Cryptocurrencies such as Bitcoin, Ether and hundreds more are a
hot commodity in online trading, and it’s possible for a smart
investor to make a big profit. But the prospect of quick riches
can blind some people to the risks and enable crooks to lure
them into scams.
According to the U.S. Commodity Futures Trading Commission
(CFTC), it’s a digital representation of value that isn’t backed
by any government or central bank. Even so, this virtual money
can be used to make purchases, and it can be exchanged for U.S.
dollars or other conventional currencies.
But unlike government-backed money, the value of virtual currencies is driven entirely by supply and demand. That can create wild swings that produce big gains for investors, or big losses. And cryptocurrency investments are subject to far less regulatory protection than traditional financial products like stocks, bonds and mutual funds.
For all cryptocurrency’s high-tech gloss, many of the related scams are just newfangled versions of classic frauds. The CFTC has warned about “pump and dump” scammers who use messaging apps and chat rooms to plant rumors that a famous business mogul is pouring millions of dollars into a certain digital currency, or that a major retailer, bank or credit card company is going to partner with it. Once they’ve lured investors to buy and driven up the price, the scammers sell their stake and the currency plummets in value.
Some cryptocurrency crooks run virtual variations on the old Ponzi scheme, peddling nonexistent opportunities to invest in digital currencies and creating the illusion of big returns by paying off old investors with new investors’ money. One such operation, called BitClub Network, raised more than $700 million before its principals were indicted in December 2019, according to federal prosecutors.
Other fraudsters pose as legitimate virtual currency traders or set up phony exchanges to lure people into giving them money. Another con involves fraudulent sales pitches for “IRS approved” individual retirement accounts in cryptocurrencies. There are also straight-up hackers who break into the “digital wallets” where people store their virtual currency.
The North American Securities Administrators Association, a nonprofit that represents securities regulators in the United States, Canada and Mexico, named cryptocurrency fraud as one of the top threats to investors in 2020. If you want to dip into this brave new world of money, take these precautions to avoid being ripped off.
The value of Bitcoin has gone up, and then it has come back
down. Over the years, it has truly taken investors, and anyone
interested in the cryptocurrency, on a rollercoaster ride. 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 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.
Unfortunately, anyone chasing that fortune can also just as easily fall victim to opportunistic con artists and 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.
If you're interested in Bitcoin, be aware of these potential scams.
In 2017, South Korean financial authorities and the local bitcoin communinity exposed on 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. To avoid this type of Bitcoin fraud, stick with popular, well-known Bitcoin exchanges and forums so you get news of fakes quickly.
Bernie Madoff may be one of the most well-known Ponzi schemers.
He did it with mainstream investments. But the principle of a
pyramid scheme, 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.
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.
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.
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
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.
If you're not sure of a website or email's legitimacy, contact the company involved directly. If you can't find the company's contact information easily on social media or on its website, that's a red flag.
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.
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