The cryptocurrency industry has taken the world by storm in the past decade, evolving from obscurity to a trillion-dollar asset class. This makes it an incredibly compelling story of the 21st century.
As the market has grown, so too has investor interest. Many are eager to learn about cryptocurrencies and stay current with the latest trends. Unfortunately, the industry’s rapid expansion has also drawn unwanted attention from hackers and malicious actors who seek to steal sensitive data and investors’ assets.
With a market cap exceeding $1 trillion as of writing these lines, the crypto space has become a playground for cybercriminals.
Investors can safeguard their assets by familiarizing themselves with malicious actors’ most common methods to target their crypto holdings. To that end, this article aims to provide a comprehensive guide on the different types of crypto attacks, how to recognize them, and practical steps investors can take to secure their investments in the digital asset space.
- Rug Pulls
- 51% Attack
- Vulnerable Smart Contacts
- Routing Attacks
- How To Mitigate Risks While Investing in Crypto
Billions Get Lost: Common Crypto Attacks
As mentioned earlier, the crypto industry has attracted a lot of investors, with over 420 million users globally in 2023. Sadly, crypto hacks and exploits have also increased in recent years, with hackers stealing billions of dollars worth of digital assets and hurting trust in the sector.
According to Chainalysis, $3.8 billion got stolen from crypto users in 2022, with the DeFi sector accounting for over 80% of it. This is a 13% increase from 2021, highlighting the need for tighter security measures.
While crypto projects strive to implement security measures, hackers find new ways to bypass them. Therefore, investors need to do their part to protect their crypto assets.
One effective way to protect yourself is to become familiar with the most common types of crypto attacks and learn how to avoid them. Failing to understand these concepts in a fast-paced industry like crypto can result in significant losses for investors.
Let’s review some common attacks targeted at crypto investors and average users.
Phishing is a type of attack that scammers often use to trick innocent victims into giving away sensitive information like login details – for a centralized entity like exchanges, or secret recovery phrases – when pretending to be the wallet itself.
The attacker pretends to be a trusted source, and once they gain access to a user’s data, they can steal the victim’s crypto assets. These attacks often use urgent or scary messages to get people to act quickly, and they may also use fake offers of free cryptocurrencies to entice people to click on malicious links.
There are many types of phishing attacks, but these are some of the most common ones.
Fake Browser Extensions
While interacting with decentralized applications (dApps), crypto users often link different browser extensions with their crypto wallets, including MetaMask. While these browser extensions make it easier for users to interact with multiple dApps simultaneously, they can also allow hackers to exploit unsuspecting users and drain their wallets.
Hackers often create malicious extensions that are designed to resemble legitimate ones. These fake browser extensions are often used to steal sensitive information, such as login credentials and seed phrases. They can also redirect victims to fake websites and inject malware into their computers.
Crypto hackers are using more sophisticated methods to steal customer funds, and Domain Name System (DNS) hijacking is one phishing method that is difficult to identify. In this attack, hackers hijack a legitimate website and replace it with a fake interface that redirects users to a malicious website.
When this happens, unsuspecting users who try to visit the legitimate website are redirected to the hacker’s fake version. Victims then use their login credentials and private keys on the fraudulent website, compromising their accounts and granting the hacker access to their crypto assets.
This phishing attack is designed to focus on specific individuals with customized messages containing details about the target. The phisher uses prior knowledge about the victim to make the fake email or message appear legitimate.
For instance, an attack may be a fake email from a user’s “wallet provider” asking them to update their password. Once the user clicks on the link to complete the task, they may give away sensitive information.
Rug pulls are among the most popular exit scams in the crypto industry. This occurs when fraudulent developers create a new token and hype up their projects to pump the price before disappearing with investors’ funds, leaving the tokens worthless.
This type of scam is common within the DeFi and NFT markets, and its perpetrators are often tricky to track down. This is because the decentralized and pseudonymous nature of the blockchain allows these fraudulent developers to obscure their identities.
While crypto rug pulls are unethical, they are not always illegal. This is why there are two main rug pull categories – hard pull and soft pull.
This is an illegal type of rug pull executed on a code level. The perpetrators intend to defraud investors from the get-go; thus, they code malicious backdoors into their token’s smart contract to help them achieve their goal. Two types of rug pulls are under this category: liquidity stealing and limiting sell orders.
Liquidity stealing is often seen in the DeFi space, where trading platforms typically require a pool of tokens for crypto trading. Fraudulent developers can build loopholes into the contract that allow them to withdraw all the tokens from the liquidity pool, removing the asset’s value and driving its price down to zero.
Limiting sell orders is another type of hard pull where the project developers include selling restrictions on the token’s code, allowing them to be the only party to sell the token. In this situation, investors can only keep buying the token without selling it unless the developer enables it. The project owner then waits for enough positive price action before dumping their tokens, leaving investors with worthless assets.
Soft pulls are unethical but not always illegal, and this is because they do not involve code-level fraud. Dumping, or the popular pump-and-dump scheme, is a major example of this scam.
