Editorial staff
As crypto tax professionals, we want to help you learn more about honeypot scams, how to spot them, and how a cryptocurrency accountant can help reduce your exposure to such risks.
What is a honeypot scam?
A honeypot scam is a type of scam that lures targets by offering them fake rewards such as real-world products and access to large crypto payouts. Scammers will approach would-be victims on platforms such as X and Reddit, asking for help moving funds and offering a small cut for your troubles.
Once you agree, the scammer will share a private key to a wallet filled with all sorts of tokens. However, the catch is that you need to cover the “transaction fee” with native cryptocurrencies. Once you send funds for the transaction fee, sweeper bots and automated scripts activate and will drain your wallet.
These scams are relatively cheap since they are automated and easy to run. It’s very much a rinse and repeat process, with scammers often running dozens or hundreds of scams simultaneously.
How do we spot and avoid honeypot scams?
While honeypot scams are quite sneaky, there are several clear red flags that you can look out for. They include:
- Unsolicited messages on social media platforms—When individuals contact you out of the blue about crypto with offers that are both lucrative and time-limited, proceed with caution. Bots have a tendency to use the same messages across multiple platforms and may even imitate accounts familiar to you.
- The sharing of a seed phrase or secret recovery phrase—legitimate users would never share such vital information with another person, let alone a stranger. Anyone sharing this information and requesting your help to access a wallet is almost certainly a scammer.
- Suspicious wallet activity—If your wallet is quickly and repeatedly sending out incoming funds, it can be an indication that a sweeper bot has gained access to your wallet.
At the same time, you can successfully avoid most honeypot scams by exercising common sense. As such, you must:
- Stay informed about the latest crypto scams and security developments.
- Go through your smart contracts in detail and look for trusted third-party audits before you engage with them.
- Test to see if a token is transferable or is subject to high transaction fees.
- Use honeypot detection tools such as Token Sniffer, Dextools, or Honeypot.is.
- Never import random seed phrases or secret recovery phrases into your wallet.
- Never connect your wallet to unknown apps and random links.
How can a crypto CPA help protect you from honeypot scams?
While we cannot guarantee that you will never encounter fraud, a qualified crypto CPA can help you recognize honeypot scams and take the appropriate measures to protect your assets. As your crypto CPA, we:
- Review smart contracts, liquidity pools, and transactions to spot any honeypot scam warning signs.
- Integrate honeypot detection tools into crypto wallets or use them alongside other management software.
- Keep detailed records of all your crypto transactions and flag any suspicious recurring transactions.
- Recommend a diverse asset storage mechanism to reduce the risk of losing your entire portfolio to a honeypot scam.
- Document the loss of property and report the theft to the IRS in the event a person has been affected by a honeypot scam.
Conclusion
Honeypot scams are designed to entice you into accepting what may seem like a way to earn a quick buck but instead breach your walls and clear out your investments. However, the good news is you don’t need to stand guard of your assets by yourself, because Onchain Accounting is here to help.
As crypto accountants, we can be an invaluable ally in reviewing contracts, monitoring suspicious activity, and keeping meticulous records of transactions. With the guidance of one of our experts, you can stay compliant, safeguard your assets, and stay on top of all the tax requirements in a world where the crypto rules change on almost a daily basis.
Editorial staff
