Cryptocurrency Scams: What They Are and How to Avoid Them

Not all cryptocurrencies are legitimate

The rapid rise in popularity of cryptocurrencies such as Bitcoin and Litecoin has spurred a new market, causing new types of virtual coins that use blockchain technology to pop up every day. There are several crypto coin scams, so you should know which cryptocurrencies to avoid.

How to Tell if a Cryptocurrency Is Legitimate

One of the main benefits of publicly traded cryptocurrencies lies in the transparency of the transactions, a feature made possible by blockchain technology. With a public blockchain, peer-to-peer transfers (currency or otherwise) are validated and added to a ledger that anyone can view at any time. This openness adds accountability that precludes the need for an intermediary to facilitate and regulate its transactions.

Any cryptocurrency should be backed by a private blockchain. In a new cryptocurrency, look for one that offers an open-source codebase and a decentralized architecture. Wallet software should be available, too. Everything should be traded publicly, not within a private system that is closed and centralized. 

Here are a few things to look for in a legitimate cryptocurrency:

  •  A public blockchain where transaction records are freely accessible.
  • An open-source codebase.
  • Core wallet software from which you can send and receive coins.
  • An active and knowledgeable community.
  • The ability to purchase and trade currency through reputable, well-known exchanges.
Electronic money mining concept

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How to Avoid a Cryptocurrency Scam

When researching a cryptocurrency, look for red flags or things that seem off-kilter with a new cryptocurrency from the outset. These oddities and inconsistencies raise alarms throughout the crypto community:

  • Promised commissions for signing up others.
  • Promises that upsold memberships will alleviate the fees required to withdraw money.
  • Inability to use your computer to mine a cryptocurrency.
  • Any country's government branding of a cryptocurrency as a pyramid or Ponzi scheme.
  • Sites that aren't secured with SSL and HTTPS.
  • Obvious spelling and grammar mistakes.
  • Anything that forces you to sign up right away.
  • Anyone asking for access to your computer or private information.

Watch the websites that turn up in support of a new cryptocurrency. If several websites, YouTube videos, and social media presences appear suddenly with commenters posing as crypto enthusiasts who attack anyone who speaks negatively about a new cryptocurrency, consider that a red flag.

If it sounds too good to be true, it usually is. Do your homework before investing in a cryptocurrency.

Cryptocurrencies to Avoid

Many new cryptocurrencies fail because they lack community interest or encounter codebase and developer issues. However, some altcoins (any cryptocurrency that isn't Bitcoin) have gained market share over time. Other cryptocurrencies are launched with corrupt purposes, designed to make money for only their creators.

A fairly well-known altcoin that might fall into this category is OneCoin, which some news outlets have reported to be a Ponzi scheme rather than a legitimate cryptocurrency. OneCoin doesn't have an active exchange on which to buy or trade. The Italian Antitrust and Consumer Protection Authority (IACPA) fined the startup cryptocurrency 2.5 million euros for being, in the IACPA's words, a pyramid scheme. Other European and African countries may be following suit.