With Bitcoin recently hitting an all-time high, the broader cryptocurrency sector received the credibility that it had desperately sought over the past several years. But since Bitcoin appears on its way toward a six-figure price tag, alternative cryptocurrencies or altcoins for short have attracted substantial attention. Thanks to the law of small numbers, it’s easier for altcoins to ride Bitcoin euphoria while delivering superior returns.
Unfortunately, whenever money is involved, nefarious actors are never far behind. This has led to the rise of fraudulent actions. In particular, you should watch out for these top 5 altcoin scams.
- Altcoin Scam #1: The Classic Pump and Dump
- Altcoin Scam #2: NFT Madness
- Altcoin Scam #3: Ponzi Schemes
- Altcoin Scam #4: DeFi Swindle
- Altcoin Scam #5: ICO is an IC-No
- How to Avoid Altcoin Scams
- Investigate Online Altcoin Exchanges
- Altcoin Regulations
- Best and Trusted Altcoin Exchanges
- The Pitfalls of Profitability
- Frequently Asked Questions
Altcoin Scam #1: The Classic Pump and Dump
Popularized by films such as Boiler Room and The Wolf of Wall Street, the classic pump-and-dump scheme consistently lures in unsuspecting investors with the promises of quick riches. As is always the case, the scheme ends up enriching the fraudsters, leaving victims with nothing but heartache and a very expensive lesson.
These days, securities regulators wised up to many pumps and dumps. Further, the imposed penalties are enough to discourage would-be con artists from attempting such a ruse. But with altcoins, it’s far easier for fraudsters to get away with their crimes.
Here’s how this could work. An individual from a jurisdiction with lax securities laws engineers a frenzy toward an altcoin that they own. Once the price reaches a bubble top, the con artist sells, leaving others holding the bag. The relative anonymity of crypto dealings along with jurisdictional issues make prosecution extremely unlikely.
Altcoin Scam #2: NFT Madness
One of the hottest segments within the broader crypto narrative is the rise of non-fungible tokens or NFTs. On face value, the NFT represents a natural evolution of the underlying blockchain innovation.
First, Bitcoin popularized the idea of peer-to-peer transactions that occur without a centralized authority or intermediary. Later, Ethereum broadened the concept to apply to intermediary-less contracts, such as legal services and real estate deals. With NFTs, the idea is to cement a unique signature to digital works of art through the blockchain.
It’s a fascinating concept that offers fundamentally useful applications, such as content and product authenticity verification. But you want to be extremely careful putting your money into NFTs without due diligence. For instance, a common scam involves con artists minting or tokenizing artists’ work without their permission.
Altcoin Scam #3: Ponzi Schemes
To some people, all cryptocurrencies might appear as Ponzi schemes. As legendary investor Warren Buffett once said, cryptos have no value since they don’t produce anything. Therefore, crypto investors are speculators, hoping that someone else will pay a higher price for their holdings.
As American Institute for Economic Research contributor Joakim Book counters, that doesn’t separate cryptos from any other asset class. But a Ponzi scheme is an entirely different matter.
According to the Securities and Exchange Commission, a Ponzi scheme “is an investment scam that involves the payment of purported returns to existing investors from funds contributed by new investors.” A classic tell of this fraud is the promise of extremely high returns, such as the disgraced Bitconnect’s promise of 1% daily compounded interest.
In other words, if it seems too good to be true, run!
Altcoin Scam #4: DeFi Swindle
What separates cryptocurrencies from pure speculation on nonsense assets is the underlying blockchain technology. Through this innovation, it’s possible to catalyze multiple groundbreaking applications, with decentralized finance or DeFi being one of the most popular.
DeFi generally describes applications that disrupt traditional financial functionalities, specifically involving centralized intermediaries. Under the DeFi umbrella, a burgeoning subsegment is yield farming, a process where a crypto owner stakes their holdings in an enterprise’s blockchain application in return for higher yields than what is possible from traditional banking institutions.
DeFi is a tricky arena because many good uses come from it. For instance, the innovation allows anybody to be a market maker (i.e. liquidity provider) for a startup crypto exchange. But nefarious actors can also abuse DeFi protocols for the purpose of pure swindling.
Altcoin Scam #5: ICO is an IC-No
One of the earlier and most pernicious scams specifically involving altcoins is the initial coin offering or ICO. Paralleling the initial public offering (IPO), an ICO works under the same principle: an upstart enterprise seeks capital to expand its business. In return, investors receive some stake in the enterprise. In this case, rather than equity, they get cryptocurrencies.
