You’ve probably heard of cryptocurrencies like bitcoin and ether, or perhaps you’ve seen celebrities promoting digital “tokens” or “coins.” But what exactly are these crypto assets? And how can you stay safe with your money and avoid getting scammed? This page provides information that you should know, including the meaning of common terms; answers to common questions about crypto assets; red flags for common scams; and tips to stay safe.
First, let’s discuss what we mean when we talk about “crypto assets.” They include cryptocurrencies, tokens, coins, non-fungible tokens (aka NFTs), stablecoins — essentially, any form of asset that is exclusively digital. Most crypto assets, like cryptocurrencies, are associated with blockchains, which are internet-based ledgers of transactions in specific crypto assets.
Second, it’s important to know that the values of crypto assets are extremely volatile, and purchasing or investing in them involves a very high degree of risk — you should not use any money that you cannot afford to lose.
Third, unlike money that you have in the bank, which is federally insured up to certain amounts, or stocks and bonds with certain kinds of brokerage firms that offer some government protections, there is no government guarantee or insurance for crypto assets. In fact, because crypto assets are still pretty new, regulation of them is still in its early stages. In other words, statements that crypto assets are FDIC-insured or SIPC-insured are false — and are a red flag for a scam.
Finally, regardless of what anyone tells you, investing in or purchasing crypto assets does not guarantee that you’ll make a lot of money — and if someone is making that promise, that’s a sign that their real goal may be to take your hard-earned cash.
Even when there are no scams involved, crypto assets can be risky, especially if you don’t have enough information to make sound judgments about how you’re spending your money. Read on for key facts about crypto assets:
Unfortunately, there are tons of scams involving crypto assets. To help you stay safe, here are some common types of scams to look out for:
So, how do you protect yourself from scams? Watch for the following signs:
🚩 Guarantees of large returns in exchange for money or cryptocurrency: If it sounds too good to be true, it probably is. Remember, there are no guarantees of large returns with crypto assets.
🚩 Token names that are similar to well-known cryptocurrencies: Scammers will use names for their tokens that are incredibly similar to cryptocurrencies like bitcoin and ether in hopes that you will either assume their tokens are the real thing or that they are associated with the real cryptocurrencies. Look at the name carefully, and do a little research (especially on government agency websites like the ones listed in our “Tips to Stay Safe”) to see if the crypto asset is legitimate.
🚩 Requiring payments in cryptocurrency: No legitimate companies will force you to pay in cryptocurrencies or other crypto assets.
🚩 Requiring large upfront payments: Requirements that you pay a significant amount of money to participate in a particular money-making venture is a signal that you are being invited to a scam.
🚩 Unsolicited phone calls or emails: Never give your account information to someone who calls or emails you unsolicited, even if they claim they are from a legitimate company. Instead, hang up the phone or close the email, go to the company’s website, and use the phone number or email on the website to contact the company.
🚩 Celebrity endorsements: Not all celebrity endorsements mean that the underlying crypto asset is a scam, but it’s important to remember that celebrities get paid a lot of money to promote these assets.
Q: Are crypto assets safe?
A: It depends. The most important point to remember is that the values of all crypto assets have been extremely volatile, and you shouldn’t invest any money that you aren’t comfortable losing. It’s also important to remember that crypto assets don’t have the same government protections as money in banks, or stocks and bonds in certain brokerages. In other words, you could lose all of your money either because the value of the crypto asset goes to zero or because the assets get stolen and there’s no government insurance to pay you back.
Q: Can I use my crypto assets to pay for my groceries?
A: Some retailers have announced that they will accept cryptocurrencies as payment, but so far, paying for everyday items with cryptocurrencies isn’t a mainstream practice — and legitimate businesses won’t force you to pay with crypto assets.
Q: Are crypto assets anonymous?
A: The transactions on blockchains are generally public, and the public address of the people involved in the transaction displayed. If someone knows your public address, they can see all of your purchases or sales on the blockchains where you use that public address.
Q: Where do I buy or sell crypto assets?
A: There are a variety of ways to access cryptocurrencies or crypto assets, such as through exchanges, marketplaces, and cryptocurrency ATMs, some of which are riskier than others. Check out our red flags above to help determine whether the place where you want to buy, sell, or hold your crypto assets could be a scam.
Q: What does “not your keys, not your coins” mean?
A: Some people believe that unless you have your private keys, you don’t really own the crypto asset. This issue often comes up with regard to crypto asset marketplaces and exchanges that hold all of their customers’ crypto assets in the marketplaces’ and exchanges’ own wallets — in other words, the exchanges, rather than the customers, have the private keys for the crypto assets.
Q: Will I get my crypto assets back if the company I’m holding them with goes bankrupt?
A: It’s not clear. Unlike banks and registered stock brokerages, there are not clear bankruptcy rules for companies that hold crypto assets for customers. It also depends on what the companies holding the crypto assets are doing with those assets. If they are lending their customers’ crypto assets to other companies (and getting paid interest, which they then pay to their customers), there is greater risk that customers would not be able to recover their crypto assets if something goes wrong at the company.
Q: What is a “proof of reserves” report and can I rely on it?
A: It is not a good idea to rely on a “proof of reserves” report. Those reports claim to show how many crypto assets companies are holding in their wallets at a particular moment in time. But, the reports generally don’t look at things like whether the company borrowed any of those crypto assets (meaning the crypto assets actually belong to other people). And, the reports don’t guarantee that the company still has those crypto assets after the date of the report.
Importantly, proof of reserve reports are not audits. Audits require companies to provide a lot of information to the auditor and result in reports that give a detailed picture about the financial health of a company. Proof of reserve reports can’t and don’t provide that full picture. For more information on proof of reserve reports, you can also check this Investor Advisory from the Public Company Accounting Oversight Board, which oversees audit standards.
Q: I’ve heard about companies that will help me recover stolen crypto assets. Should I use one of those?
A: First, if you lost your crypto assets through a telephone transaction, it is illegal for companies to charge you any fees unless and until they have recovered your crypto assets. Even if you did not lose your crypto assets through a telephone transaction, it isn’t a good idea to use a company that asks you to make an upfront payment before they will help you—you could end up wasting that money because there’s no guarantee that you’ll get your crypto assets back. Instead, if you’re thinking about using a recovery service, look for companies that only get paid if they actually help you get your crypto assets back.
Second, do your research on companies to make sure they are legitimate, especially if they want you to provide sensitive information to them. Look for reviews of the company, and ask if you can contact one or two customers who have worked with the company. Check the company’s name against government agency websites, like the California Department of Financial Protection and Innovation’s Crypto Scam Tracker. If you have reported your crypto assets stolen with local law enforcement, such as your local police department or sheriff’s office (which we recommend!), ask the law enforcement agent about the company.