Are you considering jumping in and getting involved in the exciting world of digital currency? Cryptocurrency scams in the UK are on the rise — if you’re thinking of investing some of your hard-earned money in the hope of making profits, it’s important that you do your research into some of the possible traps that could arise.
The following blog is intended to inform you on the following topics, to help educate you on all of the dangers that can arise when trading in this up-and-coming and exciting market:
- What is cryptocurrency fraud
- What types of cryptocurrency scams are there
- How to spot a scam cryptocurrency
- How a forensic accountant can support you.
What is Cryptocurrency Fraud?
Cryptocurrency, just like all finance, is a home for a number of fraudsters. Due to its relatively volatile nature and huge surge in public interest of late, the threat of cryptocurrency based fraud is increasingly prominent. Cryptocurrency scams in the UK are primarily based around faking the crowdfunding process of the currency, or faking the crypto itself.
One of the core reasons for the relative boom in cryptocurrency fraud can be traced back to its lack of any serious governing body — since crypto companies and founders have little to no resources or authorities in place to detect and stop fraudsters. It can also be tied to digital currencies being instantly transferable and not reversible.
For more information on cryptocurrency fraud prevention, read our blog going into greater detail on the subject
Fraud Cryptocurrency List
The fraud cryptocurrency list is an ever-growing one. With every new innovation in the field, there’s a chance that a new way to defraud will follow it. Common methods scammers may utilise include market manipulation, ‘rug pull’ schemes, theft, Initial Coin Offering (ICO) scams, and pump and dump schemes.
It’s important to understand the dangers in the cryptocurrency market if you are to attempt to avoid them. The list of cryptocurrency frauds include:
Market Manipulation
Manipulation of the cryptocurrency market refers to any attempt by an individual or group to attempt to, in any way, influence or interfere with the price of assets on the market. Generally the fraudsters will invest in a certain low stock, then manipulate the market to artificially raise the price, before then selling on at a huge profit.
Common activities that could be seen as attempts to manipulate the market include:
- Churning: When a broker seeks to take advantage of them receiving a commission to profit off of unaware clients. This usually comes in the guise of excessive trading to artificially boost their amount of commission.
- Spoofing: When large amounts of fake buy/sell orders are placed to manipulate traders to believe that a certain currency is on the rise. These orders will then be cancelled before completion — therefore creating the impression of a surge in demand with little impact on the fraudster.
- Front-Running: Similar to insider trading. Front-running is where a person with prior knowledge of upcoming transactions will utilise their insight to make trades and gain profit ahead of a shift in the price of the currency.
Rug Pull Schemes
A rug pull is a scheme where a developer will crowdfund for a new cryptocurrency, but prior to launch abandon the project, keeping all money raised. This type of fraud works because people think they are getting in on a new and exciting crypto opportunity on the ground floor.
When it comes to avoiding rug pulls, it’s important to remember the adage ‘if it sounds too good to be true, it probably is’. Minimise your risk by trading on centralised cryptocurrency exchanges, where the security will likely be stricter.
Initial Coin Offering (ICO) Scams
Firms use an ICO to raise money in order to fund the creation and development of their cryptocurrency. Typically, in exchange for your funds, you will receive a newly minted digital coin in return.
Similar in concept to a rug pull, an ICO scam revolves around collecting money from investors before leaving them high and dry. One of the most effective methods of reducing your risk of ICO fraud is to perform a background check and review the company’s whitepaper to learn more about their strategy, goals, the people behind the ICO, etc.
Traditional Theft
When it comes to cryptocurrency scams in the UK and abroad, fraudsters don’t necessarily need innovative new methods — sometimes the old ways work best.
These fraudsters can set up a number of scams in an attempt to gain access to your crypto wallet. This can include:
- Attempting to trick you into sharing private information to hack your account
- Phishing emails
- Impersonating a business or notable person to gain people’s trust and convince them to invest
Ponzi Schemes
It is also common for cryptocurrency to be used as a vehicle for Ponzi schemes. Ponzi schemes are a type of fraud where the fraudsters will use all new adopters to artificially give returns to the old investors.
Pump and Dump Schemes
Pump and dumps are a type of scheme where a person or group will attempt to inflate the price of a particular asset so they are able to sell on their own holdings at a huge mark-up.
This is most commonly done by spreading misinformation to attract investors, then once the momentum has peaked the scammers will cash out. Once the market catches on to what has happened, it is likely too late for most people to regain anything close to their initial investment.
How to Spot a Scam Cryptocurrency
Cryptocurrency scams are becoming more and more common. Getting caught out by one could result in you losing significant sums of money with little chance of recovering it. However, working out how to spot a scam cryptocurrency requires keeping an eye out for a few similar traits. This includes over the top promises, vagueness, secrecy, etc.
Measures you can opt to take to help you spot a scam cryptocurrency include keeping an eye out for:
Anything Too Good To Be True
No investment is ever, and will ever be, a guarantee in both its success or its profitability. This is why it’s vital that you consider any offer you receive to ensure that it is realistic. While making a massive profit on a small investment, in a matter of months might sound excellent, it’s highly unlikely — particularly with a brand new offer.
Lack of Transparency
When it comes to a cryptocurrency, just like with any business, it should be simple to look up and see exactly who is behind the operation. Should you be approached with an offer, the first thing you should do is conduct a thorough background check. Can you clearly access the names of every team member, do they have an active social media profile, does their online footprint have a traceable history, could their followers be faked, etc.
Over The Top Marketing
If you’re looking to invest, anything that can be considered heavy handed marketing should be avoided. From a scammer’s perspective, the purpose of such extreme promotion is to get their offering out to as many people as possible as quickly as possible.
However, the more legitimate digital currencies were all built more slowly, being allowed to develop and grow a following naturally over time, without the need for flashy gimmicks.
The White paper
A cryptocurrencies white paper is a vital part of a currency’s ICO. It is intended to show exactly what is planned for the asset, and should include how it is intended to grow, make money, plus information on how investment will work, etc.
If there is an offer without a visible white paper, it should be avoided. Equally, if the white paper is unintelligible, rushed, or badly designed, it should be seen as a huge red flag.
Find Out How Our Experienced Forensic Accountants Can Help You
It is reported that there has been a huge, up to five times increase in cryptocurrency fraud in recent years. The huge influx in cryptocurrency scams in the UK and around the world going hand in hand with a similar rise in popularity means that there are a huge number of inexperienced traders than ever before, all of whom could be at risk if they aren’t careful.
The blockchain is designed to be as secure as possible. However, fraud is still possible, and even likely if you aren’t careful. Inquesta’s team of experienced forensic accountants take great pride in their ability to stay up to date with all of the latest innovations in their field. This includes staying aware of all of the latest cryptocurrency fraud methods.
If you’ve been the victim of cryptocurrency fraud, contact us today for more information on how our team of experts can combine traditional fraud prevention methods with the latest techniques and technologies, to support you through the process.
