Cryptocurrencies and Crypto Assets: Avoid the Hype, Get the Facts

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.

The Important Stuff

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:

  • Withdrawal Fee Scams: In these schemes, bad actors promise large returns if folks provide them with money to purchase crypto assets. Alternatively, they’ll ask people to send them crypto assets they already own. They’ll then provide fake statements showing how much money has been made. But when people try to withdraw their earnings, suddenly the scammers say that people need to pay “taxes” or “fees” to get their money back. In reality, there are no returns: the original investment is gone, and those “taxes” and “fees” are just ways for scammers to get more money.
  • Mining Scams: To understand this scam, you need a little context: computers that successfully verify transactions on blockchains are rewarded with cryptocurrencies in a process called “mining.” In mining scams, scammers invite people to provide upfront money as an investment in their “mining operation” with promises that they’ll receive returns from the cryptocurrencies the operation gets as rewards for the mining. In reality, the scammers either have no mining equipment or much smaller mining set ups than are necessary to give the promised returns.
  • Rug Pulls: These schemes are similar to "pump-and-dump" scams that often occur with securities. Scammers hype up a crypto asset to rapidly increase the price of that currency, allowing the scammers to sell at an inflated price. The scammers then disappear with the money they’ve raised, and crypto asset turns out to be nothing more than a smokescreen for a cash grab.
  • Romance Scams/Pig-Butchering Scams: In these scams, bad actors create the feeling of a trusting relationship, such as a romance or close friendship, and in the context of that relationship, claim that they need money and request that their victim sends it to them in the form of a crypto asset. In reality, the relationship is fake, and the scammers walk away with the money that is sent.
  • Imposter Scams: In these scams, bad actors call pretending to be from a legitimate company, such as a crypto asset exchange or a well-known company, and claim that something has gone wrong with a user's account. They will ask for details about the account, claiming they need the information for verification purposes. In reality, they are using that information to hack into the real account and steal the crypto assets. Imposters may also use websites with names and appearances that are very similar to legitimate companies, but when customers use those websites, they instead connect with bad actors.

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.

  • Don’t rush into anything: Scammers prey on FOMO (fear of missing out), so that you’ll be more inclined to move fast. Resist the urge: Always take a few days to consider whether you should actually move forward with an investment or purchase.
  • Talk to a trusted relative or friend: Scammers want to keep you isolated. Instead, run the proposal by a trusted relative or friend to see what they think. Often, they are able to see an issue you may not — especially if you really want the proposal to succeed.
  • Check government agency websites for scam information: State and federal regulators often issue alerts about scams that they are seeing. In addition to this page, you can also check out:
  • File a complaint: If you’ve been scammed or think someone is trying to scam you, file a complaint with state and federal regulators. Visit this page to file a complaint with the California Department of Justice. You can also file complaints with the following government agencies:
  • Bitcoin: Bitcoin (sometimes abbreviated as BTC) is the original cryptocurrency. It consists solely of computer code — there is no actual physical coin involved. People can buy and sell bitcoins, and those transactions are recorded on an electronic public ledger known as a blockchain. Bitcoin is also given as a reward to computer owners in exchange for their computers performing complex mathematical problems as part of verifying transactions on the blockchain; this process is known as mining. Ownership of Bitcoin, like almost all crypto assets, requires a public address and a private key. The Bitcoin blockchain only tracks transactions in Bitcoin.
  • Blockchain: A blockchain is an electronic ledger of transactions that is updated through a process of multiple, independent computers agreeing that each transaction is legitimate. A blockchain records the public address of the parties involved in a transaction. The transactions are grouped together into “blocks,” and each block is linked to the blocks before and after it (hence the term “blockchain”). Most blockchains are public, meaning that people can use software and websites to see all of the recorded transactions (and the associated public addresses).
  • DAO: DAO stands for decentralized autonomous organization. It is an organization that acts based on the majority of votes of the holders of the DAO’s tokens, which are generally associated with a blockchain. Although they sometimes appear to be similar in structure to entities like corporations or limited liability companies, DAOs generally are not legally registered entities (which means they do not have the same legal status or protections as those entities).
  • Ethereum: Ethereum is a blockchain that not only keeps records of transactions in its cryptocurrency (known as Ether or ETH) but also records of “smart contracts.” “Smart contracts” are not necessarily legally enforceable contracts; the term refers to the automation of certain actions, such as the sending of crypto assets, if you send the right trigger to the smart contract. There are many tokens and coins set up as “smart contracts” on the Ethereum blockchain.
  • Fiat: Fiat just means government-backed money, like the U.S. dollar or the Euro.
  • Mining: Mining is the process by which computers compete to verify the accuracy of transactions being posted to a blockchain. The computers compete by solving increasingly difficult mathematical problems. The computer that wins is allowed to verify the transactions and receive a reward of cryptocurrency.
  • Non-fungible Token or NFT: These types of crypto assets have a unique identifier that makes them “non-fungible,” or different from any other token. NFTs have been used as a way of showing ownership of unique real-life products, such as art or video clips. NFTs can be bought or sold (but, again, prices and values are extremely volatile).
  • Private Key: A private key is a way for the owner of a particular crypto asset to authorize transactions involving the crypto asset, such as sending the asset to another person. Private keys are stored in wallets. Losing a private key means you lose access to all crypto assets associated with the private key, which means you can’t make any transactions — or withdraw — those assets.
  • Proof of Work: In a proof-of-work blockchain, multiple, independent computers compete to verify transactions being posted to the blockchain by solving increasingly difficult mathematical problems. Those difficult mathematical problems require the computers to consume a lot energy, which is why some blockchains are shifting to a staking system. Proof-of-work computers are known as “miners.”
  • Public Address: A public address is the way that a blockchain tracks who owns a particular crypto asset, such as bitcoin or ether. As such, public addresses are visible to anyone who has access to the blockchain.
  • Staking: In a staking or proof-of-stake system, computers staking (or holding) the cryptocurrency associated with the blockchain (such as ETH for the Ethereum blockchain) are chosen at random to verify the transactions being posted to the blockchain. Proof-of-stake computers are known as “validators.” The chances of a particular computer being chosen are proportional to the amount of the underlying cryptocurrency that the computer has staked. In other words, if the cryptocurrency you have staked is 25% of all of the staked cryptocurrency, you have a 25% chance of being chosen as the validator.
  • Wallet (Cold vs. Hot Storage): Wallets are a way for you to store your public address and private key for your crypto assets. Because a public address and a private key are just a string of letters and numbers, a wallet can be something as simple as a piece of paper on which you’ve written those letter and numbers. Wallets can also be software that stores the public address and private key and connects you to blockchains. Wallets that are connected to the internet are called “hot wallets.” Because they are online, "hot wallets" can be risky because hackers may be able to access them. Wallets that are completely off the internet, such as a hard drive or flash drive, are called “cold wallets.” "Cold wallets" can’t be accessed by hackers, but if you lose the cold wallet, you’ll lose access to your private keys — and as a result, your crypto 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.