Prakash U. says, “Your crypto podcast was fascinating, and the interest rates from BlockFi and Gemini for stablecoins blew my mind. You mentioned they don’t have FDIC insurance. So, to get such high rates, what are the risks?”

Susan H. says, “I love your podcast and listen to you on my morning walks with my dogs. I’m a 51-year-old married female and have worked as a paralegal for 24 years. My husband is the same age, and we’ve been married for 21 years with no children—just two very spoiled Labrador retrievers.

We have $500,000 in 401(k)s and owe about $120,000 on our home, worth about $350,000. We have a car loan and a few credit cards that equal about $20,000 of debt that I’m trying to get rid of.

I listened to your podcast about cryptocurrency and want to get in the game, as they say, so in ten or twenty years when everyone is invested, I haven’t missed the boat. My question is, where do I start? I feel so stupid and overwhelmed trying to figure it out.”

Thank you for your questions, Prakash and Susan! This post will answer them and cover who should own cryptocurrencies and NFTs and ways to avoid getting scammed.

Common cryptocurrency and NFT scams:

1. Phishing Emails
2. Ransomware
3. Fake Exchanges
4. Free Giveaways
5. Impersonators
6. Pump and Dumps
7. Rug pulls

What is cryptocurrency?

There are thousands of cryptocurrencies in circulation, but the most well-known is bitcoin. While every crypto coin is different, they’re all digital currencies you can use for payments or hold as an investment, hoping the value goes up. You keep crypto in a digital wallet, which can be on your computer, an online exchange, or an external hard drive (known as cold storage).

The main downside of owning crypto is that it’s not insured or backed by the government. So, if you lose it or store it with a company that goes out of business or gets hacked, you won’t get your money back.

Plus, the value of crypto can fluctuate wildly, even by the hour. The only exceptions are stablecoins, backed by a reserve asset, such as the U.S. dollar or gold. In other words, stablecoins peg their value to some external asset, giving them more stability. We’ll cover how to become an investor and avoid crypto scams in a moment.

What is an NFT?

Cryptocurrency is fungible, which means it’s interchangeable. Each bitcoin is the same as other bitcoins. If I exchange one bitcoin with a friend, neither of us loses anything.

But some digital assets are not interchangeable, such as non-fungible tokens or NFTs. They’re unique items, such as a digital image or file. While you might be able to physically copy any NFT file (such as a JPEG or video), owning it means there’s a record of your purchase in the blockchain.

There are many different blockchains, such as Bitcoin, Ethereum, and Solana. However, most NFTs have been created as tokens on the Ethereum network, including one of the most well-known collections called CryptoPunks. A top marketplace for buying and selling NFTs is OpenSea. Coming up, we’ll discuss how people can fall prey to NFT scams.

7 cryptocurrency and NFT scams to avoid

Here’s what every investor should know about ways criminals can steal from you in crypto and NFT scams.

• 1. Phishing Emails

Phishing scams have been happening for decades. It occurs when a fraudster convinces you to divulge private data or click on a malicious link via email. For instance, someone makes you believe they’re from a crypto exchange you use and asks for your seed phrase or that you should click a link that installs harmful software on your computer. An attacker could take all your coins or digital assets.

Instead of clicking on a link, hover your cursor over it to see the actual URL. If you want to visit the site, type the address directly into your web browser instead of clicking on a link. Never click on any hyperlinks in an email or open attachments unless you’re 100% certain what they are and who sent them.

If a URL looks suspicious or the spelling is slightly different from an honest company’s, don’t go there.

A scammer who gets control of your computer or phone via a website or mobile app can hurt you. They’re known to create phishing sites, which are replicas of sites designed to steal data or install malware, leaving you susceptible to a cyber attack. So, if a URL looks suspicious or the spelling is slightly different from an honest company’s, don’t go there.

