One in 10 Americans is currently invested in crypto, with many seeking the potential for high growth in a short time. Crypto can be a sound investment if you don’t mind some volatility. There is a big concern with crypto, though—and that’s cryptocurrency scams.
Crypto-based crime hit an all-time high in 2021. Scammers stole more than $14 billion last year, according to Chainalysis. That’s up from $7.8 billion in 2020.
This is 1875 for cryptocurrency. It’s the wild west out there—plenty of opportunities but few rules.
Small Businesses Are at Risk
Small businesses make a good target for scammers because they usually have substantial investment in cryptocurrency but do not have an IT department or team member dedicated to information security.
So, whether you’ve committed to a significant investment or accept cryptocurrency as payment, you can avoid cryptocurrency scams.
Exercise Caution with Crypto
No investment is guaranteed. Crypto is no exception.
Carefully weigh each coin you’re thinking of investing in. Do your research. If you’re unsure, contact a CPA.
“Wallet Hygiene” Matters
If you’re dealing in crypto, you’ll use a wallet to send and receive coins, buy and store them, make online payments, and convert crypto to fiat.
You can access your wallet through a “seed phrase” — a series of 12-24 words that functions as a master password.
Always store your seed phrase in physical form, not on your computer. Once you’ve put your seed phrase on paper, we recommend that you put it in a fire-proof safe to ensure its safety.
And most importantly, do not share your seed phrase with anyone.
Remember, if you lose your seed phrase, you will not be able to access your crypto. Even if its value skyrockets, the money is essentially gone.
Watch Out for Phishing Scams
Phishing is a common scam tactic that criminals have applied to cryptocurrency. Scammers contact you via text message or email to steal your personal information; they’ll likely pose as a company or public institution you recognize and trust.
This stuff is big business: Phishing scams (crypto and otherwise) cost small businesses $14.8 billion in 2021.
In the context of crypto, phishers are looking for your seed phrase or private key (an individual key for each address in your wallet). If you’re trading over a marketplace, phishers will be looking for your password and security questions.
To avoid phishing, never click on a suspicious email. It’s also a good idea to set up multi-factor authentication for all your accounts.
Beware of Social Engineering Scams
Social engineering is similar to phishing but involves psychologically manipulating people into divulging information.
A scammer may attempt to gain information like place of birth, a pet’s name, or a mother’s maiden name, all of which are commonly linked to online security questions. Avoid using this kind of information for security questions whenever possible, and never give it away if someone asks.
Scrutinize any phone calls you get that claim to be from your bank or a government organization. Scammers prey on heightened emotions. So, take a deep breath and decline to give out your info over the phone.
Avoid Investment Opportunities That Are Too Good to Be True
Crypto scammers have several tools at their disposal to separate you from your money. Being aware of them is your best defense.
Initial Coin Offering (ICO)
We’ve all seen that news story at some point: A new coin is launched, then the creators disappear with the money. As a CPA with years of experience in crypto, I recommend you steer clear of ICOs. Invest in coins that have proven reliability.
A “rug pull” happens when a fraudulent developer creates a new coin, pumps up the price, and then pulls as much value as possible before abandoning them as their price drops to zero. Rug pulls are the most common form of crypto fraud, accounting for 37% of all cryptocurrency scam revenue in 2021. To avoid rug pulls, watch out for coins that have low liquidity and a lack of background information.
When a company mines crypto for you in exchange for a monthly fee, they’ll say you can mine remotely without buying expensive mining hardware. The truth is that cloud mining companies are either a deliberate scam or a bad investment. In either case, you’re better off simply buying and holding coins.
Talk to a CPA for Help
Jeremy A. Johnson, CPA, is a CPA firm with experience and success in cryptocurrency accounting and taxes. If you’re the victim of a crypto scam, call us. We’ll handle the process of adjusting your return and accounting for the loss. You can schedule an appointment with us today.
Jeremy A. Johnson, CPA