Crypto cons: How to Recognise Crypto and Bitcoin Scams

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"Successful investing is about managing risk not avoiding it". Benjamin Graham was right on the money, literally. This investing quote has never been more applicable than today, especially with how vast Cryptocurrency has become. Bitcoin is now a recognised hold of value, and more and more big companies are investing and allowing customers to purchase commodities using Bitcoin. 

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Bitcoin is an unprecedented digital currency with similar attributes to gold. Last year, the U.S. Office of the Director of National Intelligence determined that "cryptocurrency could undermine the U.S. dollar as the world’s reserve currency."

The dilemma lies herein: as the value of Bitcoin and other Cryptocurrencies continues to dramatically increase, people want in and sometimes, 'emotional investing' or fear of missing out, leads to poor investment choices and in some cases, the dreaded 'Bitcoin Scam'.

With all the hype around Crypto, Fraudsters saw opportunities. 

First and foremost, Bitcoin is NOT a scam! Although it is a relatively new technology. 

According to Investopedia, Bitcoin is a digital currency, a decentralised system that records transactions in a distributed ledger called a blockchain.  This essentially signifies that Bitcoin can not be controlled, owned, or manipulated by any governing body or central entity. The Bitcoin network is protected against fraud via a 'trustless system'; Bitcoin transactions also work to shield themselves against potential theft, however, a few high-profile thefts have occurred.

Bitcoin is indefinite, meaning that it can be used by anyone in the world with an internet connection and a device. 

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So now that we know what Bitcoin is, let's get to the nitty-gritty of scams. 

Is Bitcoin a scam? Yes AND no. 

As mentioned above, Bitcoin technology isn't a scam itself. The scams were the doings of a few 'creative people' who recognised that the hype of Bitcoin made them susceptible to investment desperation. As a result, they conned and deceived people using Bitcoin technology. 

The rise in crypto scams has spread fear, uncertainty, and doubt among the general public about the potential of the so-called 'digital gold' or 'new gold'. 

What kind of scams should we be wary of?

  1. 'Old School' Style Scams- A lot of elderly people fall victim to this scam. Visualize the following scenario: Somebody emailed or called you, saying they were from the ATO or IRS and you apparently owed them back taxes that needed to be paid promptly. Would you pay them? You may not, but unfortunately, many people do. Instead of having the victim wire money via a trusted site like Western Union or transfer funds directly to a bank account, these con artists contact people and demand that they transfer Bitcoin. To avoid this scam, always be sceptical of phone calls or emails that say they're from a government agency. This advice goes for all types of scams. Legitimate authorities would never contact you that way, and they NEVER ask for Bitcoin. 
  2. Email scams- Recently there has been a surge in Bitcoin scam emails. Google Trends confirms that there has been a spike in users searching for: "Bitcoin email saying I have money". Never click on these emails and report 'spam' immediately. 
  3. Fake 'Bitcoin Exchanges'- One of the more commonly used scams. In 2017, South Korean financial authorities and the local Korean Bitcoin community (which is huge) revealed one of the most treacherous Bitcoin scams to date: a fake exchange called BitKRXBitKRX presented itself as part of the largest trading platform' in the country and robbed innocent investors of millions of dollars. Avoiding this type of scam is pretty straight forward. Just stick with popular, well-known Bitcoin exchange platforms like Coinbase and Binance to do all your Bitcoin transactions. You can also join 'Bitcoin forums' so you gain knowledge of fakes immediately.
  4.  'Ponzi Schemes' - These are well known. The system of a pyramid scheme, in which you take money from new investors to pay previous investors, also applies to Bitcoin scams. Most recently in 2019, three men were arrested in a $722 million cryptocurrency fraud scheme. The men operated BitClub Network for years. The scheme 'enticed investors to give up their money in exchange for shares of cryptocurrency mining pools'. In the end, the poor investors never got any returns on their investments and were essentially robbed in broad daylight. 
  5. Fake 'Cryptocurrencies' - Another common scam circulating at the moment. This scam presents a 'unique cryptocurrency' as an alternative to Bitcoin. The purpose behind this scam is: since it's too late to cash in on Bitcoin (because it is too expensive) you need to invest in one of these apparent up-and-coming cryptocurrencies. My Big Coin was closed for engaging in this type of scam. The con artists behind My Big Coin obtained $6 million from ill-advised buyers to 'invest in the fake cryptocurrency and then redirected the funds into their personal bank accounts. As you can imagine, nobody ever saw a cent again! 
  6. 'Pump-and-Dump Scams' - Another scam that's been around for a long time, this one for as long as there's been a stock market. 
  7. It goes like this: A group of 'con craftsmen' will gather and purchase a bunch of penny stocks. A penny stock typically refers to the stock of a small company that trades for less than $5 per share. This pushes the value of those stocks higher and higher, and on the back end of these 'rising prices', they get outsiders to invest in the stock, usually by promoting huge promises of 'easy money'. Unfortunately, new technology has made Bitcoin a sure target for pump-and-dump scams, something that investors may fall for EVEN if they would never fall for a traditional scheme like this. It's simply a clever disguise of an old-style scam, being performed in a new and unusual manner. More often than not, these schemes are advertised with the use of fake news stories and fake celebrity endorsements. All of which is so readily available all over the internet and social media. The issue is because digital technology is so good at appearing real, it's difficult to differentiate the real stuff from the fake stuff. If somebody ends up getting caught up in this, it can lead to financial ruin. If you know how to spot a scam, you'll go and invest elsewhere. To protect yourself from pump-and-dump scams, avoid single tip purchasing and know when something sounds too good to be true. It usually presents itself and shouldn't be that hard to pick up. Much like that date you had in your twenties where the person spent 2 hours trying to tell you how amazing he or she was when in reality they were still living in their parent's basement and belly up in debt from 'side hustles' gone wrong. You should also avoid joining groups that are doing pump-and-dump trades and people who tell you there’s no risk. Remember the golden rule: there is usually always a risk in trading, the trick is doing your research and trading smart. 
  8. Malware Scams- This style of scam has been around for a while. Malware is where hackers gain access to a user's passwords needed to access a computer, phone, bank account or credit cards. Nowadays they’re using these methods to conduct 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 easily (and unknowingly) download malware by clicking links in your email. You can also download malware by visiting certain websites and social media. For example, all those posts you see on Facebook about 'mining bitcoin for free' and 'How Chris Hemsworth made a return of $100,000 in a single investment' may be Malware hiding in plain sight. All you gotta do is click and boom, Malware is installed on your phone or computer. Be wary! If you are doubtful of a website or email's legitimacy, reach out to the company associated immediately and directly, not through a link or third party. If you can't find the company's contact information easily on social media or its website, that's a huge red flag and you should run! 
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What have we learnt so far?

The verdict is in! Bitcoin is truly valuable! Although it may be used as a means of current exchange, it is a highly efficient store of wealth, maintaining and increasing in value over time. 

The most important thing to remember from this article today is that Bitcoin and other cryptocurrencies themselves are not a scam. Scammers can see the enormous value that Bitcoin has and they are trying to exploit it. 

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If you have invested in Bitcoin or any other Cryptocurrencies, be cautious and extra vigilant about where and how you spend it.

If you decide to spend it, there are plenty of legitimate Bitcoin merchants (Paypal) and debit card providers (Mastercard), making it easier than ever to spend your cryptocurrencies with ease! But please, do your own (DYOR) research on the history and activity of any transaction or merchant you're about to send your crypto to.

Better to be safe than sorry, especially with your hard-earned cash! 

Read more on other types of Bitcoin scams here.