably because it is. It’s recommended to have a more critical approach by asking more detailed questions about the investment structure and do a lot of research. At THE RELEVANCE HOUSE, we believe that honesty and transparent communication are key to the success of a business in the new digital economy. Explore our website to learn more about our work philosophy.

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Photo credits:

Photo 1 by Max Bender on Unsplash
‍Photo 2 from DKR
‍Photo 3 by Freepik