Crypto and Investment Scam Statistics for 2024

What signs should investors watch for that may indicate an investment or crypto scam?

There is a lot to say about both. In general, most crypto scams would involve sending payment to an address (do not if you do not know what that is with 100% certainty!), being directed to sites that will ask personal info (like passwords from Coinbase, etc. -- NEVER share passwords because no site randomly decides to "verify" them), do not pay for something from someone you do not know (unlike credit card transactions, you cannot dispute cryptocurrency transactions), do not send money/account info to get "verified" with the expectation you will receive something (that's a scam, most likely). Most of these scams have a cash version. 

Don't invest in response to email from an unknown source, or by links from Twitter, etc. 

Investment scams are another area entirely. But in general, when promised a hefty return, it is useful to ask yourself the question "what am I doing to deserve this money?" I mean, is capital really expensive to come by? Am I skilled at identifying the best investments and that is why I can get them for cheap? How do I contribute? If this answer is unclear, it's a scam. 

In general, buy from reputable places (known brokerage firms, websites that are reputable), understand the risk (initial coin offerings can go to zero easily) and understand the product (do I need to maintain a margin account? How large?).

If someone realizes that they're being scammed, what should they do?

Police, FBI, or reportfraud.ftc.gov for crypto scams.

There was a huge spike in investment-related scams in 2020. Why do you think we saw such an increase in 2020, and do you anticipate a continuation in 2021 and beyond?

Everyone stayed home, including those who scam, so there was more time on their hands. Also, everyone had to overly rely on technology, so we all were more likely to read email, click on links etc. 

I expect scams to continue, although perhaps at a lower rate. While we may be on our phones and computers less, software that allows snooping or launching ransomware attacks, etc. is more and more easily available on the dark net, so more and more thieves may decide to buy and use this software. 

Who has a responsibility to educate consumers about these kinds of scams?

Consumers have the responsibility to educate themselves. They should not be afraid to ask questions, do their research, take free courses online and at universities. The government should sponsor and encourage such programs. Financial literacy, also, should be part of a person's credit score. 

Anything else to add about investing scams?

Do not make the assumption that cryptocurrency payments are private. In fact, they can be undone, as it happened with a ransom paid recently.

What signs should investors watch for that may indicate an investment or crypto scam?

The old adage --if it sounds too good to be true, it probably is -- fully applies here. 

Generally, watch out for anyone who offers guarantees, especially in this market. Anyone "guaranteeing" that they will generate market beating returns is lying -- either to themselves or to their investors. 

If someone realizes that they're being scammed, what should they do?

Contact the Consumer Financial Protection Bureau and submit a report to the Federal Trade Commission. Both have very neat websites with the ability to harvest reports by victims. And both offer plenty of resources and information on the most common scams and on what to do if one falls victim. 

There was a huge spike in investment-related scams in 2020. Why do you think we saw such an increase in 2020, and do you anticipate a continuation in 2021 and beyond?

I do not believe there was a significant rise in the frequency of scams –- rather, there were market movements that revealed the scams. Truth is, scams are always there. But they are often revealed during times of market turmoil. As Warren Buffett famously said -- "Only when the tide goes out do you discover who's been swimming naked."

While I don't think the actual rate of scams is the main driver here, the influx of unsophisticated traders into markets might have moved the needle a bit -- let's just say the supply of scams has not necessarily increased, but the "demand" for them might have. Not that young, inexperienced traders are begging to be scammed -- no one wants to be the victim, of course. But the prevailing mentality among a certain group of investors who have become active for the first time during the pandemic is one of "big or bust." The reddit investor is not looking for safe, conservative, stable investments to fund their retirement. Rather, the goal is to find the next big thing that will offer lottery-like payoffs.

Clearly, that kind of mentality offers fertile grounds for scams. And let's be honest –- the current ethos among tech start-ups is "fake it until you make it." Sometimes the line between the genius, daring entrepreneurs we celebrate and the scammers we despise is a lot thinner than we would like to recognize. 

Who has a responsibility to educate consumers about these kinds of scams?

First and foremost, it falls on educational institutions. Higher ed has a responsibility to impart technical knowledge—to give all students at least a basic understanding of how markets and financial instruments work. We live in a society in which we are all captive investors. There is no opt out here -- so everyone needs to have at least a basic working knowledge of personal finance.

Yet, even before that, primary education institutions have to sharpen their teaching of critical thinking skills. There is a parallel here between individuals unable to spot a blatant financial scam and individuals believing outlandish political claims or nonsensical "fake news" about the pandemic. 

Regulators also have to play a role. Rational decision making is predicated on having access to timely and truthful information -- regulators must ensure that is the case. 

Yet there is no silver bullet. It is impossible to protect investors from their own greed. 

Anything else to add about investing scams?

I think one aspect that often gets lost is the moral argument. The sad reality is that we in higher education, especially in business schools, have not done enough to emphasize the moral side of business and investing.

People fall for scams, often, because of greed. Not always, of course -- there are plenty of blameless, innocent victims. Yet, oftentimes, scam targets are well aware of being involved with a scam. They just don't realize they are themselves the victims. Look at Bernie Madoff, the mind behind the largest Ponzi scheme in the history of financial markets. Many of his clients knew there was no legal, legitimate way to generate the returns he had been promising. Yet, they were satisfied by hints of insider contacts and trading on insider information. They were very happy to invest with Mr. Madoff even though they thought he was breaking the law. When they found out he was, indeed, breaking the law, but at their expense, they were outraged.

And, to be clear, I am not saying that applies to all of his victims -- far from it. But certainly the large, sophisticated investment funds who were playing along had enough skill and expertise to know something was off. They chose to ignore it. The best way to avoid being mugged is to walk on the bright side of the road.

