The value of Bitcoin has fluctuated over, going up and down and then it has come back up again. Bitcoin’s meteoric first rise in prices in 2017 awakened mainstream interest in the original cryptocurrency.Over the years, it has truly taken investors, and anyone interested in the cryptocurrency, on a roller coaster ride. But the rise in interest has not been without consequences. Only time will tell whether Bitcoin, which has been controversial since its introduction in 2009, will continue booming or if the bubble will burst and prompt more people to short sell bitcoin.
One of the downsides of new investors entering the market is the increase in the number of scams, frauds, and stories of retail investors who lose their coins to shady ventures. From ICO scandals to wallet theft and fraud, regular consumers can fall prey to crime easily.
One thing is for sure though: Bitcoin’s meteoric rise has attracted a lot of attention. People may not understand the technology or philosophy behind Bitcoin, but they do see stories of early adopters and savvy investors who turned a few thousand bucks into millions when Bitcoin’s value increased as it did in 2017.
It may seem as though it’s the Wild West for investors, but it doesn't have to be. While there are certainly risks in the market, the opportunities may be irresistible for some. However, being cautious is always a must, and there are clear signs of scams that investors can look for. By avoiding these traps, users can better their chances of success and protect their investments. These are some of the most common scams and how they can be avoided.
Unfortunately, anyone chasing that fortune can also just as easily fall victim to hackers who perpetrate Bitcoin scams. One of the benefits of cryptocurrency is that it’s unregulated by the government and very private. But that also makes it ripe for bitcoin fraud.
- Bitcoin investors can increase their odds for success by identifying common scams, such as Ponzi schemes, fake ICOs, and fraudulent exchanges.
- One common scam, exposing bitcoin users to theft, is the sale of a hardware wallet with a compromised pre-configured seed phrase, which allows hackers to steal funds.
- Since bitcoin exchanges are unregulated, fraudulent exchanges can trap investors with the promise of unrealistic prices and heavy discounts on use.
- Websites featuring fake ICOs instruct users to deposit funds into a compromised wallet through their site, resulting in the theft of funds.
If you're interested in Bitcoin, be aware of these potential scams.
Fake Bitcoin Exchanges
In 2017, South Korean financial authorities and the local Bitcoin community exposed one of the most insidious Bitcoin scams: a fake exchange called BitKRX. It presented itself as part of the largest trading platform in the country and took people’s money.
Hardware Wallet Theft
For users who are concerned with security and privacy, a hardware wallet—a physical device that stores their private keys—is an increasingly popular option. Usually, as small as keychain USB drives, these wallets offer an offline way to help crypto investors protect their bitcoin even further. However, there have been reports that some of them have built-in vulnerabilities that open them to hackers that could easily steal all a user’s holdings.
This creates a backdoor that allows hackers to drain funds once a wallet is activated. These scams are becoming more common, but they can easily be avoided by only accepting wallets from trusted sources.
Bernie Madoff may be one of the most well-known Ponzi schemers. He did it with mainstream investments. But the principle of a pyramid schemes in which you take money from new investors to pay previous investors, can be applied to Bitcoin scams. In 2019, three men were arrested in a $722 million cryptocurrency fraud scheme. The men operated BitClub Network for years. The scheme solicited money from investors in exchange for shares of cryptocurrency mining pools. It also supposedly rewarded investors for recruiting new investors. As you can imagine, the investors never got any returns on their investments in the end.
Despite their decentralized nature, most cryptocurrencies are still bought and sold at exchanges. While this makes it easier to find the coins investors desire, there is still no regulatory body overseeing these exchanges in many countries. Thus, many investors have been left penniless when the exchanges they signed up for turn out to be traps. In December of 2017, several South Korean exchanges were exposed, leading to promises of stiffer regulations by the country’s authorities.
These scams are not hard to spot but can be costly if not avoided. One of the biggest red flags is the promise of unrealistic prices. Exchanges that promise heavy discounts on bitcoin use this strategy to lure in unsuspecting victims.
Additionally, users can check exchanges’ URLs. Web addresses should always begin with HTTPS, a sign that traffic is encrypted. Visiting unsecured websites is a bad idea, but alert investors can avoid losing thousands by looking for the right signs.
A common scam is to present a new cryptocurrency as an alternative to Bitcoin. The idea is that it’s too late to cash in on Bitcoin and that you need to invest in one of these up-and-coming cryptocurrencies. My Big Coin was shut down for this reason. The fraudsters behind My Big Coin took $6 million from customers to invest in the fake cryptocurrency and then redirected the funds into their personal bank accounts.
One of the best results of the cryptocurrency boom has been the rise of the initial coin offering as a way for companies to raise capital. With thousands of new blockchain-based companies entering the market with unique ideas and exciting projects, users can now back their favorite businesses easily. However, this massive explosion of ICO opportunities has inevitably raised the specter of fraud.
There are several ways scammers can separate investors from their bitcoin. One popular method involves creating fake websites that resemble ICOs and instructing users to deposit coins into a compromised wallet. Other times, it’s the ICOs that are at fault.
