Common Scams in Virtual Currency Investment

01 Introduction

There are many good movies in August, but the one I highly recommend is “All In”. It’s not because the movie is great, but because it has a high degree of authenticity in depicting anti-fraud scenes. Although the cruelty may have been toned down compared to the real situation, it’s still good to let those who have fantasies about online fraud learn more about anti-fraud knowledge and tricks. After watching the movie, including lawyer Hong Lin, three colleagues from Manquan Law Firm wrote their reflections from their respective professional perspectives. Lawyer Wei from Manquan Law Firm even joked that watching the movie felt like working overtime.

For those familiar with Manquan, it’s clear that we insist on publishing two original articles on legal education every working day. On one hand, it is to let friends in the blockchain industry know about Manquan Law Firm, so that they can think of us when they need related legal services. On the other hand, it is indeed our hope to provide as much as possible, in a popular and easy-to-understand manner, knowledge of law to friends in the industry, helping them navigate legal pitfalls, whether it is on the path of entrepreneurship or wealth accumulation. Because the legal risks in the cryptocurrency industry are relatively severe, many times it involves criminal issues, which cannot be easily resolved just by spending money (we’re not arguing about whether the money was well spent).

In the movie, there is a scene where English is translated into Chinese, and it is said that it was ether before the trial and became “Ke Tai” afterwards. It’s true and false, a very magical world. We won’t focus on that. In this article, I want to talk to you about some common scams in the industry and what they involve.

With the popularization of the Internet and the development of blockchain technology, scams using virtual currencies are becoming more and more prevalent. After all, criminals are also thinking about digital transformation to reduce costs and increase efficiency. In this article, we have compiled some common scam scenarios that we often encounter in our daily work, hoping to help raise awareness of anti-fraud among everyone.

02 Common Scam Schemes

1. Fake Exchanges

You may come across some virtual currency exchanges on websites that look very real, but they are actually fake. These fake exchanges will guide you to enter your personal information and transaction password, and then they can steal your money or information. For example, in 2021, the police cracked a case of a fake exchange. The scammers copied the interface of a well-known exchange and created a fake trading platform. They lured users to deposit money and attempt virtual currency transactions on this platform. However, this platform was actually controlled by the scammers, who could freely manipulate data, steal users’ personal information, or directly transfer funds. The Manquan team previously received a consultation from a client who was cheated out of millions of dollars in digital assets by a fraudulent team through a fake exchange.

2. Shanzhai Coin, Air Coin

Although China banned the issuance of shanzhai coins in 2017, there are still a large number of scam groups issuing various virtual currencies in the name of overseas companies or project parties. These “shanzhai coins” or “air coins” created by scammers usually only have consensus within the scam group and have no real value. They are just tools used by scammers to deceive money, also known as “ponzi schemes”. For example, in 2022, the police announced a fraud case involving shanzhai coins and air coins. The scammers used the psychology of investors pursuing high returns to spread false information about a virtual currency with broad prospects through social media. They claimed that this coin was issued by a well-known company and had high appreciation potential. At the initial stage of issuance, the price of this virtual currency did indeed rise, attracting a large number of investors. However, when investors wanted to sell, they found that the coin had become worthless and the scammers had disappeared without a trace.

3. Tempting with High Returns to Increase Sales

If a friend who has never shown interest suddenly wants to introduce you to invest in a certain cryptocurrency, he is most likely trying to deceive you. This, I believe, should be understood by friends who have watched the movie “All or Nothing”. They often use so-called insider information to allow your account to make some money in the early stages, and then encourage you to invest more and say that the larger the investment, the greater the return. They constantly stimulate your desire to make money through various sales income screenshots in the circle of friends, and try to induce you to invest. However, the majority of the screenshots and databases are tailored for you. Their goal is to induce other investors to buy at high prices and then sell their own holdings. As long as you dare to make a big bet, they dare to really run away.

03 Risk Prevention Strategies

1. Verify the Source of Information

When trading on exchanges, try to choose the top 5 virtual currency exchanges. It’s not that they are particularly safe, but there is always a taller person among short people. With such a large market volume, they have a certain level of good reputation and industry integrity. In terms of investment targets, you can do some research and understanding of the true information of the project, such as checking the domain name registration information of the website, investigating the background and reputation of the team, etc. Although it is common in the industry for a European and American team to be in front and a Chinese team to be behind, it is still very helpful to filter out some chicken projects by gathering as much information as possible on the internet.

