Last week US Senator Elizabeth Warren blasted "highly opaque and volatile" cryptocurrency markets for their lack of regulation and protection for consumers. She made plain her concerns in a letter to the US Securities and Exchange Commission and demanded regulation to protect "ordinary investors at the mercy of manipulators and fraudsters". Regulators are struggling over how to police cryptocurrency markets when the modus operandi of the new technology is to trade in a borderless and encrypted environment. In this unregulated sector, investors must use their own due diligence to avoid the plethora of swindlers infecting the crypto-sphere, where billions of dollars are pilfered annually in mining pool scams, exchange hacks and meme-coin "rug-pulls".
The most common cryptocurrency swindle is the exit scam, or "rug-pull", and it unfolds in subtle stages. First, you may read of a new memecoin project that has scant fundamentals, but with a cute mammal as a motif, it seems harmless. Encouraged by former memecoin success stories, early investment could see gains of upwards of 10,000%. Soon the hype and fear of missing out becomes feverish, a multitude of retail investors get on board and the charts go green and pitch upwards at a steep angle. Then one morning a red vertical line appears on the memecoin's price chart, the token's value has plummeted to a pittance and it can’t be traded on any decentralised exchange. Your original investment is locked behind that cuddly mammalian smile, that now looks more like a grimace. Then, the memecoin’s Telegram group gets deleted, and all trace of the project’s social media footprint is wiped. You’ve been "rug pulled", and because the crypto-sphere is unregulated, there are no official bodies to turn to, and the nefarious individuals behind these scams are rarely revealed.
According to blockchain data analysis platform Chainalysis, retail investors alone have lost over £1.87bn ($2.59bn) in "rug-pulls" to date. In a six-month period spanning 2020 and the beginning of 2021 the number of exit scams rose nearly 18%, to 1,335. So, investors must remain vigilant and do their own research by reading the whitepaper attached to a cryptocurrency that details the fundamentals and the personnel behind the project. Another legitimacy check is to search for a new cryptocurrency project on Tokensniffer, which scans the latest coin offerings for signs of malicious code patterns.
Another pitfall to avoid is the cryptocurrency mining pool scam, a relatively recent development. With mining difficulty levels escalating, individuals now need to "pool" their processing power in order to compete with the big operators. This can be done by downloading one of the legion of mining pool apps available on the Google Play store. However, access to the mining returns promised comes with a monthly subscription, and prices range from £9.35 to £187.18. Scammers have now created legitimate-looking mining pool apps that steal subscription money from users and never deliver the promised mining returns. Protection against mining pool scams can be enhanced by installing Lookout scanning software from the Lookout Threat Lab. It maintains an up-to-date database of apps that could be linked to cybercriminals.
Read more: What is crypto-mining and can anyone do it?
Leaving digital assets on a cryptocurrency exchange wallet has its risks. Online exchanges have always been the prime target for malicious actors. Hacking an exchange is the most lucrative endeavour for the ambitious cybercriminal. One of the most notorious exchange hacks was the attack on Binance in May 2019, when more than £28m worth of bitcoin was stolen. Those with long-term holdings should consider transferring their assets to a cold storage crypto-wallet, such as the Ledger Nano X.
Ultimately, before an investment is made, the functionality and adoption strategy of a cryptocurrency project should be evaluated. Many memecoins collapse because they have no intrinsic function, and functionality should be detailed in the project’s whitepaper. A cryptocurrency project should also have a comprehensive adoption strategy, where the developers outline how the token can work in the wider economy and become sustainable long term. Adoption strategy details should also be set out in the project’s whitepaper.