Protect Myself Against Bitcoin Fraud

You can protect yourself against Bitcoin fraud by understanding what cryptocurrencies are, educating yourself on the most common forms of fraud, and strictly observing certain safeguards that will prevent you from becoming an “easy mark.” Many of the same general principles that will protect you from any kind of fraud will also protect you against Bitcoin fraud.

Standard currencies, such as the US dollar and the Euro, exist in paper, coin, and digital form. Their value is guaranteed by a central bank, such as the US Federal Reserve bank. Since the gold standard was abandoned in 1971, the US dollar has been backed solely by the credibility of the US government. Such is not the case with the new cryptocurrencies such as Bitcoin.

Cryptocurrencies are a private alternative to government-issued currency, and they can be exchanged for goods and services worldwide. They are backed by no central bank and have no central administrator, relying instead on peer-to-peer networks. Bitcoin is the first cryptocurrency, and so far it is by far the most popular. Bitcoin’s value has appreciated from virtually zero to as high as $20,000 per “coin” in 2018. Its use, however, is fraught with peril.

How Bitcoin Works

Bitcoin, which came into use in 2009, utilizes transactions that are verified by a network using cryptography, and these transactions are recorded in a publicly available ledger known as a blockchain. Its source code has been made public as open-source software. As of 2017, there were 3 to 6 million people using some form of cryptocurrency, with Bitcoin accounting for more than half of all transactions.

Bitcoin’s reputation has been damaged by allegations of frequent fraud, theft, and price volatility. A significant number of economists advise against its use, considering that it is particularly prone to speculative bubbles and pyramid schemes.

The Inherent Vulnerabilities of Bitcoin Transactions

The following is only a partial list of the risk of using Bitcoin instead of government-backed currency:

Bitcoin payments cannot be automatically reversed. Once you have invested your money, there is no way of getting it back without either the cooperation of the vendor or the filing of a lawsuit.
Computerized Bitcoin exchange platforms can be hacked, and they often are. Some of these platforms have collapsed for this reason, and many Bitcoin users have lost a lot of money.
Fraud and theft are rampant in individual Bitcoin transactions. One popular form of fraud is for someone to pose as a Bitcoin trader to induce you to send him money for an “investment” which, of course, you will never see again.
The Federal Deposit Insurance Corporation and other institutional safeguards that protect the US dollar to not apply to Bitcoin. The situation resembles the meager protections available to the US dollar in the runup to the Great Depression.
The fluctuation in the valuation of Bitcoin is extreme, rendering investments extremely speculative. Some have likened the entire cryptocurrency market to an online casino.

Common Forms of Bitcoin Fraud

The scale of Bitcoin fraud is almost incomprehensible. In 2019, for example, cybercriminals defrauded cryptocurrency users and exchanges out of at least $4.26 billion (not limited to Bitcoin). Japanese cryptocurrency exchange BITPoint, for example, lost $4.26 million in July 2019 alone. The danger to individuals is just as acute, if not more so.

The number of possible types of Bitcoin fraud is limited only by human ingenuity. Some of the most common are listed below:

Blackmail: A fraudster claims to be in possession of damaging information about you (an affair, business corruption, etc.), and demands payment in Bitcoin as “hush money.” You can expect threats, pressure, and various forms of intimidation. If you pay, the perpetrator is likely to increase the price until you run out of money. Contact the FBI, the local police, and the Federal Trade Commission.
Pyramid “chain letter” schemes: In this scam, you are offered the opportunity to make a lot of money by investing into the scheme, using Bitcoin to buy the right to recruit other people into the chain, making you even more money from the money those people invest. Essentially, this is an illegal pyramid scheme. The pyramid eventually collapses, leaving those at the top rich and everyone else broke.
Bogus “investment opportunities”: The opportunities for this type of scam are endless. One warning sign is the guarantee – no honest operator will guarantee that you will make money.
Malware & viruses: It is not difficult to use Bitcoin as a lure to insert malware and viruses into your computer and other devices. Beware of offers of easy access to Bitcoin resources, especially on social media, that require you to click a link. Malware can give scammers sensitive information about you (passwords, etc.) and access to your existing Bitcoin accounts
“Bit-phishing”: Online criminals might pose as a well-known company, and then use that company’s credibility to entice you to enable them access to your Bitcoin keys. At this point, your Bitcoin wallet is open to them. One prominent example is a $27 million “typosquatting” scam run out of the United Kingdom and the Netherlands that involved a fake website used to gain access to Bitcoin wallets.

Major Litigation

Litigation involving Bitcoin and other cryptocurrencies is widespread in both state and federal courts. The following is only a small sample:

The New York Attorney General is investigating the Bitfinex exchange over allegations of fraud and misleading investors. Prosecutors allege that the exchange and associated firm, Tether, concealed an $850 million loss, to the detriment of investors.
Trader Jeffrey Berk filed a lawsuit in California against a cryptocurrency exchange, Coinbase, alleging that Coinbase provided misleading information and committed insider trading, causing massive losses to investors.
Commodity Futures Trading Commission v. Morgan Hunt and Kim Hecroft: The Commodity Futures Trading Commission claimed that the two defendants executed a fraudulent scheme to solicit Bitcoin from the general public. The defendants were found guilty and ordered to pay $400,000 in restitution.

How to Protect Yourself against Bitcoin Fraud

The following are some basic rules that can help prevent you from being scammed. Many of these principles will protect you against many different types of scams, not only Bitcoin scams:

Sign up for free scam alerts from the FTC. Scammers are innovative, and they are always coming up with something new.
Diligently research any Initial Coin Offering (ICO) opportunity you are considering. There is no substitute for this, and there are no shortcuts. Read and analyze the white papers with a critical eye, and obtain assistance if necessary. Find out as much as you can about the individuals behind the ICO.
Check any bitcoin exchange’s URL. If a website’s address starts with http rather than https, your suspicions should immediately be raised. Only https URLS offer encryption, which can protect against cyber attacks.
Only accept hardware wallets from trusted sources, because certain disreputable operators will sell hardware wallets with embedded “back doors” that will allow the contents to be stolen.
Be alert for identity theft. Bitcoin fraudsters will often attempt to impersonate a government official, a charity, or even a trusted relative. Don’t give out personal information or money to anyone simply on the basis of a text, an email, or some other indirect form of communication.
Use the internet as an investigation resource. If you are offered a phone number, check it on the internet – it may have been reported as a scam. You can also search “XYZ company scam” or “ABC company complaint” to obtain information, for example.
Don’t trust your caller ID, because it can be fooled by easily obtained technology. Call back only to a number you know is legitimate, that you have obtained from a reliable source(such as a phone directory) – not your caller ID.
Don’t pay money simply for a promise that may or may not be kept.
Don’t make a decision in a hurry. That is exactly what fraudsters want you to do, and that is why so many of them rely on high-pressure sales tactics.
Hang up on robocalls. They are illegal and they are a favorite technique of con artists.

The Challenges of Bitcoin Litigation

It can be challenging indeed to prove your case in a Bitcoin scam. In fact, in some cases, it can be difficult to even identify the perpetrator. A significant degree of technical expertise may be required to identify the defendant and build a case against him. This is not always true, of course – some Bitcoin fraud cases are more complex than others. Under no circumstances, however, is a novice qualified to litigate a Bitcoin fraud claim.

How Can I Protect Myself Against Bitcoin Fraud?