2. Invest with Caution

When engaging in virtual currency trading, it is important to conduct thorough market research and risk assessment. Do not easily believe in so-called “insider information” or “guaranteed profit” investment opportunities. Do not easily believe in promises of high returns. If you find abnormal price fluctuations or a large number of sell-offs of a virtual currency, you should investigate the reasons and make cautious decisions. Start taking profits as early as possible. In addition, my personal advice is for individual retail investors to avoid getting involved in primary market investments and not to participate in projects on DEX. The get-rich-quick stories you hear in Telegram groups are just stories the project team wants you to hear.

3. Use secure payment methods

Do not connect to unfamiliar hotspots or WiFi networks. It’s really not worth risking your security. It’s better to use a clean and secure mobile phone for transactions. When conducting transactions, it is recommended to use widely recognized and secure payment methods, such as the official wallet of reputable exchanges. Avoid using uncommon payment methods to prevent fraud. Also, be cautious of unfamiliar phone calls, text messages, and emails. Do not click on links or download files from unknown sources.

4. Regular backups and secure storage

Regularly backup important virtual currency wallets and transaction records, and store them in a secure place, such as an encrypted hard drive or offline cold storage device. It is also advisable to prepare multiple cold wallets to avoid the loss of all assets if one is lost. If you are using a hot wallet, make sure to securely store your private key or mnemonic phrase. If your digital assets are stored in centralized exchanges, it is essential to safeguard your trading account and password and not disclose them to others or use them in an insecure network environment.

04 What to do if you fall victim to a scam?

If you unfortunately become a target of scammers, the first thing you need to do is to take immediate action to minimize your losses. Below are some experiences shared by lawyer Mankun based on practical experience, which you can refer to.

1. Stop trading and freeze your account immediately: If you suspect that you have become a victim of fraud and your assets are on a centralized exchange, the first thing you should do is to stop all trading activities and apply to freeze your account with the platform. If your virtual currency is stored in your own cold wallet and only one type of virtual currency is lost, transfer your virtual currency as soon as possible to ensure that the assets in your wallet will not continue to be stolen. This can prevent the scammer from further transferring or stealing your funds. Also, keep all records and evidence related to the transaction.

2. Collect evidence: Collect all evidence related to the fraud, such as transaction records, emails, text messages, chat logs, etc. These pieces of evidence can help you track the scammer’s behavior and can also be provided to relevant institutions for investigation. Try to preserve electronic evidence, such as transaction records and emails.

3. Contact the platform: If possible, contact the virtual currency trading platform, report the scam, and request assistance. Mainstream virtual currency exchanges usually have customer service teams. However, it is important to note that when contacting customer service, do not do so through Telegram groups or internet searches. Try to contact them through the official website or certified Twitter accounts. This is because there are many scammers who impersonate fake customers and can cause further harm to you. This is also very common in the industry.

4. Call 110 to report the crime: If you have suffered significant losses, it is recommended to report the case to the local police. Provide as much detailed information and evidence as possible so that the police can investigate and track the scammers. Many people mistakenly believe that virtual currencies are not protected by law, and they are afraid to report the loss of assets or being deceived to the police. Some even go to the police and are told by the police that “playing virtual currencies is illegal.” However, this is obviously a misunderstanding of virtual currencies. From Manquan’s practical experience, whether it is civil court trials or combating criminal activities, virtual currencies held by individual citizens will be protected.

05. Conclusion

It is a well-known fact that “there is no free lunch in the world,” which is understood by anyone who has studied basic physics. There are various fraudulent practices in virtual currency transactions, which are not particularly sophisticated. They often exploit investors’ desire for high returns, lure them to transfer funds or purchase worthless virtual currencies through false investment opportunities, and participate in the game of passing the buck in the fund pool. Sometimes, in some of the consultations we receive, many clients would say, “I know they are scammers, but I didn’t expect to fall into their trap.”

In the movie “The Big Short,” a police officer in the anti-fraud propaganda said a classic sentence, asking why there are still so many people who are deceived despite the overwhelming anti-fraud propaganda. The police officer’s answer is: because people have two hearts, one is greed and the other is unwillingness.

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