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When one of our students told us they were going to drop out of college in August 2021, it wasn\u2019t the first time we\u2019d heard of someone ending their studies prematurely.<\/p>\n
What was new, though, was the reason. The student had become a victim of a cryptocurrency scam and lost all their money \u2014 including a bank loan \u2014 leaving them not just broke, but in debt. The experience was financially and psychologically traumatic, to say the least.<\/p>\n
This student, unfortunately, is not alone. There are hundreds of millions of cryptocurrency owners, with estimates predicting further rapid growth<\/a>. As the number of owners has increased, so has the number of scam victims.<\/p>\n We study behavioral economics<\/a> and psychology<\/a>, and recently published a book <\/a>about the rising problem of fraud, scams and financial abuse. There are reasons why cryptocurrency scams are so prevalent. And there are steps you can take to reduce your chances of becoming a victim.<\/p>\n Cryptocurrencies \u2014 decentralized, digital currencies<\/a> that use cryptography to create anonymous transactions \u2014 were originally driven by \u201ccypherpunks,\u201d individuals concerned with privacy. But they have expanded to capture the minds and pockets of everyday people and criminals alike, especially during the COVID-19 pandemic, when the price of various cryptocurrencies shot up and they became more mainstream<\/a>. Scammers capitalized<\/a> on their popularity.<\/p>\n A January 2022 report by Chainanalysis<\/a>, a blockchain data platform, suggests that in 2021 close to $14 billion was scammed<\/a> from investors using cryptocurrencies. Then, in February 2022, the FBI announced it had arrested a couple who used a fake cryptocurrency platform to defraud investors of another $3.6 billion.<\/p>\n There are two main types of cryptocurrency scams that tend to target different populations.<\/p>\n One targets investors, who tend to be active traders holding risky portfolios<\/a>. They are mostly younger investors, under 35, who earn high incomes, are well-educated and work in engineering, finance or IT<\/a>. In these types of frauds, scammers create fake coins or fake exchanges.<\/p>\n A recent example is SQUID, a cryptocurrency coin named after the TV drama \u201cSquid Game.\u201d After the new coin skyrocketed in price, its creators simply disappeared with the money<\/a>.<\/p>\n A variation on this scam involves enticing investors to be among the first to purchase a new cryptocurrency \u2014 a process called an initial coin offering \u2014 with promises of large, fast returns. But unlike the SQUID offering, no coins are ever issued, and would-be investors are left empty-handed. Many initial coin offerings turn out to be fake<\/a>, but because of the complex and evolving nature of these new coins and technologies, even educated, experienced investors can be fooled.<\/p>\n As with all risky financial ventures, anyone considering buying cryptocurrency should follow the age-old advice on thorough research: Who is behind the offering? What is known about the company? Is a white paper, an informational document from a company outlining the features of its product, available?<\/p>\n With SQUID, one warning sign was that investors who bought the coins couldn\u2019t sell them. The SQUID website was riddled with grammatical errors, typical of many scams.<\/p>\n The second basic type of scam simply uses cryptocurrency as the payment method to transfer funds from victims to scammers. These include ransomware cases, romance scams, computer repair scams, Ponzi schemes and the like.<\/p>\n In the recent past, scammers would request wire transfers or gift cards \u2014 irreversible, anonymous and untraceable \u2014 to receive money. But such payment methods do require potential victims to leave their homes, where they might encounter a third party who can intervene and possibly stop them. Crypto, on the other hand, can be purchased from anywhere at any time.<\/p>\n Indeed, Bitcoin has become the most common currency requested in ransomware cases, demanded in close to 98% of cases<\/a>. According to the United Kingdom\u2019s National Cyber Security Center, sextortion scams often request payment in Bitcoin and other cryptocurrencies<\/a>. Romance scams targeting younger adults increasingly use cryptocurrency.<\/p>\n If someone asks you to transfer money to them via cryptocurrency, you should see a giant red flag.<\/p>\n Research has identified common traits that make someone especially vulnerable to scam solicitations, including differences in cognitive ability, education, risk-taking and self-control.<\/a><\/p>\n We believe authorities need to step up and employ new methods of protection. For example, the regulations that currently apply to financial advice and products could be extended to the cryptocurrency environment. Data scientists also need to better track and trace fraudulent activities.<\/p>\n Cryptocurrency scams are especially painful because the probability of retrieving lost funds is close to zero. For now, cryptocurrencies have no oversight. They are simply the Wild West of the financial world.<\/p>\n Yaniv Hanoch is associate professor in risk management, University of Southampton. Stacey Wood is professor of psychology at Scripps College. <\/i><\/p>\n Want to write a letter to the editor or submit an op-ed for the Sun-Times? See our<\/i>guidelines<\/i><\/a>.<\/i><\/p>\n<\/p><\/div>\n window.fbAsyncInit = function() { appId : ‘425672421661236’,<\/p>\n xfbml : true, (function(d, s, id){Crypto takes off \u2014 and so do the scams<\/h5>\n
Shakedown payments<\/h5>\n
The Wild West<\/h5>\n
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