Cryptocurrency use has grown steadily since Bitcoin debuted in 2009–and now, it’s set to explode. Crypto transactions valued at nearly $35 billion are forecast for 2022, and that’s expected to more than double to 74 billion in five years. As cryptocurrencies see more widespread adoption, the question of crypto safety becomes more urgent.
Is crypto safe? The short answer is: Not right now. In fact, in the 18 months preceding June 2022, the FTC reports that more than $1 billion was lost to crypto scams.
Below, we explain why crypto is seeing widespread fraud, and outline the steps you can take to safeguard your coins.
The good news: It’s likely that crypto will become safer in the near future. Whether you’re brand-new to crypto investing or are a longtime owner of crypto thinking about expanding your stake, this guide will help you keep your crypto safe.
We’ll begin with a few basics for newbies, starting with a definition.
What is Cryptocurrency?
Cryptocurrency is a digital form of money. It’s called ‘crypto’ because it’s secured by means of cryptography in a way that prevents counterfeiting or double-spending.
Most cryptocurrencies are implemented on decentralized networks. Unlike a traditional bank that centralizes control of its currency, cryptocurrencies use blockchain technology to create a distributed ledger that operates on computers run by many parties. The value of most cryptocurrencies isn’t pegged to a particular country’s traditional currency. The exception is a special class of "stablecoins," which is typically pegged to the U.S. dollar.
For all its powerful advantages and potential, crypto has seen widespread fraud and poses certain risks.
What causes cryptocurrency risk?
There are several reasons why crypto is a target for thieves and a higher risk to investors than traditional asset classes:
- Unregulated. Lack of government oversight has drawn thieves to the cryptocurrency space.
- Untraceable and irreversible. Once a crypto transaction has gone through, there’s no way to undo it. It’s also possible for thieves to conceal their identity and vanish.
- Not FDIC insured. Bank deposits are insured against bank failures by the FDIC. Crypto holdings are not.
- Price volatility. As an emerging investment vehicle, cryptocurrency has been subject to wild price swings. For instance, the price of Bitcoin plummeted from a high of over $61,000 in October 2021, to barely $20,000 a year later.
Cryptocurrency’s relative novelty and lack of government regulation has created a higher-risk environment for investors than that of traditional investments due to widespread theft. That higher risk has brought some investors higher rewards, but many have seen large losses.
Think of it this way: investing in crypto is a bit like swimming at the beach. You often see a lifeguard posted at the beach, because swimming can be dangerous. Sometimes there are undertows or a shark sighting, or you get a leg cramp and could drown.
Investing in crypto is a similar situation. While most users don’t encounter any issues, the risk of a loss is there. The problem is that to date, the industry doesn’t have many lifeguards–systems that would help keep investors safe.
What is the current state of crypto safety?
Crypto has a long way to go to offer investors a safe alternative to traditional currency. In fact, crypto theft has grown in recent years. A cool $1 billion has been stolen in crypto from 2021 to mid-2022, the FTC reports, a level sixty times that of 2018.
In the 18-month period from Jan. 2021-June 2022, over 46,000 people reported they were victims of crypto theft. Nearly one in four dollars exchanged in crypto during that period was reported stolen, the FTC found. The median loss was $2,600, with 70% of the losses coming in Bitcoin.
How do thieves get their hands on your crypto? Let us count the ways.
What are the most common types of crypto scams?
Thieves have been creative in finding ways to purloin cryptocurrency. Here are the most widely reported types of crypto scams:
Hackers can exploit security flaws of a crypto platform to access accounts. For instance, a bug in a smart contract allowed hackers to access the Binance trading platform and siphon off 2 million Binance Coin (BNB) worth $570 million in October 2022.
Rug pulls and other investor scams
This is the biggest category the FTC tracks for consumer fraud. In a rug pull–also known as an exit scam–investors are promised outsized returns if they buy a new coin or fund its development. In fact, once the perpetrators have collected this initial money, they vanish.
A familiar scam from the stock world, pump-and-dump has made its way into the crypto arena. Organizers heavily promote a new coin, sending its price soaring.
Once the price skyrockets, the organizers sell all their shares at the top, causing the value to crash. A recent example is the Save the Kids crypto scam of 2021. A group of esports influencers known as FaZe Clan promoted this new coin, which they claimed would generate charity donations. After driving up the coin’s value by tapping their large social-media following, FaZe members liquidated their holdings, creating a price crash and leaving other investors with worthless coin.
No funds were ever donated, but the Save the Kids scheme shows just one way in which online influencers may play a part in crypto scams. In some cases, celebrities’ names are used without their consent–Richard Branson is a popular target–and in others, the influencers are actively involved.
Possibly the most cruel of all crypto theft angles, romance scams play on the victim’s emotions to steal crypto. People who date online sometimes get tips on how to get into crypto investing from their new paramour–only to discover they’ve really been unwittingly sending crypto to a thief.
Once they’ve transferred the coin, the love interest vanishes. The FTC reports $185 million in crypto was stolen in romance scams since 2021, with the median loss a painful $10,000.
Most consumers are familiar with imposter scams in fiat currency–and they also happen in the crypto world. Rather than the familiar emails purporting to be from Amazon or Best Buy, though, the FTC found the venue for crypto imposter scams is primarily social media.
The FTC reports that $93 million in crypto was stolen by business imposters in the 18 months prior to June 2022. An additional $40 million was lost to thieves posing as government agencies.
Best practices for keeping your crypto safe
With all these flavors of theft in play, how can you safeguard your crypto? There are basic security steps all investors should take, but many don’t–and that leaves them vulnerable to crypto theft. Important security measures include:
- Secure and never share your private keys, seed phrase, or passphrase.
- Don’t copy or store your seed phrase on any internet-connected device. This includes taking a screenshot of the phrase.
- Never enter your seed phrase into a dApp–no legitimate transaction will require it.
- Use a cold wallet to protect larger amounts of cryptocurrency, not a hot wallet that could be accessed by online hackers.
- Purchase hardware wallets only direct from the manufacturer’s site.
- Choose authenticator apps over SMS authentication–it’s more secure.
- Use a strong, unique password for each crypto wallet, platform, and account.
- Store passwords in a secure password manager.
- Send a small test amount to verify identity before any large crypto transaction.
- Remember, no reputable company initiates contact to ask for sensitive information. Don’t click on links in messages.
For more tips to keep your crypto safe, see our complete Web3 security guide.
What changes could improve crypto safety?
For cryptocurrency to win more widespread acceptance, the industry must implement better anti-fraud measures. Addressing the crypto security crisis is our sole focus at Dragonscale.
Changes we believe will create a more secure Web3 for all:
- Broader investor education on current security best practices. Too much is lost to thieves today that could be prevented with available measures.
- Better tooling will help users detect and prevent fraud, as well as giving regulators enhanced abilities to identify and prosecute thieves.
- Closer regulatory oversight will help discourage theft. Initial steps in this direction are already being taken in the US and EU.
- Off-chain input is needed. It takes a village to make crypto safe–that’s why we’re building a community that will share their insights, detect suspicious patterns, spot questionable activity, and help prevent theft.
- Advanced machine learning applied to on-chain data, combined with community knowledge, will create more robust security solutions.
We believe crypto will become safer in the future, thanks to industry innovations like those Dragonscale is undertaking. The crypto industry can evolve to prevent and detect fraud, helping law enforcement agencies catch and prosecute thieves.