On the surface, an ICO is not inherently good nor bad. It’s just another way of accruing capital for a startup, similar to how a special purpose acquisition company (SPAC) is alternative method to an IPO. Where things go wrong, though, is that the ICO is vulnerable to abuse.
Primarily, it’s easy for anyone to promote an ICO as it occupies an ambiguous zone within the regulatory structure. Therefore, it’s very important for anybody considering an ICO to perform due diligence. Even then, that may not spare you from a clever scheme.
How to Avoid Altcoin Scams
The best lies have an element of truth to them. Yes, you can make substantial profits through cryptocurrencies, far more than many traditional asset classes. But it’s also true that if you’re not careful, you can fall victim to myriad scams in the crypto space. Below are signs that may hint to a possible scam.
Spot #1: The Promise of Exceptional Profits
Statements of extreme profitability are nothing new in the annals of investment fraud. But they’re insidious in the virtual currency sector because in many ways, it’s true — people have made lifechanging profits through crypto wagers.
But no financial platform with any integrity makes any promise of profitability, especially extraordinary ones. If you’re seeing too many pictures of Lamborghinis and seductive models, you need to watch out.
Spot #2: No Risk, You Say?
Though cryptocurrencies have legitimately made some investors wildly rich, this is the exception, not the rule. Because of their decentralized nature and lack of extensive oversight, many crypto coins are fly-by-night ventures.
Even the most established virtual currencies carry incredible risk. For any entity to suggest otherwise reeks of delusion or fraud. Either way, it’s not a great sign.
Spot #3: Wild Passive Income Promises
Through innovations such as the aforementioned DeFi architecture, it’s possible for crypto enterprises to not only replicate passive income platforms but also offer much higher-than-normal yields. Thus, not every platform offering a 10% annualized yield is a scam.
But at some point, you’ve got to do the math. When you’re dealing with 1% daily returns as was the case with Bitconnect, you should question where the money is coming from. If you don’t like the answer or don’t get one at all, it’s time to put on your running shoes.
Spot #4: Requests for Information
If you ever find yourself in a fraudulent situation, the first thing you must do is damage mitigation. Sadly, the fraud may not end at the initial violation but may translate to further crimes of opportunity. The best thing you can do before you initiate any investment venture is to keep your personal information to yourself.
This is crucial when it comes to your crypto private keys and passwords. Never give up such valuable information as you will not find recourse if you become victim to a scam.
Investigate Online Altcoin Exchanges
Despite the many pitfalls involved with altcoin scams, reputable exchanges exist. As virtual currency adoption becomes mainstream, you will likely see more examples of legitimate platforms. Further, greater scrutiny and standardization should spark greater protections for individual investors.
That said, the altcoin world is still the wild west. Therefore, you should always approach any platform with extreme skepticism. Investigate the target platform inside and out. Also, check out social media posts to see what other users experienced. Though you should take anything on such forums with a grain of salt, they can provide unfiltered commentary that can inspire pointed research.
As a groundbreaking and unprecedented asset class, it’s no surprise that international laws vary regarding Bitcoin and altcoins. Generally speaking, governing bodies do not consider cryptocurrencies as legal tender and some countries are much more favorable to cryptos than other nations.
International investors will want to pay close attention to taxation laws. How regulatory agencies treat crypto-related transactions can make a huge difference in your total profitability.
Best and Trusted Altcoin Exchanges
While the topic of the top 5 altcoin scams is an uncomfortable one, rest assured that many legitimate platforms exist. Below is a list of altcoin brokers to consider.
Webull, founded in 2017, is a mobile app-based brokerage that features commission-free stock and exchange-traded fund (ETF) trading. It’s regulated by the Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA).
Webull offers active traders technical indicators, economic calendars, ratings from research agencies, margin trading and short-selling. Webull’s trading platform is designed for intermediate and experienced traders, although beginning traders can also benefit.
Webull is widely considered one of the best Robinhood alternatives.
