The Fraudulence of Cryptocurrency: Why People Think Crypto is a Scam and Lose Their Money

Table of Contents

• Introduction
• Reasons Why Crypto Seems Like a Scam to Critics
• Types of Cryptocurrency Scams That Defraud Investors
• Ways Investors Lose Money Due to Crypto Volatility and Risk
• How to Avoid Cryptocurrency Scams and Bad Investments
• The Future Outlook on Cryptocurrency Stability and Trust
• Conclusion

Introduction

Cryptocurrency refers to digital or virtual currencies secured by cryptography. As opposed to fiat money issued by governments, cryptocurrencies operate independently using advanced coding and decentralized systems like blockchain to record transactions and issue new units.

Top cryptocurrencies by market capitalization include names like Bitcoin, Ethereum, Tether, and Binance Coin. As of February 2023, around $1.3 trillion is invested in over 21,000 different cryptocurrencies, indicating growing mainstream adoption.

However, crypto's rising popularity has been accompanied by frequent frauds, scams, hacks and volatility leading investors to lose confidence and money. Critics point to these downsides as reasons why cryptocurrency seems like a fraudulent scam overall, rather than a legitimate investment.

This article will overview the shady side of cryptocurrencies to explain concerns about fraudulence, as well as provide tips to avoid becoming a victim.

Reasons Why Crypto Seems Like a Scam to Critics

Here are the main reasons why cryptocurrency markets often appear suspicious or scam-like to outside observers:

Extreme Volatility Erodes Confidence

Cryptocurrencies are infamous for their wild price swings and extreme volatility. It's not unusual for top cryptos to gain or lose 20-30% of value within a single day. For assets with no tangible backing, these huge price moves seem irrational.

Sudden crashes also fuel suspicions of manipulation or fraud. The 2018 Bitcoin crash erasing 80% $20,000 value in one year, for instance, made many ask "Was crypto just a bubble or pump and dump scheme all along?"

Without any underlying assets, earnings, or fundamentals supporting valuations, crypto depends purely on investor confidence and speculation of future adoption. This leaves it vulnerable to herd mentality and boom/bust cycles.

Scandals Like Hacking or Theft Erode Trust

Given cryptocurrency's digital nature and lax regulatory oversight thus far, the ecosystem unfortunately suffers frequent scandals.

Massive crypto exchange hacks resulting in billions of dollars worth of Bitcoin or other tokens being stolen are common. And exchanges often lack insurance backing assets further fueling critics dismissal of crypto as akin to an uninsured uninsured casino gambling away money with inadequate security controls.

High profile controversies like the Mt Gox exchange scandal losing over $400 million worth of Bitcoin severely damages trust in the legitimacy of cryptocurrency infrastructure. The fact over 46% of Bitcoin hasn't moved in over a year implies many early adopters distrust exchanges and see crypto as risky rather than a reliable asset class.

Cryptocurrencies Seem Overhyped

Critics argue crypto primarily enriches insiders and early adopters via excessive hype designed to pump up prices and offload holdings onto less sophisticated investors.

Supporting this view, cryptocurrency projects and advocates often rely on questionable "get rich quick marketing" full of promises unlikely to materialize for latecoming investors.

And early holders frequently cash out gains from later investors trying to chase overnight riches after seeing coins like Dogecoin or Shiba Inu gain 10000%+ seemingly overnight. But latecomers rarely capture equivalent wins.

This cycle leads outsiders to see crypto more as pump and dump pyramid schemes than fair or stable markets.

Types of Cryptocurrency Scams That Defraud Investors

While some cryptocurrencies like Bitcoin or Ethereum likely represent legitimate innovation rather than outright frauds, the ecosystem does suffer several recurring scam types bilking unwary investors:

Pump and Dump Schemes

Crypto pump and dump (P&D) schemes involve coordinated groups artificially hyping up prices to "pump" valuations, which then "dumps" once unwitting investors bought at inflated levels.

Often pump groups organize over messaging apps like Discord or Telegram. After deciding on low market cap coin, they spread exaggerated "news" and social media hype attracting new money in. This rapidly pumps prices enabling insiders to dump holdings onto new entrants.

• As an example, Dogecoin suddenly gained 800% in January 2021 largely thanks to pump groups and Reddit threads like r/SatoshiStreetBets rather than any fundamental improvements. But many latecomers ended up losing up to 90% after buying near the peak.

While not outright fraudulent like Ponzi schemes per se, these manipulative pump tactics do attract naive investors with hopes of quick profits. Yet actual losses often follow after prices dump.

