Recently I had the misfortune of speaking with a gentleman and his family regarding a crypto scam he fell victim to. He had been in contact with a woman on Facebook, who encouraged him to send money to an online cryptocurrency exchange and then send the money via a cryptocurrency to another exchange that promised significant returns. The first exchange is legitimate, the second was not.
The exchange indicated that the man’s money had gone up 5x in value over a very short period of time. He decided to withdraw it, but the illegitimate exchange asked for an additional, sizable sum of money to cover “taxes.” It was at this point that his family became aware of the scam and reached out for information on the next steps.
One of the largest and most misunderstood risks of cryptocurrencies comes from the fact that transactions are considered irreversible. Every other financial transaction—with the one exception of cash sales—can be reversed by one of the entities conducting the transaction. If someone writes a fraudulent check, the money can make its way back to the rightful owner. This does not occur with cryptocurrencies, making it very difficult to seize stolen crypto funds and return them.
Because of these risks, it is important that everyone understand some red flags, many of which are present in the above story. Identifying these red flags can help prevent someone from being scammed into sending cryptocurrency and being unable to retrieve it.
Identifying Red Flags in Crypto Scams
Conversations with a stranger. If someone reaches out to you—via phone, text, email, social media, or any other method—and you don’t know them or have no way of verifying they are who they say they are, be very cautious. You should be especially wary if they request you to give your personal information or send money.
Sending money, via cryptocurrency. There is nothing unnecessarily risky with setting up an account on a cryptocurrency exchange, nor purchasing a cryptocurrency and using it for a transaction. However, if you send money via a cryptocurrency, be very sure you know where it is going—especially if you’re sending money at the request of someone you don’t know.
Promises of significant returns. Any exchange that promises you significant returns—or even promises you any guaranteed returns—should make you question its legitimacy. I have seen fake cryptocurrency exchanges guaranteeing returns of 25% and higher. Mathematically speaking, those returns are simply not sustainable in the real world.
Requiring lock-in of your money. This red flag often goes hand-in-hand with promises of significant returns. Many fake cryptocurrency sites will guarantee even higher returns if you lock your money up for a specified period of time; think of it as a crypto-CD … but fake. Any exchange that guarantees returns in exchange for a lock-in period should make you pause.
Requiring you to pay money to withdraw. Many illegitimate exchanges claim you need to pay them to withdraw, often citing a need to pay taxes on your behalf. Tax code issues aside, no legitimate company will ask for you to deposit more money in order to withdraw. Some legitimate exchanges charge you a fee to withdraw, but their fee is taken from the amount you are withdrawing, not from requiring you to send them more money.
What to do if you think you’re being scammed
Despite everyone’s best efforts, scams will continue. If you believe you are a victim of a cryptocurrency scam, there are a few steps you can take.
Don’t give the scammers anything more. Do not give the scammers any more money, nor any more information about you.
Reach out for information. Talk to someone you trust. It can be a family member, tax or legal advisor, or even someone in the cryptocurrency industry.
I, personally, am always willing to review any situation to provide information on whether it looks like a scam. Please email or call me if you would like my input.
Document. Document as much as you can. Take screenshots of your computer and phone, save emails, and put all your documentation in one location.
Report the scam. The FTC has a web page dedicated to information about cryptocurrency scams. You can find it here. At the bottom of the webpage, you can find information on how to report scams to a few different government agencies.
If you were instructed by the scammer to use a legitimate cryptocurrency exchange as a step in the scam process, you will also want to notify that exchange. They can provide you or law enforcement with additional information on the transactions that occurred.
Consult advisors. Depending on your situation, it may be a wise step to consult a legal advisor or a tax professional.
Scams are serious and should not be taken lightly. Please share this blog post with anyone you know who might benefit from learning how to identify and avoid these red flags. If anyone would like to discuss this further, please reach out and I would be happy to talk.
To learn more about the safety of Bitcoin, read our blog, Is Bitcoin Safe? For additional financial safety education, read What Is Venmo and is it Safe?
Digital Bank Manager