Following the success and skyrocketing demand for Bitcoin and some other cryptocurrencies, interest in these digital currencies has been on the increase around the globe and Nigeria has not been left behind.
A 2020 online survey of cryptocurrency adoption found that 32% of respondents that affirmed usage came from Nigerian, making it the highest proportion of any country in the world. In Nigeria, according to a BBC report on February 28, Nigeria ranks third among the top 10 countries for trading volumes behind US and Russia in 2020, generating more than $400m worth of transactions – $1.1m cryptocurrency trades per month, $65m traded every month, $100m spent on each trade on average.
The figures above show the reason why fraudsters and scammers have latched onto the popularity of cryptocurrencies to swindle the unsuspecting populace. Below are some important terms we need to understand before diving into various cryptocurrency scams and how to avoid them.
CRYPTOCURRENCY
According to Investopedia, a cryptocurrency is a digital or virtual currency that is secured by cryptography (the science of hiding/protecting information), which makes it nearly impossible to counterfeit or double-spend. Many cryptocurrencies are decentralized networks based on blockchain technology—a distributed ledger enforced by a disparate network of computers. A defining feature of cryptocurrencies is that they are generally not issued by any central authority, rendering them theoretically immune to government interference or manipulation.
Being a form of digital currency, therefore, it can be used to buy goods and services and act as a store of value hence, its popularity.
WALLET
A cryptocurrency wallet is a secure digital wallet used to store, send, and receive digital currency. It is essentially the software that interacts with the blockchain and lets users receive and send their digital money.
MINING
A very technical process but in a nutshell is the process through which new bitcoin or some altcoins are created. The process involves validating data blocks and adding transaction records to a public record (ledger) which is the blockchain. The process of mining is also responsible for introducing new coins into the existing circulating supply and is one of the key elements that allow cryptocurrencies to work as a peer-to-peer decentralized network, without the need for a third party central authority.
BLOCKCHAIN
Blockchain is a chain of connected blocks that can store information. A blockchain collects information together in groups also known as blocks that hold sets of information. Blocks have certain storage capacities and, when filled, are chained onto the previously filled block, forming a chain of data known as the “blockchain.” All new information that follows that freshly added block is compiled into a newly formed block that will then also be added to the chain once filled.
To understand blockchain, it is imperative to view it in the context of how it has been implemented by Bitcoin. Like a database, Bitcoin needs a collection of computers to store its blockchain. For Bitcoin, this blockchain is just a specific type of database that stores every Bitcoin transaction ever made. Bitcoin’s blockchain has been used in a decentralized way making it impossible for one to manipulate and control. The decentralized way is in the sense that each node has a full record of the data that has been stored on the blockchain since its inception. For Bitcoin, the data is the entire history of all Bitcoin transactions. If one node has an error in its data, it can use the thousands of other nodes as a reference point to correct itself. This way, no one node within the network can alter information held within it. Because of this, the history of transactions in each block that make up Bitcoin’s blockchain is irreversible.
Because of the decentralized nature of Bitcoin’s blockchain, all transactions can be transparently viewed by either having a personal node or by using blockchain explorers that allow anyone to see transactions occurring live. Each node has its own copy of the chain that gets updated as fresh blocks are confirmed and added. This means that if you wanted to, you could track Bitcoin wherever it goes.
EXCHANGE
Cryptocurrency exchange, or digital currency exchange (DCE), is a business that allows customers to trade cryptocurrencies or digital currencies for other assets, such as conventional fiat money or other digital currencies. Cryptocurrency exchanges are like cryptocurrency’s version of a stock exchange where buyers and sellers are offered a platform to trade different assets with their value based on the current market prices. Typically, the exchanges offer conventional fiat-to-crypto transactions as well as offering crypto-to-crypto trades.
There are three types of cryptocurrency exchanges:
- Centralized cryptocurrency exchange (CEX): These are like traditional stock exchanges, buyers and sellers come together, and the exchange plays the role of a middle man while charging a commission for facilitating transactions.
- Decentralized cryptocurrency exchange (DEX): This is a marketplace where buyers and sellers come together to trade directly eliminating the need for a middleman, they are often referred to as peer-to-peer trading.
- Hybrid cryptocurrency exchange: These combine features of both CEX and DEX allowing users to access trading platforms as they do in a CEX then engage in a peer-to-peer trade as they do in a DEX.
In order to be allowed to exist and operate, a cryptocurrency exchange needs to adhere to the laws of the country. These laws are different according to the country but generally follow regulations related to the protection of the customer.
Two of these are important in most countries:
Anti-money laundering (AML) laws and Know your customer (KYC) laws.
There are so many cryptocurrency exchange companies widely used in Nigeria but Binance and Luno are the most popular among them.