Centra Tech, for example, a blockchain venture backed by several celebrities, has been sued in the US. The company stands accused of portraying fake team members, misleading investors, and lying about their products. The best way to avoid these scams is close research that involves picking apart the white paper, reviewing the team behind the venture, key board members, and investors. Before making any investment, it’s vital to learn as much about the company as possible to avoid any unpleasant surprises.
Old School Scams
If somebody emailed or called and said they were from the IRS and that you owed back taxes that had to be paid immediately, would you send them money? Unfortunately, many people do. Instead of having the victim wire money via Western Union or transfer funds to a bank account, con artists are contacting victims and demanding that victims transfer bitcoins. The best way to avoid this scam is to be skeptical of phone calls or emails that say they're from a government agency. Legitimate authorities wouldn’t contact you that way—and they won’t ask for bitcoins.
Cloud Mining Schemes
Mining is the only way to extract new bitcoins without buying or exchanging them, but it has become an incredibly resource-intensive activity. Due to the unique way new coins are mined, it takes massive amounts of processing power and electricity, and thus money, to mine a coin. However, many companies now offer regular users the ability to rent some server space to mine coins for a set rate.
Some companies offer "lifetime contracts" that keep costs the same and supposedly offer outstanding returns. However, as the difficulty of mining increases, the same investment will return smaller amounts each time. Moreover, some companies make bold claims regarding their returns without being transparent about the true costs and diminishing returns. Others operate Ponzi schemes that can lead to massive losses. It’s vital to look into opportunities and understand the risks and costs associated with mining before investing.
Malware has long been a way for hackers to get passwords needed to access computer networks or steal credit card and bank account numbers. Now they’re using it to conduct another one of the most common Bitcoin scams. If your Bitcoin wallet is connected to the internet, they can use malware to get access and drain your funds if you're not protecting yourself from malware.
You can download malware by clicking links in your email. You can also download it from websites and social media. There might be a post, for example, where someone claims a certain program allows you to mine bitcoins for free. Download it, and you could get malware.
Pump-and-dumps have been around as long as the stock market has. A group of scam artists will get together and buy up a bunch of penny stocks. This drives the price of those stocks higher, and on the back of these rising prices, they get outsiders to invest in the stock—using big promises of easy money.
Unfortunately, new technology has made Bitcoin a target for pump-and-dump scams, something that investors can fall for even if they would never fall for a traditional scheme like this. It’s a matter of an old scam being perpetrated in a new and unusual way that people aren’t prepared for.
Often these schemes are promoted with the use of fake news stories and fake celebrity endorsements. And because digital technology is so good at seeming real, it’s not always easy to tell the real stuff from the fake stuff. If a person ends up getting caught up in this, it can lead to financial ruin—unless you know how to spot a scam and invest somewhere else instead.
You can protect yourself by avoiding single tip purchasing and knowing when something sounds too good to be true. You should also avoid joining groups that are doing pump-and-dump trades and people who tell you there’s no risk.
Even in the digital spheres, many multilevel marketing schemes have emerged that offer naïve investors excellent "opportunities" for progressively larger sums of bitcoin. MLMs, as they’re known, are predicated on offering quick returns, but involve taking more money for the promise of even higher profits.
One major company that has been repeatedly outed is OneCoin, whose owners were implicated in several other shady operations. The company offered investors massive earnings, as well as luxury goods and perks for paying more.
However, there is little information on the company outside of its site, and users have left scathing reviews online. It’s important to pay attention to a company’s fine print and ensure that their claims are feasible and real. Avoiding these scams early can protect investors’ wallets.
With the current craze, being vigilant and doing one’s due diligence are a must before investing in bitcoin. The market is also showing signs of maturity, leading to better transparency and clearer rules. Regardless, a smart investor’s first step should always be careful research to ensure their investments are winners.
Don’t Fall Victim to Bitcoin Scams
Bitcoin is a volatile enough investment as it is. Don’t increase your chances of losing money by falling prey to these Bitcoin scams. Stay alert for potential Bitcoin fraudsters and trust your instincts. If something seems too good to be true, it probably is.
Bitcoin is a digital or virtual currency created in 2009 that uses peer-to-peer technology to facilitate instant payments. It follows the ideas set out in a whitepaper by the mysterious Satoshi Nakamoto, whose true identity has yet to be verified.(More)
Initial Coin Offering (ICO)
An initial coin offering (ICO) is an unregulated means by which funds are raised for a new cryptocurrency venture.(More)
Coinbase Commerce allows merchants to accept multiple cryptocurrency payments from global customers.(More)
What Is a Crypto Airdrop?
A cryptocurrency airdrop is a marketing stunt that involves sending free coins or tokens to wallet addresses to promote awareness of a new currency.(More)
Paper Wallet Definition
A paper wallet is an offline mechanism for storing bitcoins. The process involves printing the private keys and bitcoin addresses onto paper.(More)
What is Bitcoin Private (BTCP)?
Bitcoin Private combines the popularity of bitcoin with the privacy of ZClassic(More)
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