How Safe Are Crypto Exchanges? Warning Signs to Heed

Written by

Paulo Oliveria

Cryptocurrency Writer

Published Dec 12, 2022 at 9:23 AM
Last updated Feb 23, 2024 at 6:26 PM

It is essential to learn the answer to the question: “How safe are crypto exchanges?” before considering depositing money in one. The crypto industry is becoming more mainstream, and many people are looking to invest to fight back against inflation and a lack of viable alternative investments.

However, the sector is rife with scams as shady companies use digital currency's anonymity and decentralized nature to create unregulated cryptocurrency exchanges. Through this process, they can steal money from unsuspecting consumers.

Estimates vary, but according to the Federal Trade Commission (FTC), over 46,000 people have reported losing more than $1 billion to crypto scams. Moreover, the mean reported loss per person is $2,600!

Therefore, it is clear that you have a lot to lose by choosing the wrong company and encountering crypto exchange problems. This guide outlines warning signs to watch for when selecting an exchange, and hopefully, this information will reduce your risk of becoming another victim.
 

Why Do Scammers Create Fake Crypto Exchanges?

Before we investigate the most common scams, let’s delve deeper into why so many shady, unregulated crypto exchanges appear.
 

To Profit From a Growing Trend

Cryptocurrency is a hot topic, with over 59 million Americans alone owning digital currency in 2021. In September 2022, there were almost 270,000 Bitcoin transactions per day!

There are many different reasons why people get involved. For some, there is a genuine belief that digital currency is the future of money. Others are investing in the technology, while for certain investors, crypto is ‘easy money.’
 

An Abundance of Easy Targets

These casual, inexperienced investors are most likely to fall prey to crypto exchange issues. Such individuals fall for tales of fast-rising assets and are looking for a quickfire return on investment. They believe the stories of people who became millionaires from digital assets overnight too easily and walk headlong in traps.

For unregulated cryptocurrency exchanges, these naïve investors represent ‘easy money.’

 

Fake Crypto Exchange
Spotting Fake Crypto Exchange

Crypto Payments Aren’t Reversible

You simply must know the answer to the query “How safe are crypto exchanges?” before investing because once you make a payment, there’s no turning back. Only the receiving party can refund the money. Let’s face it; the scammer isn’t suddenly going to develop a conscience and give you the cash back!
 

There Is No Bank Protection

As cryptocurrency is decentralized, there is no interference from financial institutions. This is fantastic news for anyone who wants to prevent banks from controlling their money. However, it also means that if you get scammed, there is no financial authority to complain to.

Also, if a crypto exchange goes to the wall, you will lose whatever money is inside your account. In contrast, banks in the United States are usually insured by the Federal Deposit Insurance Corporation (FDIC). If your bank fails, the coverage protects you for up to $250,000. There are similar protections in place for bank customers all over the world.

Now that you understand the reasons behind fraudulent exchanges' growth, let’s learn a little more about the types of scams.
 

What Are the Most Common Scams?

Unfortunately, there are an alarming number of different scams. For the sake of brevity, we will focus on five ‘standard’ scams.
 

1. The Rug Pull

This scam involves a group hyping a new non-fungible token (NFT), cryptocurrency, or project to earn funding. Once the fraudsters get paid, they disappear into the night. If you try selling your now worthless investment, you’ll find that the coding prevents you from making a sale.

The Squid token fiasco of October 2021 is a prime example of a rug pull. Scammers released a crypto project inspired by the Squid Game drama that has captivated Netflix audiences. Its value skyrocketed to over $2,800, but then the creators cashed out, causing the token to become worthless. According to some reports, they walked away with at least $3 million.

 

Most Common Steps
Most Common Scams

 

2. BTC Investment Schemes

This trick uses the universal popularity of Bitcoin to succeed. Scammers contact unsuspecting individuals and claim they are investment managers. They spin a tale about how crypto made them millionaires and promise to do the same for clients.

After requesting an upfront fee, they disappear. They may also request personal identification information, which they say is necessary for depositing or transferring money. Through this process, they can also access a person’s crypto wallet and steal from it.
 

3. Phishing

The classic phishing scam involves sending emails with links to fake sites to gain personal details such as crypto wallet login information. Since there is only one private key to a digital wallet, changing it is a major undertaking if it gets stolen. At this point, your money is gone in any case.
 

4. Man-in-the-Middle

The man-in-the-middle attack intercepts information sent through a public network, including crypto wallet keys, passwords, and bank account details. A virtual private network (VPN) can help block these attacks. Also, never try to access financial information on a public Wi-Fi network.
 

5. The Fake Exchange

Fraudulent, unregulated cryptocurrency exchanges are the subject of this article, which is why we have saved the worst for last! These entities lure you in with promises of a quick and easy fortune, only to grab your deposit and vanish. Remember, at this point, you have no way of getting your money back.
 
