Crypto: The New Wild West - DataScienceCentral.com

Cryptocurrency scams are costing investors billions.
Most are new takes on old con man techniques.
Why you shouldn’t invest in crypto.

As we move towards the metaverse, the scammers are moving right alongside us. Thanks in part to the lack of formal rules governing trading, scammers are bilking billions of dollars out of unsuspecting investors. Cryptocurrency is a highly speculative market with “get rich quick” schemes abound. Add in the anonymity of the internet and you have an ideal breeding ground for scammers who can instantly receive illicit cash—anonymously—and walk off with your hard-earned cash before you’ve had a chance to hit refresh on your account page.

The crypto scam problem has become as widespread as phishing, spurring the U.S. Securities and Exchange Commission (SEC) to issue the following warning:

“…the rising use of virtual currencies in the global marketplace may entice fraudsters to lure investors into Ponzi and other schemes in which these currencies are used to facilitate fraudulent, or simply fabricated, investments or transactions.”
U.S. Securities and Exchange Commission [1].

A few scams are relatively new, like the Twitter hack of 2020, which netted Joseph O’Connor $100,000 worth of bitcoin [2]. However, most scams are schemes from days gone by, wrapped up in a shiny virtual wallet. Here are three notable ones.

The Virtual Ponzi scheme

A Ponzi scheme is a phony investment where early investors are paid with investments from later investors. The scheme has been around since at least 1879 and sprang back into the headlines just over a decade ago when Bernie Madoff, who ran the largest Ponzi scheme in history, conned investors out of almost $65 billion. The common thread in these schemes is that people have a poor understanding of the vehicles they are investing in [3]. People definitely have a hard time wrapping their heads around crypto; One third of cryptocurrency investors know little to nothing about how crypto works [4]. This makes it ripe pickings for the new generation of aspiring Madoffs. A few examples:

Trendon T. Shavers, the founder of BCS&T, was sentenced in 2014 to 18 months in prison for his Bitcoin Ponzi scheme in which investors lost over one million dollars [5].
MMM began its scheme in September 2014, circulating more than $150 million a day before its collapsed in June 2016 [6].
Cryptocurrency investment firm G.A.S. Consulting & Technology processed at least $7 billion in fraudulent transactions from 2015 through mid-2021 [7].

The Forum Cry for Help

“Cry for help” scams have been around for about the same length of time as Ponzi schemes. In 1859, one con man, A.V. Lamertine, feigned suicide, tugging at the heart strings of Good Samaritans and receiving significant sums of cash before moving on to his next con [8]. In the modern version of the scam, the plea for help arrives in a chat room.

A scammer posts that his bulging crypto wallet (which is actually empty) is broken and he needs helps accessing it. The seemingly innocent post contains all the information needed to withdraw the funds, including his seed phrase—which works like a bank account password. This attracts people who attempt to steal money from the scammer’s wallet; As the wallet has nothing in it, anyone accessing the wallet must pay gas fees to move the money. The gas fees hit the scammer’s wallet and are immediately diverted to another account owned by the scammer. The result is

“a long and depressing list of gas payments in and out: depressing because of the length of the list, representing the high number of people who have tried to steal the purported-newcomer’s tokens.”
Simon Mackenzie, Victoria University of Wellington Institute of Criminology [9].

Token Pump and Dump

A “pump and dump” is where a particular investment is hyped to drive up prices; when everyone jumps on the Get-Rich-Quick train, it drives up prices for a short time before the inevitable plummet. One of the most infamous “Pump and dumps” was the 1920s Radio Pool scam, where a group of investors drove up RCA stock prices and pocketed the profits, leaving other shareholders to watch helplessly as shares hit rock bottom [10].

The modern version is practically identical: a knowledgeable group amasses coins in a crypto project, while marketing their expertise in making good calls to unsuspecting newbies. The group “calls” the coins they have amassed as the next big thing, and followers jump on the bandwagon. Prices inflate tenfold or more in a few short hours; when the price peaks, the group dumps their tokens, pockets the profits, and leaves their followers to choke on the resulting price dump [3].

Don’t Invest in Crypto

The SEC offers several tips on how to protect yourself, including being wary of secretive and/or complex strategies and fee structures, unlicensed investors, and no minimum investor qualifications [1]—all of which describe the crypto market. The takeaway is simple: don’t invest in cryptocurrency. And if you do, don’t expect the local sheriff to come with guns blazing; in this new frontier, it’s every man for himself.