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Although the cryptocurrency market is evolving, there is still something of the Wild West of the investing world. Even the largest and oldest cryptocurrencies, such as Bitcoin and Ethereum, are notoriously volatile.
Bitcoin, for example, is down about 70% from its all-time high, reached in November 2021.
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But it gets even crazier when you dig among the cryptos often quoted in the financial press. In fact, according to CNBC, there are more than 19,000 cryptocurrencies, with names that most people have never heard of. In this type of environment, how do you know which cryptos are legit and which could be scams?
Here are some things you need to know to protect yourself from illegitimate cryptocurrencies.
Pump and Dump Schedules
In a pump and dump scheme, scammers first load an undisclosed cryptocurrency – one that flies under the radar. They then begin an aggressive marketing program using a combination of social media posts, blog posts, and financial “press” to draw attention to crypto.
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As more buyers take notice and start driving up the price, the scammers get carried away and advertise the price increases in every possible way to entice more and more investors to buy. of their coins on the open market, leaving unwitting investors holding the bag when the crypto inevitably crashes afterward.
Needless to say, if you are approached to buy an undisclosed crypto that suddenly surges in price, you need to be careful.
One of the ways scammers trick unsuspecting crypto investors is by using fake websites. It works best with cryptos that have made headlines but are still not widely known.
Scammers will create websites that look legit and trick buyers into making a purchase there. Some scams impersonate individual cryptocurrency developer pages, while others impersonate legitimate cryptocurrency exchanges.
One way to avoid being scammed in this way is to make sure you only use secure websites, with “https” in their name and the locked padlock icon in the address bar.
Another common scam is to whip up a coin that realistically has no chance of going mainstream. Fraudsters will market and hype a coin and say it’s “the next xyz” or “bitcoin killer” or some other grandiose phrasing. In reality, these parts exist only to enrich the crooks, such as pump and dump systems.
Once enough investors have bought in, the hypesters will blow out their positions and take their profits, leaving investors in the dark with crypto that is essentially worthless.
Fraudulent offers of initial coins
Some scams are so daring that they are almost unbelievable. The initial offering of scam coins borrows from the principles of pump and dump systems and hyped coins, but take it a step further by offering unregistered cryptocurrencies for sale directly to the public. At best, these fraudulent coins simply have little value or use. However, in some cases, general investors are sold coins that don’t even exist. The money they put back into these fraudulent “IPOs” is simply pocketed by the fraudsters, who then disappear.
The SEC has started taking action against these fraudulent unregistered coin offerings, but that doesn’t mean they don’t exist anymore. Before handing over your hard-earned money, make sure the crypto you are investing in has legit lenders and is sold by reputable companies.
Wherever there is hype or money being made in the investment world, scammers are sure to follow. Since cryptocurrency is one of the most unregulated and volatile investment options in the world, it is a ripe field of opportunity for scammers.
Especially if you are just starting out, stick with the most liquid and well-known cryptocurrencies that are really useful and that you can track closely. Bitcoin is a good example. Although it is not yet widely accepted by its supporters, it is used as real currency by legitimate businesses, perhaps even your local coffee shop.
As long as you trade Bitcoin on a legitimate exchange, the risk of fraud is low. But the deeper you dive into the unregulated pool of unknown cryptocurrencies, the more you expose your investment to the risk of fraud.
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