As consumers’ adoption of bitcoin continues to increase and a number of major retailers have decided to accept the virtual currency, alarming cases of fraud with bitcoins continue to emerge. Because bitcoin transactions are irreversible and not overseen by a central authority or bank, bitcoins are a popular vehicle for fraud and theft.
Bitcoin scams are often initially promoted in online forums or chat rooms, with promoters creating an elaborate front to convince investors they are legitimate. The following are five of the most common scams involving bitcoin:
1. Bitcoin Ponzi Schemes and High-Yield Investment Programs. These scams lure people in with promises of high interest rates on deposits. As with other Ponzi schemes, early investors are paid out using investments from later investors. When new investors stop joining and payments cannot be made, the scheme collapses. These scams last often only a couple of months, but the organizers are prone to simply repeat the whole process again afterwards.
2. Bitcoin Mining Investment Scams. Bitcoin mining involves validating transactions and providing security for the public ledger, known as the blockchain. This process requires extremely powerful and expensive computer equipment. The mining scams typically involve orders for equipment that are paid for in advance and never delivered.
3. Bitcoin Wallet Scams. A bitcoin wallet is a software program used to store bitcoins. Wallet scams attract users with the assurance of greater transaction anonymity. Once the deposit level rises above a certain level, the scammers simply move the bitcoins into their own wallet.
4. Bitcoin Exchange Scams. These exchanges attract users by offering credit card processing at more competitive rate than their competitors. The fraudulent bitcoin exchanges simply do not return bitcoin or cash after receiving payment.
5. Bitcoin Phishing Scams. Phishing scams can involve emails informing people that they have been awarded or given bitcoins. They are told that they need to log into their bitcoin wallets through a link in the email that unbeknownst to them gives the phishers complete control the account.
Avoiding Bitcoin Scams
It is advisable to thoroughly investigate the background of the bitcoin-related company you are thinking of transacting with and look for transparency in their dealings. Publicly available audits can assuage doubt over whether a company is able to deliver what it promises. Proof-of-reserves cryptographic audits enable companies to publicly disclose their bitcoin holdings. Established forums like reddit can help provide a balanced perspective on the legitimacy of a company.
The Bottom Line
As in the offline world, if it looks too good to be true, it is most likely a scam. When dealing with bitcoins, it is best to treat the currency as carefully as cash in the everyday world. If you lose it, it is very unlikely that you will ever get it back.