Fraudulent ICOs

In legitimate Initial Coin Offerings (ICOs), startups release new crypto tokens representing ownership stakes to raise funds for blockchain projects. But in fraudulent ICO scams, fake companies fabricate impressive whitepapers to attract investor funds with no intent of building promised platforms.

Common tactics sham ICOs rely on include:

• Paid celebrities making questionable endorsements
• Fake team member profiles using stolen identities
• Plagiarizing content from legitimate websites
• Promising guaranteed returns unlikely with volatile crypto assets

Between 2016-2018, estimates indicate over 80% of ICOs conducted were identified as scams designed only to grab investor cryptocurrency rather than build viable services.

Red flags novice investors should watch for include:

• No working product despite raising millions
• Anonymous team members
• No GitHub code repository
• Unsubstantiated hype on forums like Reddit

Checking for obviously fraudulent signs helps avoid these "too good to be true" ICO offerings.

Cryptocurrency Ponzi Schemes

Ponzi schemes represent overt financial frauds disguised as investment opportunities. Income paid to existing members stems solely from new joiners rather than actual business activities.

In crypto Ponzi schemes, founding teams promise high crypto returns often boasting fake mining rigs, trading bots, or investment pools. These fabrications convince followers to deposit funds and promote the scam to friends for additional rewards. In reality, money from newer victims pays earlier members until inevitable collapse when new money inflows stop.

Two of the most brazen cryptocurrency Ponzi schemes to date include:

• Bitconnect promised a proprietary "trading bot" turned an initial $1,000 investment into over $50 million in 18 months. But the company suddenly closed in under 2 years defrauding estimated $3 billion after ceasing payouts.
• The OneCoin scam purported to have a genuine cryptocurrency and blockchain. Yet investigations revealed no such technology existed. Founder Ruja Ignatova disappeared after scamming billions from believers globally.

Typical Ponzi victims overlooked obvious red flags like guaranteed profits and referral incentives beyond actual cryptocurrency trading or mining returns. As the saying goes: "If it sounds too good to be true, it probably is".

Ways Investors Lose Money Due to Crypto Volatility and Risk

Aside from outright scams, cryptocurrency markets contain several inherent risks causing investors to lose funds fairly through mistakes or oversight:

FOMO Leads to Buying Price Peaks

Fear of missing out (FOMO) describes investors rushing into asset rallies dangerously late due to psychological pressures. By buying crytocurrency price spikes emotionally instead of waiting for pullbacks, late FOMO traders often lose big when volatility strikes.

As an example, newbies who bought Bitcoin at $69,000 during late 2021 suffered steep 70%+ drawdowns when prices crashed soon after. Even crypto advocates advise avoiding "fear of missing out" based entry points since timing is so difficult even for experts given crypto's extreme swings.

Panic selling after buying volatile price spikes locks in losses that more patient holders could avoid by riding out downturns. But inexperienced traders frequently sell pullbacks rapidly, only to see cryptocurrencies later recover. Developing discipline around when to sell helps mitigate risks from buying peaks.

Leverage/Margin Trading Amplifies Losses

Trading cryptocurrencies with leverage/margins further amplifies loss-making potential during volatile periods.

For example, if 50:1 leverage used on Bitcoin price swings exceeds over 2% daily, brokerages liquidate entire positions. Several rapid price drops triggering automatic selling essentially bankrupts accounts reliant on excessive leverage.

In May 2021 alone, over $1.2 billion worth of leveraged crypto positions liquidated as a sharp -30% pullback hit markets according to Bybt.com data. Traders saw accounts wiped out in minutes attempting to maximize smaller price oscillations.

Again, crypto advocates preach avoiding greed by lowering leverage and maintaining reasonable stop losses/position sizing. But lack of experience causes many to overextend until learning hard lessons later.

Getting Scammed by Fraudulent Projects

Even if traders avoid FOMO entries or leverage properly, cryptocurrency ecosystems contain endless phony projects impersonating truly innovative blockchain networks.

Unwary investors easily entrust assets to scammy exchanges, fraudulent wallet apps, fake mining pools, questionable DeFi sites or Ponzi-type lending platforms promising unrealistic interest rates. However, money given over to obvious crypto scams rarely returns to victims later.

Observing basic security practices like using complex passwords, enabling 2-factor authentication (2FA) with whitelisting, and practicing general skepticism around "too good to be true" options helps deter frauds seeking cryptocurrency theft. But greed blinds many newbies until difficult lessons get learned.

Losing Funds Due to Hacks of Exchanges or Wallets

With exponential growth in new crypto participants, hackers increasingly target vulnerable digital asset ecosystems extracting billions via sophisticated cyber intrusions.