Another scam to avoid is any communication—such as an email, text, or social media post—asking for money or help to move money. That’s a common fraud where a criminal says you’ll get a portion of the funds in exchange for your help but takes your money instead. Even if it comes from someone you know, their email or social media account could have gotten hacked.

Also, watch out for any emails asking you to reset your password or click through to handle some administrative issue on your account. Check the communication by forwarding it to the company or logging into your online account when in doubt. If there’s a legitimate issue, you should see it there.

2. Ransomware

Ransomware is a type of malware that blocks access to files or a device unless you pay a ransom. A criminal may say they’ve hacked your computer and have confidential information or used your webcam to record you doing something embarrassing. They may threaten to send it to your email and social media contacts or destroy your data unless you pay them bitcoin or another cryptocurrency.

Again, that’s why it’s so important to never click on a hyperlink, download a file, or install software that may not be legitimate. If you become the target of ransomware, don’t send money and immediately report it to the Federal Trade Commission (FTC).

3. Fake Exchanges

As crypto has become more popular and valuable, more bad actors are trying to steal it from you by setting up fake exchanges, which are digital marketplaces to buy and trade crypto. You can’t buy bitcoin or other cryptos directly from a brokerage or bank. You must create an account on a crypto platform to exchange your U.S. dollars (or other currency) into digital currency.

Beware of email or social media posts that say you can buy crypto under market value. When visiting an exchange, make sure the URL starts with HTTPS and not HTTP. Without the “S,” the site is not secure, and you should stay away from it. If you fund a fake crypto exchange to buy crypto, a scammer can take your money.

If you want to buy crypto, use a reputable exchange, such as:

• Crypto.com
• Coinbase

4. Free Giveaways

Sometimes scammers try to take advantage of you by offering something for free, such as bitcoin or an NFT, in exchange for personal data, such as your email, phone number, or mailing address. They may use that information to try to hack your financial accounts.

In the NFT world, creators can randomly airdrop tokens to crypto wallets. They may be legitimate, but they could also be sent by a cybercriminal and include malicious coding. They could try to lure you to a fake website to sell the tokens, where you’d discover they aren’t real. 

So, if you do receive an unexpected token or NFT to your crypto wallet, ignore it because it’s likely useless and potentially dangerous.

5. Impersonators

Many old-school scams rely on someone trying to impersonate a company, famous person, or authority, such as your bank or the IRS. Crypto scammers try to do the same thing by calling you to say you owe money for debt or taxes. They say you can clear up the fake problem by buying and sending crypto to their wallet within a short period.

Remember that no legitimate company or government official would call you about owing money—it would always come in the mail. Never give any caller your personal or financial information.

Remember that no legitimate company or government official would call you about owing money—it would always come in the mail. Never give any caller your personal or financial information. When in doubt, ask for the caller’s contact information and call the company or institution to ask if they contacted you.

Likewise, if a social media influencer contacts you through social media and asks for your crypto wallet password, known as a seed phrase, personal information, or money, ignore the request. Unfortunately, it’s easy for scammers to create fake social accounts and impersonate people to try and trick you.

6. Pump and dumps

A pump and dump scheme happens when someone or a group purchases a large number of investments, such as a stock or crypto, to drive demand so the price will go up or get “pumped.” Then those in the know sell or “dump” the asset for a quick profit, causing the price to dive, so everyone left with it loses out.

Always do your own research about investments and never buy something based on a tip from someone. If you see the same people buying and selling an asset, it could indicate a pump and dump effort. And if you think you bought an investment getting pumped, sell it and get out quickly.

7. Rug pulls

A “rug pull” happens when a criminal creates crypto or an NFT, manipulates its perceived value, and then steals money from investors. One well-known rug pull was the SQUID token; once its value reached a peak value of $2,850, the developers pulled the rug from investors, preventing them from selling. The coin’s value plummeted to nearly zero, leaving it worthless for owners, while the SQUID creators stole millions of dollars.

Fraudsters use various tech tactics and hidden triggers to launch rug pulls. The idea is that they hype an asset, such as on social media, get people to buy it, and leave them with a worthless investment. 