Therefore, it is wise to learn as much as possible about differentiating a fake exchange from a real one.  
 

10 Ways to Spot a Fake Crypto Exchange

The good news is that uncovering the deception carried by fraudulent crypto exchanges is relatively easy once you know what to look for. Read these ten signs of a fake company. If you spot even one when looking to invest in an exchange, steer clear!

  1. Lack of a Local Exchange: You can convert real cryptocurrencies into local or fiat currency. Therefore, it is a major red flag if the exchange only offers coins you must exchange internally.
  2. The Crypto Only Goes Up in Value: On scam sites, coins only increase in value, usually at a remarkable rate. Also, this rise happens even if the general crypto market experiences a fall. The Squid token’s value rose suspiciously fast, for example.
  3. Promises of Enormous and Consistent Returns: Scam cryptocurrency exchanges also insist that investors will experience incredible returns, typically in a short timeframe. Ignore any site that “guarantees” anything; crypto is far too unpredictable and volatile to make promises about.
  4. High Deposit and Withdrawal Minimums: Most reputable exchanges allow you to get started with a few bucks. In contrast, fraudsters tend to show their greed from the beginning by demanding high minimum deposits of $200+. Moreover, they also set the minimum withdrawal limit to hundreds, if not thousands, of dollars.
  5. A Lack of Liquidity When Trading: Visit a reputable site like Binance, and you’ll marvel at the astounding level of trading activity. Since scam sites (hopefully) have few users, liquidity is suspiciously low, with very few orders.
  6. Lack of Information About the Exchange Online: Top-rated exchanges are well known. If you spot a site with practically no information written about it online, avoid it at all costs! It is also worth checking customer reviews to determine whether the site has scammed customers.
  7. No Information on Insuring User Funds: Exchanges such as Binance and Gemini insure their user’s funds. Sites that lack information about such protective measures are not the right fit.
  8. Offers of Free Coins: This trick gets you on board with the promise of free cryptocurrency, which is, of course, worthless. The site gets some personal information and bombards you with emails until you relent and get your ‘free gift.’ However, you don’t get the coins until you make a deposit. You can guess what happens next.
  9. Cold Calls: Major exchanges will not phone you out of the blue with ‘special offers,’ nor will they send you download links. Don’t click on these links, and hang up the phone!
  10. Fake Apps: Scam crypto exchanges might invite you to download an ‘official’ app of a well-known company via email. Instead of clicking on the link, go to the reputable company’s website and find the app there.

Examples of Fake Crypto Exchanges

Some people ask: “Who regulates cryptocurrency exchanges?” It depends on what part of the world you live in, as regulations differ from one country to the next. In the United States, for example, exchanges fall under the regulatory scope of the Bank Secrecy Act (BSA). Other countries will have similar entities charged with overseeing exchanges.

While unregulated cryptocurrency exchanges aren’t always scams, a high percentage are. South Korea has had its fair share of such fraudulent companies. In 2017, authorities exposed BitKRK as the fake company it was. Its creators deliberately named it after the Korea Exchange (KRX). South Korean authorities also uncovered Coinbit and Komid as fake companies, seizing the organizations and making several arrests.

With a little research, you can learn more about the growing number of scam sites online. Here is a regularly updated list featuring fake cryptocurrency trading platforms.

 

Fake Crypto Exchange Examples
Examples of Fake Crypto Exchanges

However, you can also lose money from seemingly reputable sites. FTX, for example, made several acquisitions to ensure it became a “well-regulated” crypto exchange. In November 2022, FTX collapsed, leaving a trail of devastated investors in its wake.

Critics of FTX and its founder, Sam Bankman-Fried, suggest that the failure was down to human error, not crypto. Illia Polosukin of Near Protocol and Unchain Fund argues that the FTX empire was analogous to the overleveraged institutions that played a huge role in the 2008 financial crisis. In essence, the exchange was neither decentralized nor transparent.

Consequently, one must look behind the curtain to analyze the activities of an exchange’s founders. In the case of FTX, it began as a legit company, but the actions of its founder resulted in its demise. There is plenty of information about his unethical conduct on the web.
 

How Safe Are Crypto Exchanges? Don’t Be a Victim!

Reputable exchanges with a relatively long history, such as Coinbase and Binance, are fairly safe. However, as the FTX scandal proved, knowing what’s happening behind the scenes is imperative.

However, we can tell you that straying away from ‘mainstream’ exchanges is typically a bad idea. There are plenty of crypto scams, and too many gullible people fall for them every single day.

Follow the tips outlined in this article to ensure you don’t fall prey to fraudulent exchanges. Always perform due diligence on the crypto exchange you use, and keep informed about its activities to ensure your investment remains secure.