Top recent crypto exchange hacks include:

• FTX - $477 million lost
• Wormhole - $325 million hacked
• PolyNetwork - $273 million stolen

And decentralized finance (DeFi) platforms saw over $3 billion drained via technical exploits in 2021 alone directly accessing user wallets.

Accordingly, experts strongly advise utilizing trusted hardware wallets like Trezor or Ledger rather than keeping life-changing crypto funds on exchanges or DeFi sites vulnerable to hacking.

However, convenience often overrides security for traders seeking quick profits day trading. By overlooking cyber threats, naïve investors frequently suffer harsh lessons losing portfolio balances to relentless hacking efforts.

How to Avoid Cryptocurrency Scams and Bad Investments

Now that we've covered various scams and legitimate risks causing cryptocurrency investors to lose money, here are some tips to avoid becoming another victim statistic:

Perform Due Diligence on Any Crypto Project Invested In

• Research the founders, developers, project history
• Join Discord/Telegram groups to gauge community ethos
• Review GitHub code commits if possible
• Ensure claimed partnerships appear legitimate

Avoid "Too Good to Be True" Opportunities

• If guaranteed returns promoted, likely a Ponzi scheme
• verify registered businesses have valid addresses/contact info
• Ensure leadership team fully doxxed themselves

Use Exchanges Cautiously and Store Crypto Securely

• Limit holdings kept on exchanges after trading
• Enable all possible security features like 2FA or whitelisting
• Use hardware wallets for long term holdings not actively traded

Limit Leverage Trading and Avoid FOMO Decision Making

• Start with low leverage like 5:1 maximum to limit liquidation risks
• Consider setting stop losses to lock profits and constrain losses
• Don't rush into trades when prices spike fomentally

Carefully following tips like these helps crypto investors protect hard-earned capital against some worst case scenarios. However staying informed on latest threats remains vital due to rapidly evolving cryptocurrency risks and fraud methods.

The Future Outlook on Cryptocurrency Stability and Trust

Given the past history of volatility, scandals, and scams frequenting cryptocurrency markets it's fair for critics to question if crypto assets merit trust or investment compared to traditional financial systems.

However, supporters argue most issues stem from crypto's relative infancy rather than intrinsic flaws. Over time, higher regulation, institutional adoption, and technological progress could lead to the maturity and stability necessary for mainstream reliance:

Increasing Regulation Improves Fraud Prevention and Investor Protection

Expanding regulatory frameworks like the EU’s MICA (Markets in Crypto-Assets) legislation projects require cryptocurrency entities to follow strict reporting rules, governance standards and security requirements.

These regulations should deter scams and foster accountability more aligned with traditional investing protections. However, some crypto idealists argue excessive rules contradict decentralization principles.

Institutional Adoption Stabilizes Volatility

In recent years investment giants like BlackRock, publicly traded corporations such as MicroStrategy, and even nation states like El Salvador bought substantial cryptocurrency holdings. Their sizable purchases assist absorbing available liquidity curtailing crypto's historical price swings.

If the largest players owning significant stakes mostly hold through market gyrations rather than panic selling, increased stability could attract broader worldwide usage and trust longer-term.

Advances to Blockchain Security Reduce Hacks

Open source cybersecurity experts continually submit upgrades addressing vulnerabilities in blockchain codebases allowing digital asset hacking previously. institutional custodians now offer insured hot and cold storage mitigating exchange risks.

And investors utilizing hardware wallets via manufacturers incentivized to maximize security now sleep easier avoiding publicly known exploits hitting assets held on oversight deficient offshore exchanges historically.

If cryptocurrency developers, hardware custody solutions, and audited smart contracts maintain reliably improving security practices, fears over catastrophic hacking incidents plaguing the ecosystem may slowly fade.

Conclusion

In summary, while the fraudulence and volatility keywords associated with cryptocurrencies have legitimate factual basis due to frequent scams, hacks, and price crashes since inception - reasonable arguments suggest crypto represents innovation still in its infancy rather than outright failures:

• Most reputable blockchain projects building Web 3.0 or Metaverse infrastructure remain overwhelmed addressing exponential user/speculator growth in a largely unregulated environment.
• Governments now recognize banning crypto impractical compared to regulating appropriately fosters economic growth opportunities on digital asset adoption rather than risk prohibition inviting more underground fraud.
• And cypto's overall resilience despite ongoing volatility and scandals implies fundamental value recognized by investors, corporations, and even sovereign nation states.

Therefore, prudent investors willing to telescope several years ahead while ignoring short-term price oscillations may still profit from the innovations genuine cryptocurrencies offer civilization advancing into the digital future.

Exercising great care avoiding scams and understanding risks remains vital however - as cryptocurrency will likely continue exhibiting extreme volatility intermixed with upside breakthroughs for years to come.