When one of our students told us they were going to quit college in August 2021, it wasn’t the first time we’d heard of someone finishing their studies early.
But the reason was something new. The student lost all of their money, including a bank loan, in a cryptocurrency scam. They are now not only broke, but also in debt. At the very least, it was hard on both their finances and their minds.
The bad news is that this student is not alone. There are currently hundreds of millions of people who own cryptocurrency, and estimates show that this number will continue to grow quickly. As more and more people bought cryptocurrencies, more and more people fell for scams.
We study behavioral economics and psychology, and we just put out a book about how fraud, scams, and other types of financial abuse are getting worse. There are reasons why there are so many cryptocurrency scams. And there are things you can do to make it less likely that you will be a victim.
Crypto gets a boost
Scams have been around for a long time. There are even stories about them in the Bible. What has changed most is how easy it is for scammers to reach millions or even billions of people with the click of a button. The internet and other technologies have changed the rules of the game, and cryptocurrencies have become the most prominent example of these new ways to commit cybercrime.
Cryptocurrencies are decentralized, digital currencies that use cryptography to make transactions anonymous. They were started by people who cared about privacy, called “cypherpunks.” But they have grown so much that they are now on the minds and in the pockets of both regular people and criminals. This was especially true during the COVID-19 pandemic, when the prices of different cryptocurrencies shot up and they became more popular. Scammers capitalized on their popularity. The pandemic also messed up regular business, which made people turn to alternatives like cryptocurrencies more.
South African brothers, Ameer and Raees Cajee, Founders of Africrypt, a cryptocurrency platform have disappeared with $3.6 billion of clients’ #Bitcoin pic.twitter.com/ssnkRClxK1
— Africa story Live (@AfricaStoryLive) June 24, 2021
A January 2022 report by Chainalysis, a blockchain data platform, suggests in 2021 close to US$14 billion was scammed from investors using cryptocurrencies.
In 2021, for example, two brothers from South Africa were able to scam investors out of $3.6 billion from a platform for investing in cryptocurrencies. In February 2022, the FBI said it had arrested a couple who had used a fake cryptocurrency platform to steal another $3.6 billion from investors.
You may be curious about how they did it.
There are two main types of cryptocurrency scams that tend to target different groups.
One is aimed at people who invest in cryptocurrencies. These people tend to be active traders with risky portfolios. Most of them are under 35 years old, make good money, have good educations, and work in engineering, finance, or IT. In these kinds of scams, con artists make fake coins or exchanges. SQUID, a digital currency named after the TV show “Squid Game,” is a recent example. After the price of the new coin went through the roof, the people who made it just took the money and ran.
In one version of this scam, investors are enticed to be among the first to buy a new cryptocurrency by promising big and quick returns. This is called a “initial coin offering.” But unlike the SQUID offering, no coins are ever made, so people who want to invest end up with nothing. In fact, many ICOs turn out to be fake, but because these new coins and technologies are so complicated and always changing, even smart, experienced investors can be taken in.
Anyone who wants to buy cryptocurrency should do a lot of research on the offer, as they should do with any risky financial venture. Who is making the gift? What do we know about the business? Is there a white paper, which is a document that a company puts out with information about its product?
In the case of SQUID, one sign that something was wrong was that investors who bought the coins couldn’t sell them. The SQUID website was also full of spelling and grammar mistakes, which is common for scams.
Payments for shakedowns
The second basic type of cryptocurrency scam is when scammers just use cryptocurrency as a way for victims to send money to them. Targets can be people of any age or group. There are cases of ransomware, romance scams, computer repair scams, sextortion, Ponzi schemes, and other similar cases. Scammers use the fact that cryptocurrencies are anonymous to hide their identities and avoid getting caught.
Scammers used to ask for wire transfers or gift cards as a way to get money because they are permanent, anonymous, and hard to track. But in order to use these payment methods, potential victims have to leave their homes, where they might run into a third party who can stop them. On the other hand, crypto can be bought anywhere and at any time.
In fact, Bitcoin has become the most common currency asked for in ransomware cases, being asked for in almost 99% of them. The U.K. National Cyber Security Center says that people are often asked to pay in Bitcoin and other cryptocurrencies in extortion scams. More and more, romance scams that target younger adults use cryptocurrency as part of the scam.
If someone asks you to send them money through cryptocurrency, that’s a big red flag.