The proposed scam investments share one unique characteristic: they all appeal to greed. They promise unrealistically high rates of returns fast.

Many scammers explain that such returns are achieved because the company, investment, or cryptocoin invents or uses new technology or because "we live through the technology revolution." Often, scammers refer to the high performance of "similar" companies or instruments (like Bitcoin), hiding the downside or extreme volatility. For example, they can say that Etherium went from $200 to $4,000 in less than a year but ignore that it dropped 50% after reaching the peak.

How to prevent those scams from ruining the investors? For public companies, go to Edgar.gov and study the SEC filings. Pay attention to risk disclosures. For crypto-assets, unless you feel that you know the space, you should stay away. Most of the crypto assets are not connected with assets or future cash flows. In other words, it does not have any intrinsic value. The asset's value is determined by supply and demand driven by the expectation of the future price.

Dogecoin here is the case in point. The cryptocurrency that was created as a joke reach a capitalization of $85 billion. The best analogy for such assets is the price of rare objects like black tulip bulbs, baseball cards, or defunct Enron stock certificates.

It is important to note that at least some digital coins can be considered by SEC as securities offerings. It means that there should be some information on those assets in the public domain above what the creators put on their web pages. However, even in those cases, the number of violations is enormous and exceeds the violations in the normal IPO process by orders of 
magnitude.

Bottom line: follow the Buffett rule and invest only in the assets you understand.

What signs should investors watch for that may indicate an investment or crypto scam?

In penny stocks, crypto, or any potential investment, I would encourage investors to watch out for some well-known red flags of fraud. These include claims of high guaranteed returns or assurances that the investment carries little or no risk. Fraudulent promoters often use language such as "zero risk" or "guaranteed profit" in their sales pitch.

Crypto assets certainly have substantial risk, especially since their value is not tied to an underlying business model that generates cash flows that can be reported on a financial statement and audited by third parties. Even a well-accepted cryptocurrency like Bitcoin is subject to highly volatile returns. In the past 90 days, its price has dropped from a high of $63,000 in April to just over $34,000 as I type these notes. That is a drop of −46% in a very short period. Coins with a smaller market capitalization, lower following, and those that are more difficult to trade (e.g., not available on Coinbase), will likely experience even larger percentage changes in their price. 

Other hallmarks of investment or crypto scams are unsolicited sales pitches, pressure to invest right away, claims that "everyone is buying it," and sellers that are unregistered. Investors can check an investment professional's background, registration status, and other information at this SEC website: www.Investor.gov. If it sounds too good to be true, it probably is.

I would encourage potential investors to exercise extreme caution when investing in crypto assets that have a very small market capitalization. Similar to penny stocks, these are preferred vehicles for conducting fraud because small changes in trading can result in large price swings. Fraudulent promoters can employ classic pump-and-dump schemes by purchasing a large amount of a token with a small market capitalization that is thinly traded (which we call illiquid). 

My analysis of penny stocks shows that vulnerable investors—older, low income, low education—tend to do worse in promoted stocks. I suspect the same is true in crypto scams.

There was a huge spike in investment-related scams in 2020. Why do you think we saw such an increase in 2020, and do you anticipate a continuation in 2021 and beyond?

The spike in scams in 2020 is likely tied to other factors pushing up all asset prices (homes, stocks, collectibles, etc.). We had unprecedented government stimulus, which injected trillions of dollars into the economy. This stimulus resulted in an incredible amount of money stock in the economy. The graph of M1 Money Stock at the St. Louis Fed paints some of this picture—there were large amounts of cash placed in the hands of potential investors.

Couple this cash infusion with advances in technology and platforms that allow for trading in crypto assets, as well as mature social media platforms like Twitter where well-known celebrities were touting their support for crypto assets, and this makes for a great opportunity for scammers. I also believe that widely publicized news stories about enormous investment returns in meme stocks and other asset classes raised anxieties among individuals about missing out on investment returns. Scammers are constantly trying to exploit the so-called "fear of missing out" or "FOMO."

Who has a responsibility to educate consumers about these kinds of scams? 

There are several regulators trying to enforce laws in this space, including the SEC, CFTC, IRS, Treasury's FinCEN, and even the Department of Justice. However, the decentralized nature of cryptocurrency makes them both appealing to investors and simultaneously challenging for regulators to enforce. So, the role of investor education is paramount for crypto assets.

The SEC regulates and enforces securities laws for start-ups trying to fund their business through initial coin offerings (ICOs). The SEC's Office of Investor Education (OIEA) has put out investor alerts on trading schemes and regularly issues alerts on investment fraud and scams.

The Commodity Futures Trading Commission (CFTC) plays a big role in regulating and enforcing crytpocurrencies, which are treated like commodities. The CFTC also has a dedicated website for crypto asset education, and provides advisories, primers/backgrounds, brochures, and even podcasts.

The Department of Justice conducts criminal investigations into wash trading or manipulation in this space. The Cyber-Digital Task Force published a nice report last year on their enforcement efforts in the crypto space. However, the DOJ seems to focus more on enforcement than education.

I have also read articles about the DOJ working with Treasury's FinCEN when banks are involved and the CFTC (who regulates derivative trading in Bitcoin and Ether) if the fraudsters use derivatives in their activities.

The Financial Industry Regulatory Authority (FINRA) also provides some crypto education resources.

Anything else to add about investing/crypto scams?

I would just reinforce to investors that crypto assets are highly speculative and, thus, investors should exercise extreme caution and conduct extensive research on both the asset and trading platform before making these investments. If an investor decides they want to invest in a crypto asset and can tolerate the extreme amounts of risk, I would be sure it is part of a well-diversified investment portfolio and consider limiting your holdings to a small fraction of that portfolio due to its return volatility.