- Active traders
- Intermediate traders
- No charges to open and maintain an account
- No account maintenance fees or software platform fees
- Intuitive trading platform with technical and fundamental analysis tools
- Only offers 14 coins
Founded in 2015, Exodus is a multiasset software wallet that removes the geek requirement and keeps design a priority to make cryptocurrency and digital assets easy for everyone. Available for desktop and mobile, Exodus allows users to secure, manage and exchange cryptocurrencies like Bitcoin (BTC), Ethereum (ETH) and more across an industry-leading 10,000-plus asset pairs from a beautiful, easy-to-use wallet. The noncustodial functionality is encrypted locally on users’ own devices, ensuring privacy, security and complete control over their wealth. Exodus is on a mission to empower half the world to exit the traditional finance system by 2030.
- Newcomers to the cryptocurrency world
- Ease of use
- Trezor integration
- Huge selection of cryptocurrencies
- Excellent 24/7 customer support
- No personal info needed
- FTX app not available on the mobile app
SoFi takes a modern approach to personal finance. It recently created buzz with the release of SoFi Crypto, a way to trade cryptocurrency on the app. The platform allows investors to familiarize themselves with crypto. It offers a high level of security, great customer support and an intuitive interface. However, it does have shortcomings with the number of cryptos offered and geographic restrictions.
- Centralization of your money
- Charges low or no fees for some functions within the interface.
- Relies on Coinbase, a very secure platform, to process transactions.
- Presents a low barrier of entry — you only need $10 to start trading.
- Currently only offers 28 coins.
eToro is headquartered in Cyprus, England and Israel. A major eToro plus is its social trading operations, which allows new clients to copy trade the platform’s best performers. Its social trading features are top notch, but eToro loses points for its underwhelming research and customer service features.
- Investors looking to CopyTrade other traders
- Simple user interface
- Several major cryptocurrencies and altcoins
- Expansive network of social trading features
- Large client base for new traders to imitate
- Only 29 coins available
Gemini is a cryptocurrency exchange and custodian that offers investors access to over 100 coins and tokens. Founded in the US, Gemini is expanding globally, in particular into Europe and Asia. Offerings include both major cryptocurrency projects like Bitcoin and Ethereum, and smaller altcoins like Orchid and 0x.
Gemini is 1 of the only brokers with multiple platform options based on skill level. New investors will love the streamlined interface of Gemini’s mobile and web apps, while advanced investors might appreciate all the tools that come with ActiveTrader.
In addition to a host of platform choices, Gemini users also have access to insured hot wallets to store tokens without worrying about digital asset theft. Learn more about what Gemini can do for you in our review.
- New investors looking for a simple mobile and web app
- Day traders looking to use technical analysis tools
- Users looking for a 1-stop-shop to buy, sell and store all of their cryptos
- Easy and quick signups — can get started in as little as a 5 minutes
- Multitude of platforms to accommodate traders of all skill levels
- Hot wallets include insurance to protect your from theft and hacking attempts
- Charges both a commission and a convenience fee for users buying and selling through the desktop or mobile app
Coinbase is one of the Internet’s largest cryptocurrency trading platforms. From Bitcoin to Litecoin or Basic Attention Token to Chainlink, Coinbase makes it exceptionally simple to buy and sell major cryptocurrency pairs.
You can even earn cryptocurrency rewards through Coinbase’s unique Coinbase Earn feature. More advanced traders will love the Coinbase Pro platform, which offers more order types and enhanced functionality.
Though Coinbase doesn’t offer the most affordable pricing or the lowest fees, its simple platform is easy enough for complete beginners to master in as little as a single trade.
- New cryptocurrency traders
- Cryptocurrency traders interested in major pairs
- Cryptocurrency traders interested in a simple platform
- Simple platform is easy to operate
- Comprehensive mobile app mirrors desktop functionality
- Coinbase Earn feature rewards you with crypto for learning about available coins
- Higher fees than competitors
The Pitfalls of Profitability
Undoubtedly, cryptocurrencies represent one of the most transformative investment classes and their underlying blockchain innovation may permanently change finance. At the same time, the extraordinary opportunities in the virtual currency space naturally attract con artists. By watching out for the top 5 altcoin scams and keeping your wits about you, you can enjoy the crypto space while being able to sleep at night.
At time of writing, the author held a position in Bitcoin and Ethereum.
Frequently Asked Questions
Are Altcoins scams?
No, altcoins merely describe cryptocurrencies that are not Bitcoin. But many altcoins are scams and you must approach each on a case-by-case basis.
Are Altcoins legit?
Some are, some are not. For instance, the blockchain architecture underlining Ethereum also forms the basis for countless legitimate applications. But many con artists view altcoins as vehicles for fraudulent schemes so investors must be extremely careful where they put their money.