Of all the technological trends of the last decade, perhaps none has made more of a splash than crypto.
Since the rise of Bitcoin in the early noughties, people have been obsessed with cashing in on the boom in cryptocurrencies. And for good reason: some early investors ended up making millions when the value of bitcoin surged.
However, while some people have ended up in the black by cashing in their crypto, all the hype has created a perfect opportunity for scammers and dodgy brokers to scam and steal from people investing their life’s savings.
In this article, we explore the pitfalls of the crypto boom, common scams and how you can get redress if you’ve been burnt.
What is cryptocurrency?
Cryptocurrencies are a kind of digital currency. The first form was Bitcoin – proposed by the still-unknown Satoshi Nakamoto.
Since Bitcoin, a number of other cryptocurrencies have appeared. CoinMarketCap reports that there are now more than 23,000 cryptocurrencies – the most popular include Etherium, Tether and Solana.
The principle behind all cryptocurrencies is the same: transactions are verified and records maintained by a decentralized system rather than a centralised authority, such as a government or bank.
Without a central authority, the worth of crypto depends on the collective worth generated by people investing. Transactions are verified and recorded on a blockchain – a distributed ledger technology that tracks and records trades and assets.
The security of the blockchain, and the transactions it records, is guaranteed by a computational process called “mining” – a computationally intensive system of cryptography that acts like a proof of work for each single transaction. In a nutshell, this system ensures that anyone attempting to alter a record would also have to redo the work of all previous transactions in the chain, eliminating the possibility of altering or falsifying the records.
Possibilities and pitfalls
Crypto allows people to trade and invest without being subject to the regulations of banks and governments or trends of the stock market – resisting things like inflation. For those who don’t work in finance or on trading floors, crypto seems to offer an alternative way to make large amounts of money through financial savviness.
However, at the same time, all kinds of new threats have emerged. Mining has serious negative environmental effects: it requires large quantities of electricity, most of which is generated through fossil fuels, and the lifespan of equipment is also short, resulting in large quantities of e-waste.
As well as the negative environmental consequences of mining, it also exposes investors to high levels of risk – and banks have been slow to respond to protect consumers.
First, you can easily lose the private key and thus access to your crypto. If you lose or forget the passcode to your digital wallet there is very little you can do. (In one infamous case, a man from Newport has spent the last decade petitioning his local council to allow him to search the landfill for a lost hard-drive with an estimated £227million of Bitcoin on it !)
Second, like any investment, you can lose money. And the fact that cryptocurrencies are de-centralised and unregulated means that the fluctuations can be wildly unpredictable.
Beyond the fact that crypto can be easily lost, or have its value nose-dive without warning, scammers are now taking advantage of people investing in cryptocurrency to make high-value, instant returns.
If you were conned by a crypto scam you could claim compensation from your bank
Common crypto scams
Crypto-assets have been hailed as an important technological and financial innovation. But investing in them is still considered highly risky. In 2021, blockchain data firm Chainalysis reported that fraudsters stole $14 billion of crypto.
There are some common scams that potential investors should be especially vigilant for:
Fake websites, apps and phantom currencies
Perhaps the most common method of scamming crypto investors is the creation of fake trading platforms, fake versions of official crypto wallets or phantom currencies.
Fake websites and apps will have slightly different domain names from the official sites they try to mimic – but it can be extremely difficult to spot the difference. Fake apps may even be available for download through trusted sites like Google Play and the Apple App Store.
These fake sites and apps will harvest your financial details or simply disappear once you’ve invested a substantial amount of your money.
Phishing scams
Crypto phishing scams often target people to get them to hand over the private key to their crypto wallets.
Fraudsters will usually send an email to lure recipients to a specially created website that will prompt them to enter private key information. Once they have obtained these details, they’ll transfer the cryptocurrency stored in the wallet to themselves.
When crypto is stolen like this, there is very little you can do to track it down or get it back.
Pump and dump schemes
Sometime scammers will take to social media channels like Facebook, X and Telegram and use bots or fake endorsements from business people, celebrities or influencers to capture the attention of wannabe crypto investors. They’ll create hype around a particular coin or token and get people to invest in it – even if it doesn’t actually exist.
When traders rush to invest it will drive up the price. Scammers will then sell all their holdings – causing a crash in value. With crypto, the decline of an asset can happen in mere minutes – leaving ordinary investors with nothing before they’ve noticed what’s happening.
Fraudulent initial coin offerings (ICOs) and giveaway scams
Sometimes scammers create social media accounts that spam people with promises to match or multiply cryptocurrency sent to them. Or they will promise customers a discount on a new kind of crypto coin in exchange for transferring existing cryptocurrencies like bitcoin.
In both cases, the scammers will use messaging that makes people feel a sense of urgency – not wanting to miss out on an ‘opportunity of a lifetime’ they will hand the scammers their money and be left with nothing. In the case of fake ICOs, criminals will go to extreme lengths to deceive people, including renting fake offices.
Crypto fraud claims
The hype around cryptocurrencies has created a perfect opportunity for scammers to steal from people investing their life savings. As well as vigilance from people investing in cryptocurrencies, banks should be protecting them from scams.
According to new regulations, if banks do not act in their customers’ best interests to prevent financial loss, they’re neglecting their duty of care and should reimburse them.
So if crypto fraud has caused you financial losses, you can complain and get financial redress from your bank.
Download the Resolver Guide to Bank Fraud complaints
Our free guide explains the process of complaining to your bank about fraud – and how to go to the Ombudsman if you feel they have treated you unfairly and owe you financial redress.
Make a crypto scam claim
If the process of complaining yourself is putting you off pursuing fair treatment, our recommended provider, Fraud Helpline, could pursue a bank fraud claim on your behalf.
By claiming with this respected legal firm, you will save time and energy and be protected from legal costs later on – only paying a fee if you are awarded compensation. So don’t hesitate to ask for their help with your crypto claim!
If you have any thoughts on this topic, or any other consumer issues you would like us to cover, feel free to get in touch with us at support@resolver.co.uk.