As the price of bitcoin has increased substantially over the last few years, so has the number of malicious individuals and organizations looking to take advantage of others in the Bitcoin community. Bitcoin scams are not a new occurrence as they have been around since the currency first gained some popularity. Today, however, there is a broad range of bitcoin scams that are defrauding unsuspecting users.
A 2015 research paper by Marie Vasek and Tyler Moore titled “There’s No Free Lunch, Even Using Bitcoin: Tracking the Popularity and Profits of Virtual Currency Scams” shed more light on the prevalence of bitcoin-related scams, revealing that over $11 million had been lost to scams up to that point in time.
In this article, we introduce the seven most prevalent types of scams you should be aware of to avoid falling victim to any of them.
Fake Bitcoin Wallets
Every user requires a bitcoin wallet to store their funds and to send and receive payments. There are four main types of wallets for bitcoin, namely; hardware wallets, web wallets, desktop wallets, and mobile wallets.
Scammers, seeing the high demand for mobile wallets, have started to create fake wallets to defraud people. The fake bitcoin wallets usually have a name that is very similar to legitimate and trusted wallets such as Coinbase or Mycelium and, in some cases, even the same logo. These copycat tactics trick the user into downloading it believing it is the legitimate company’s wallet. Some fake wallets have crept onto the Apple and Android stores masquerading as genuine wallets.
Another way that fake wallets get customers is by promising greater transaction anonymity according to Marie Vasek’s and Tyler Moore’s study:
“We were able to analyze three of these services (Onion Wallet, Easy Coin, and Bitcoinwallet.in), in which all transfers from the victims were ultimately delivered to the same address held by the scammer. These particular scams advertise themselves as offering a mixing service that enhances transaction anonymity for customers. In fact, all three services appear to be operated by the same scammer, because the siphoning transfers all go directly to the same Bitcoin address.”
The way wallet scams work is that the user downloads the mobile wallet and starts to use it. It usually works for a while, but once the amount stored in the wallet reaches a certain threshold, it is moved out of the wallet leaving the user empty handed.
To prevent yourself from falling for such a scam, download wallets directly from the link provided on the reputable bitcoin wallet provider’s website.
Fake Cloud Mining Services
Bitcoin mining is a process where complex mathematical equations are solved by Bitcoin “miners” in exchange for rewards in the form of new bitcoins. These equations validate the transactions in the blockchain ensuring that all requirements are met and that no double spending can occur.
Cloud mining companies charge users a small fee in return for mining bitcoin (or other cryptocurrencies) on behalf of the user. That allows individuals to receive the financial rewards for mining cryptocurrency without having to purchase and maintain expensive bitcoin mining hardware.
However, this area of the Bitcoin economy has also been infiltrated by scammers. Cloud mining scams are websites that state that they are offering cloud mining services without actually conducting any cryptocurrency mining. Generally, these sites pay users out for a period after they have purchased a fake cloud mining contracts for more than the payouts they are receiving. Then, after some time, the fake cloud mining company stops paying out, and users’ funds disappear. In other words, fake cloud mining operations are simply Ponzi schemes that pay out as long as more users are attracted to the service and are buying fake mining contracts. Once the amount of new paying users dries up, the scammer disappears with the funds.
Examples of cloud mining scams are Hashinvest, Hashpoke, Cointellect, GAW Miners and HashOcean, with GAW Miners and HashOcean arguably having been the biggest cloud mining scams executed to date.
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Joshua Garza, the owner of GAW Miners, allegedly got away with over $10 million worth of investors funds and was charged by the SEC with various counts of fraud. He convinced investors that he had large amounts of computing power necessary to mine bitcoin, which led to strong sales of his fake cloud mining contracts. However, investors did not get the returns they were promised and were, instead, defrauded out of a significant amount of their invested funds, so they filed a class-action lawsuit against GAW Miners.
To prevent yourself from falling victim to a bitcoin cloud mining scam, conduct thorough research on the cloud mining service providers you are considering using and make sure that they are properly incorporated businesses that are run by individuals whose identities are known.
Bitcoin Investment Schemes
Bitcoin investment schemes are another common type of scam in the Bitcoin economy. Bitcoin investment schemes are somewhat similar to cloud mining scams in the sense that they promise returns and pay out small daily returns until one day all payments stop and the scammer runs off with users’ invested funds. Like cloud mining scams, bitcoin investment scams are set up as Ponzi schemes.
Since these “investments” usually seem very profitable at first as daily payments are being received by users, many users will re-invest their “returns” into the scheme to generate more profit. Once a user tries to withdraw his or her earnings, however, is where the trouble usually starts and before you know it, the investment scheme stops paying and users lose their invested funds.
If you decide to put funds into a digital currency investment service ensure that the company providing the service is properly incorporated and run by reputable industry professionals. Also, make sure that the investment strategy they propose is outlined and makes sense. Most of all, anyone who guarantees high returns in any investment service is lying as there is no certainty in the investment world.
MLM Schemes
Bitcoin multi-level marketing (MLM) schemes with no actual product or service that promise high commissions for successful referrals are simply another type of Ponzi scheme. Funds paid out to participants in the scheme are not company profits. Instead, they are solely a share of the new money that new users that were referred to the service are placing into the scheme.
Any multi-level marketing scheme that does not have participants selling an actual product or service are almost always guaranteed to be Ponzi schemes.
Fake Exchange Scams
Bitcoin exchanges are services provide users with a marketplace that allows them to trade bitcoin for fiat currency or other cryptocurrencies. However, there have also been instances of fake exchanges in the bitcoin economy.
Fake exchanges swindle users by asking them to put a payment in that goes to the purchase of bitcoin. However, the exchange does not remit anything to the user. These exchanges usually attract customers by having lower credit card processing fees than their competitors.
Hence, it is highly recommended to only use reputable exchanges that are regulated and trusted by community members instead of just any site that promises users a good price and low transaction fees.
Phishing Scams
Phishing scams involve sending out emails with the intention to steal personal information. Bitcoin phishing scams usually involve a user receiving an email where they are informed they won bitcoins but to collect their coins; they are required to log onto their wallets through a link in the email body. Once this happens, the user puts his or her wallet username and password onto the fake wallet site and, thereby, loses access to their wallet and the bitcoin held therein as his login information gets stolen by the scammers.
Phishing scams are very common and have also started to plague the Bitcoin community. Always be careful when clicking on any links in emails that seem inauthentic, especially when you are checking your emails on your phone, where it is easier to miss the details of the actual sender.
Bitcoin Donation Scams
Unfortunately, scammers know how to leverage your emotions, whether they target greed by offering "high investment returns" or, as in the case of donation scams, people’s compassion for others.
There have been instances where scammers have created fake donation pages where they ask people to donate in bitcoin. After the Orlando terror attack, for example, a fake donation page was set up that urged users to send the cryptocurrency to help the attack’s survivors.
Even when donating, it is imperative to conduct thorough research into the cause and the charity or person behind it before sending any bitcoins to avoid getting scammed.
While there are many ways you can earn bitcoin, make sure you avoid Ponzi schemes that promise you a high return on investment. Also, avoid using any exchange or wallet provider that is not reputable or professionally run. Cybercrime is on the rise globally and the Bitcoin economy is also affected by this trend. Hence, it is wise to always conduct your research about a product or service, as well as who is behind it, before parting with your cryptocurrency.