The lesson is that if a project seems cooked up quickly, the developers aren’t well-known, or the website doesn’t look legit, it’s likely a scam.

A notorious NFT rug pull happened in October 2021 when a collection of 10,000 “Evolved Apes” went on the market and sold out within ten minutes. A week later, the developer, known as Evil Ape, rug-pulled 798 Ethereum, worth about $2.7 million, from the project. That money was supposed to pay various expenses such as marketing, developing a promised video game, and reimbursing the artist.

The lesson is that if a project seems cooked up quickly, the developers aren’t well-known, or the website doesn’t look legit, it’s likely a scam. Before buying an NFT, check the transaction data to see who minted it on the blockchain and when. That’s an easy way to spot a replica. No one wants to buy a fake, especially when NFTs are supposed to be irreplaceable and unique digital assets.

How to stay safe from digital asset scams

Crypto and NFTs are relatively new and complex assets that have skyrocketed in value. Unfortunately, that’s why scammers can fool uneducated and unsuspecting investors. 

The best way to protect yourself from cyber thieves is to do plenty of research before buying a coin or NFT and use reputable exchanges and marketplaces. If anyone approaches you on social media, promises a guaranteed, risk-free return, wants your confidential information, or asks to give you something valuable, question their motivation.

While I believe there are great investment opportunities in crypto and NFTs, if something seems too good to be true, it probably is. Even if you follow the advice here, there’s still no guarantee that you can’t lose money in legitimate crypto and NFT investments.

Who should invest in crypto and NFTs?

Let’s get back to the questions from Money Girl podcast listeners Prakash and Susan. Prakash wanted to know about the risks of getting high yields on stablecoins. And Susan asked about how to start investing in crypto as a newbie. 

First, I want to emphasize that crypto and NFTs are alternative investments that don’t fit into conventional categories, such as stocks and bonds. That means average investors should own a relatively small percentage of them. For example, if you have $500,000 in total investments, including real estate, you might limit your crypto exposure to no more than 3% to 5% or $15,000 to $25,000.

However, if you’re a conservative investor or don’t max out a workplace or self-employed retirement plan, crypto may not be appropriate for you. Before making taxable investments, always max out tax-advantaged options first, such as a 401(k) or IRA. 

To learn more about buying crypto in an IRA or retirement account for the self-employed, check out 6 Ways to Invest in Cryptocurrency (Including Tax-Friendly Options).

Most crypto exchanges offer stablecoins, such as USD Coin (USDC), pegged to the U.S. dollar. Right now, you can earn up to 10% on USDC at Crypto.com. Exchanges pay high yields on stablecoins because they offer liquidity in the crypto market, allowing them to earn money by making crypto loans, similar to how traditional banks make money.

Stablecoins have been compared to money market accounts, which also strive to match the U.S. dollar; however, it isn’t an apples-to-apples comparison because crypto accounts aren’t FDIC insured. So, the high crypto yields factor in potential risk in a relatively young market with little regulation. 

While reputable exchanges haven’t caused stablecoin investors to lose money, it’s always possible. And as the market matures, we’ll likely see stablecoin yields drop significantly.

My advice for Susan is that if you’re interested in buying crypto without the volatility of coins such as bitcoin or Ethereum, purchasing a high-yield stablecoin could be a great place to start. Again, limit your total exposure to a percentage that makes sense for your financial goals and risk tolerance. 

The first step to investing in crypto is opening an account at a reputable exchange, such as Crypto.com or Coinbase. Then transfer funds from your bank account to the exchange. It may take a day or two for your account to get funded, and then you can buy any digital asset listed there.

Many exchanges offer lots of education about their coins, NFTs, and blockchain topics. Coinbase has a “Learn and Earn” function where you complete a short amount of schooling about certain coins and get paid small amounts of the currency as a reward. So, it’s an excellent platform for beginners to explore and see if owning crypto is right for them.