Dumping occurs when developers hype their project’s native token to draw the attention of retail investors and encourage trading activity. They often use heavy marketing, including popular social media platforms, influencers, and enticing incentives. The team also tries to build a massive community around the project, likely on Telegram and Discord.
However, after inflating the value of the tokens, the developers quickly sell off their large tokens supply chunks, causing the price to tank and leaving investors to deal with the losses. A pump-and-dump scheme can play out for years before the developers eventually pull out, which makes it difficult to identify it as a deliberate scam.
Regardless of the type of rug pull, whether hard or soft, investors always get rekt. Therefore, keeping an eye on these types of rug pulls will go a long way to help investors avoid falling victim to them.
Also known as malicious crypto mining, cryptojacking is the unauthorized use of user’s devices to mine crypto assets. Mining crypto comes at a high cost, and hackers want to reap the benefits without incurring mining costs.
A typical cryptojacking attack occurs when a malicious actor lures the victim into downloading and installing the cryptojacking software, which operates in the background of their device mining crypto. Victims often do not notice any suspicious activity on their devices, except for slower performance and occasional lags.
A 51% attack occurs when a malicious miner or group of miners gain control of more than half of a blockchain’s mining power. When successfully executed, the attackers use their majority position to rewrite parts of the blockchain.
They can delay or cancel transactions, disrupt the network, and execute other fraudulent transactions, including double-spending, which involves spending the same unit of cryptocurrency twice. This action makes the crypto asset worthless, causing investors to lose money and eroding trust.
Vulnerable Smart Contacts
Smart contracts underpin most of the activities carried out within the DeFi and NFT ecosystems. Smart contacts are specialized programs stored on a blockchain and used to automate the execution of an agreement between different parties.
However, sometimes these contacts have vulnerabilities that hackers find and exploit. Due to the large sums of money flowing through them, smart contracts become prime attack targets.
One popular smart contract vulnerability that hackers often exploit is re-entrancy. This attack occurs when a smart contract allows an untrusted external code to be executed within the original contract. This technique enables hackers to repeatedly call a contract function and drain funds.
Blockchain networks and applications rely on transferring massive amounts of data in real-time to operate efficiently. Hackers often take advantage of the anonymity offered by the protocol to intercept the data being transmitted via internet service providers.
The danger in routing attacks is that they expose confidential data and allow the attacker to siphon funds from the network without alerting users. This is because while the attack is ongoing, every other activity on the network continues as usual.
How To Mitigate Risks While Investing in Crypto
Despite the security risks, crypto assets remain an attractive investment option for investors. As such, investors should follow these safety guidelines to protect their assets when engaging with the crypto market.
Do Your Due Diligence
The importance of due diligence can never be over-emphasized; as such, you should research projects and their tokens before investing.
Remember that too much hype on social media or celebrity endorsements does not guarantee the project’s legitimacy.
Additionally, research the background of project owners. Be wary of developers who try to hide their identities or any means of verifying that they have not been involved in a previously failed project. Check the token distribution chart and vesting schedule.
Only Invest In Audited Projects
A blockchain protocol or decentralized application (dApp) is as secure as the underlying code. Any vulnerabilities in the code will ultimately endanger investors’ funds.
Smart contract audits seek to test the code and identify and fix any issues. While these audits are expensive, they are worth less than the losses that could result from a hack. Therefore, developers must ensure that they run regular audits on their platforms, and investors should always ensure to invest in audited projects.
However, remember that these audits don’t guarantee that there won’t be vulnerabilities in the code, but can assist in finding such before they occur.
Keep Your Account Secure
Use secure passwords and two-factor authentication systems to make your crypto wallet account more secure. Keeping your assets offline is the best protection, so consider using a hardware wallet. More importantly, resist the urge to store the seed phrase on your device.
Avoid Clicking On Random Links
Look out for emails, text messages, or chats on social platforms that urge you to click on random links and only interact with crypto platforms using their official website. Avoid the urge to click on every airdrop link no matter how enticing the offer is; chances are it might be a malicious link.
Stay Updated and Update Your Software
The crypto industry is constantly evolving, with new trends emerging each day. Staying updated on the latest happenings in the industry will help investors stay ahead of the curve and always protect their digital assets.
On top, make sure your software, especially your browser, is up to date. On Google Chrome, for instance, when you see the “update” button on the top bar – always click on it to install the latest updates.
The crypto industry is showing no sign of ever slowing down, and this has increased the activity of exploits and funds theft. We have considered some of the most common crypto attacks, including rug pulls, phishing, and smart contract vulnerability attacks, and how to identify and avoid them.
Hackers will likely devise even more sophisticated methods to target unsuspecting users as the digital asset ecosystem progresses toward mainstream adoption. Identifying and avoiding these crypto attacks better prepares investors to protect their assets. Implement the tips above to ensure the safety of your sensitive information and crypto investments.