Cryptocurrency was promoted as a new way to gain financial freedom and conduct private, decentralized digital transactions outside of the traditional banking system. In November 2021, the global crypto market capitalization exceeded $3 trillion for a brief time, making crypto a seemingly easy way to generate some cash. However, that growth came with a surge of fraudulent schemes that have cost crypto investors billions of dollars. Cryptocurrency has become the primary tool for criminals who want to move money quickly and anonymously. If you’re an investor considering crypto, it’s critical to fully understand what you’re getting into and how to spot a scheme.
Why crypto attracts fraudsters
Cryptocurrency makes it possible for criminals to reach victims anywhere in the world with little overhead. Anyone who has access to the internet can buy cryptocurrency. This makes everyone a potential target for crypto scams and schemes. For example, when a cybercriminal targets a victim with ransomware, they’ll request payment through Bitcoin to avoid being discovered. If they had to request money in any other way, the scheme wouldn’t work as well. If anyone did pay the ransom, they’d be caught quickly because of the paper trail.
Another reason crypto schemes work so well is because the whole game of crypto seems confusing. People don’t understand how wallets work, what exchanges do, or how blockchain technology works. Criminals exploit this ignorance.
Since cryptocurrency transactions are complete within minutes, it’s difficult to recover them after discovering a scam. Once the funds leave a victim’s wallet, recovery is challenging, if not impossible. And during bull markets, investors can be swayed more easily into a scam because they’re focused more on potential profits and miss the warning signs of a scam.
Cryptocurrency fraud is a federal crime
It might seem like crypto criminals are beyond the reach of law enforcement, but that’s not true. Cryptocurrency fraud is prosecuted at the federal level under crimes like wire fraud, securities fraud, conspiracy, money laundering, and tax violations. Once under investigation, these criminals don’t usually stand a chance. Prosecutors spend months or years gathering evidence in secret before charges are filed. Once the criminal is informed of the charges, the federal government has already built its case.
Some notable convictions include:
- Sam Bankman-Fried. In 2023, after diverting billions of dollars in customer funds to support his trading activities at Alameda Research, he was convicted on multiple counts of fraud and conspiracy, sentenced to 25 years in prison, and ordered to pay $11 billion in forfeiture.
- BitConnect. This operation claimed to be a crypto lending platform that would produce extraordinary returns through an automated trading system. However, the federal government found it to be a Ponzi scheme.
- OneCoin. Investors lost more than $4 billion investing in OneCoin, a scam that didn’t even utilize genuine blockchain technology. The co-founder, Karl Sebastian Greenwood, was sentenced to 20 years in prison.
- Forsage. In 2023, the founders of Forsage were charged with conspiracy, wire fraud, and securities fraud after prosecutors found evidence that it was a global pyramid scheme.
- Bitfinex. In 2023, Ilya Lichtenstein and Heather Morgan pled guilty to laundering more than 120,000 Bitcoin they stole from Bitfinex in 2016. Investigators were able to trace the movement of assets despite their attempts to hide the trail.
- SafeMoon. In 2023, several SafeMoon executives were convicted of securities fraud, wire fraud, and money laundering conspiracy for falsely claiming that liquidity pools were locked while diverting millions of dollars for personal purchases.
- Celsius Network. In 2024, Alex Mashinsky was convicted after admitting to commodities fraud and manipulating the price of Celsius’s CEL token.
All of these cases were meticulously investigated long before anyone knew they were under investigation, and that’s why the government is able to secure convictions for crypto fraudsters. However, that doesn’t stop everyone from believing they won’t get caught.
Crypto scheme red flags
While the details vary, most crypto schemes present the same red flags. They guarantee returns, generate fake trading charts and profit statements, encourage recruitment, and block withdrawals. These are just some of the signs to watch out for when you’re thinking about investing in crypto. Legitimate investments involve risk and don’t require recruiting new people.
Rug pulls are common
Scammers take advantage of the fact that people are willing to buy into new tokens and projects. There’s no way to know if a new project is fraudulent. Sometimes these scams are marketed extremely well with fake social proof that creates artificial demand. Even when things seem to be going well, scammers will withdraw liquidity from the market and cause the token value to collapse in an instant.
Romance scams are fueled by cryptocurrency
Romance scammers commonly use cryptocurrency to run their scams. First, they spend weeks or months developing an online relationship before they introduce their scam disguised as an investment opportunity. Since the victims feel emotionally connected to the scammer, they’re more likely to overlook red flags and warning signs.
Cryptocurrency facilitates money laundering
Criminal organizations that need to move money internationally choose cryptocurrency so they don’t need to rely on traditional banking systems. These groups often disguise transaction histories by pooling and redistributing funds among multiple users. Although these transactions can be difficult to follow, investigators often hire blockchain analytics companies to trace transactions.
How you can protect yourself from crypto fraud
Like every other scam, crypto fraud will continue to evolve and exploit new technologies. However, you can reduce your risk by researching every investment opportunity carefully and maintaining a skeptical mindset.
When presented with an investment opportunity, research the teams and search for independent reviews before committing your funds. If a project claims high returns with minimal risk, that’s a huge red flag. Most importantly, only use reputable exchanges and trust your instincts. If something feels off, it’s not worth the risk.
Cryptocurrency isn’t inherently fraudulent; it just makes it easier for fraudsters to run their schemes. Although many scammers end up getting caught, preventing yourself from falling into one of these schemes is the best defense.
If you’re going to invest in crypto, recognize the warning signs to reduce your chances of falling victim to the next billion-dollar cryptocurrency fraud case.