COMMON CRYPTO SCAMS
As earlier stated, the popularity and adoption of cryptocurrencies have made it a target for cybercriminals as they have come up with several ways to swindle unsuspecting users. Below are the most popular crypto scams and how they can be avoided.
- FAKE ONLINE EXCHANGES AND WALLETS
Fake exchanges scam victims by posing as legitimate exchanges. They lure potential victims through unsolicited emails or advertising promising lower prices than the prevailing market rate. Another way such cybercriminals get victims is through typosquatting – the act of registering domain names close to the original (for instance, coinnbase.com instead of coinbase.com) and hosting fake websites that are replicas of the original. In both scenarios, high-pressure tactics are used to make the victims commit their funds. After funds have been deposited, the victims find out that they face several difficulties in accessing their funds, only to ultimately find out all their funds have vanished.
Fake Crypto wallets pose as legitimate wallets with the aim of infecting a victim’s device to steal passwords and private keys.
To avoid fake exchanges and wallets:
- Keep away from exchanges that advertise offers that seem too good to be true
- Watch out for pressure to deposit funds
- Check if the name resembles or is trying to impersonate another popular brand
- Ask questions on forums like Reddit and check to see if there’s a mention on reputable sites like Forbes
- INITIAL COIN OFFERINGS (ICO)
An ICO is a type of funding using cryptocurrencies. ICOs are the kind of companies looking to create a new coin through crypto crowdfunding where you are promised a certain percentage if you invest with them. Many ICOs end up being scams. ICOs can also be called token sales.
ICO scams have been on the rise. ICO exit scams mean when the Founders shut down their project and run with the acquired funds. ICO scams are too numerous to mention but the purpose of this article is to create awareness of ICO scams.
How to spot an ICO scams include:
- Is the company incorporated?
- Do they have valid addresses and identities?
- High guaranteed returns.
- Check out their social media accounts and try to carry out due diligence to make sure they are not using stolen Identity.
- Google and check their reviews, time and date they were posted, etc.
- CLOUD MINING SCAM
This happens when a shady company asks potential victims to invest their cryptocurrency (usually bitcoin) and in return, the victims are promised a share in the platform’s hash power. This hash power is said to go towards mining bitcoins and the profits will be split between all investors. What usually happens is that these funds are used to pay earlier investors so that the scheme seems legitimate for a while, then when it becomes unsustainable, the perpetrators make their exit.
A sure way to spot these scams is that they always promise huge returns on investments. Don’t be taken in just because you see someone standing on a huge mining farm. Mining profitability can change drastically due to the electricity rate, current exchange rate of the cryptocurrency, mining difficulty, and increase in hardware prices. As such, anyone promising a huge profit is a sure red flag. Also, make sure to thoroughly research the company and verify they are what they claim to be.
- SOCIAL ENGINEERING SCAMS
Social engineering scams are scams in which hackers use psychological manipulation and deceit to gain control of vital information relating to user accounts.
Within the context of the cryptocurrency industry, these scams target information pertaining to online wallets. Specifically, hackers are interested in crypto wallet private keys, or keys required to access funds within the wallet. Their method of working is similar to that of standard scams. An email is sent to wallet holders that leads to a fake website specially created to ask users to enter private key information. Once the hackers have this information, they can steal Bitcoin and other cryptocurrencies contained in those wallets.
Another popular social engineering method used by hackers is to send Bitcoin blackmail emails. In such emails, hackers claim to have a record of adult websites visited by the user and threaten to expose them unless they share private keys.
The best way to stay safe from such scams is to avoid clicking on-site links in emails or verify whether the email address actually belongs to the said company by calling them up or checking the email syntax. For example, check whether the linked web address is encrypted (i.e., it contains the HTTPS syntax).
- PUMP AND DUMP SCHEMES
This occurs when a group gets together and buys an altcoin, this action drives the price up, then on the back of these rising prices, they get outsiders to invest, luring them with the promise of easy money, quick returns, and claims that the price will continue to rise. Once outsiders invest, the group then sells their stake in the altcoin and cash out.
A sure way to avoid such schemes is to invest in popular and stable cryptos like Bitcoin and Etherum. Also, be wary of the “fear of missing out” (FOMO), this happens when you see a massive surge in crypto and you rush to buy. Remember that what goes up must come down and you’re better off waiting for the hype train to end and then buy at lower prices.
Finally, you can be sure as the crypto market continues to evolve, there will be new scams and iterations of older ones. Extensive research is always a tried and true way of not falling for scams. Also, consider taking courses on cryptocurrency investing and seek advice before carrying out any new investments.
Contributors:
Wale Osoba
Oluwaseun Adio
Iheanacho Obinna