New tech, old scams: Don’t fall for this crypto and NFT scam

Web3 Products like non-fungible tokens and cryptocurrencies are already changing the world, a change that blockchain evangelists say will revolutionize how the internet is built, how we transfer and transfer money, how people pay for goods, and even how we navigate the world socialize emerging metaverse.

Right now, most Americans don’t give a damn. Google search shows that interest in NFTs, Bitcoin, decentralized autonomous organizations and other Web3-related innovations is already declining. A reason? Rampant fraud, experts told CBS MoneyWatch.

In January, hackers looted $2.2 million worth of NFTs from New York art collector Todd Kramer in a series of incidents. A month later, OpenSea – the world’s largest NFT marketplace – had an estimated $1.7 million worth of NFTs stolen in an alleged phishing scam. And users of MetaMask, one of the most popular crypto wallets, routinely report unauthorized transactions. According to Check Point Research, MetaMask users lost about $500,000 in a targeted phishing attack last fall.

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Google search trends for NFTs dropped significantly in early 2022.

Google


“The average selling price of NFTs and the number of accounts buying and selling NFTs weekly have also fallen,” said Anand Sanwal, a technical analyst at CB Insight. “The market plunge raises questions about the long-term prospects for NFTs, which hit $41 [billion] in sales and an explosion in VC investment in 2021.”

In another sign that fraud concerns are taking their toll, trading volume on OpenSea is down 80% in March from its peak in February, according to the Financial Times.

Expect the downtrend in NFT trading to continue into 2022, said Dan Ives, a technical analyst at investment firm Wedbush. “It’s been a very slow start for the NFT market in 2022 with some major growing pains ahead. Along with a handful of high-profile scams, a black cloud hung over the NFT market. Some bad actors have clearly picked the flower of the rose.”

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NFT trading volume on OpenSea, one of the largest digital asset marketplaces, began to decline in early 2022.

FT/CB Insights


Crypto and NFTs are also confusing and risky, said Molly White, editor of satirical website Web3IsGoingGreat.com, noting that “regulators haven’t really cracked down on the bad actors.”

“The hype and noise erode a lot of the confidence most people need to get involved,” she added. “The scams are hard to avoid.”

If you are thinking of investing money in cryptocurrencies, NFTs or so-called Decentralized Autonomous Organizations (DAO), beware of these common scams.

pull carpet

The “rug pull” occurs when a startup or influencer promotes a crypto token, NFT, or DAO project, solicits public investment, and then disappears with the money or stops updating the project. To attract investors, these projects often launch on reputable platforms or claim celebrity involvement. According to Chainanalysis, a company that tracks and analyzes blockchain trends, investors have lost nearly $3 billion to these types of schemes over the past year.

One of the most notorious examples is the “Squid Game” rug pull. In 2021, a group of developers unrelated to the hit Netflix show created a pay-to-earn crypto card game. To fund its development, the team asked public investors to buy a “squid coin,” which at its peak was worth $2,860. It crashed when the coin’s creators abruptly canceled the project, citing “stress,” and disappeared from the wallet with $3.3 million.

Such tactics are nothing new, White told CBS MoneyWatch. “It’s not even an innovative scam, it just scales well,” she added, noting that potential investors should be wary of both small schemes and well-publicized projects. “Sometimes the same scammers have done it on smaller projects [the rug pull] several times,” White said.

Wash the trade

Buying NFTs can be a frustrating experience. Some NFTs sell for millions while others gather digital dust. And some seem to explode in value after a flurry of trades for no apparent reason.

According to the Chainalysis report, some of this activity boils down to what is known as “wash trading.” In this age-old scheme, buyers and sellers of an asset work together to artificially inflate its value and make it appear as if there is significant outside interest. Sometimes the buyer and seller are the same person or company. This practice was outlawed by the Commodity Exchange Act in 1936, and the IRS prohibits taxpayers from deducting wash trading losses.

With NFTs, the goal of wash trading is “to make your NFT appear more valuable than it really is by ‘selling’ it to a new wallet that the original owner also controls,” according to Chainalysis in a report. Since some of the most well-known crypto wallets don’t require users to verify their identity, it’s relatively easy to create multiple accounts and just trade the NFT back and forth.

The report uncovered 262 users who traded NFTs back and forth 25 times using their own wallets – 110 of those users made a profit. Overall, scammers made nearly $9 million from wash trading NFTs last year, according to ZDNet.

pump and drain

Long a staple of penny stock scams, pump-and-dump schemes involve artificially inflating an asset’s value by making misleading statements and misrepresenting investor demand. These schemes are particularly common with small or obscure cryptocurrencies and NFTs, which lure investors by touting the opportunity to get early entry into a coin that could have great potential down the road.

Most U.S. states and the federal government prohibit similarly manipulative stock market scams, but crypto investors lost millions to pump-and-dump schemes over the past year.


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“With this scam, the people issuing the token get influential people to actually talk about it without disclosing that they were paid or are part of the project,” White said. “The price of the tokens shoots up because, you know, ‘Kim Kardashian is part of the project and it’s going to be big!’ Then they sell the tokens and people lose interest and the whole thing crashes again.”

Some claim that this scenario now appears to be playing out with EthereumMax, a Kardashian-promoted cryptocurrency, which recently skyrocketed upon confirmation and then quickly plummeted. Earlier this year, a group of investors filed a class action lawsuit Lawsuit attribution KardashianBoxer Floyd Mayweather, basketball player Paul Pierce, and others who claimed the celebrities received payments to promote the token, claiming early investors could earn “significant returns” from buying the currency.

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