Bitcoin’s very quick rise in prices in 2017 awakened mainstream interest in the original cryptocurrency. The rise in interest however has not been without consequences.
One of the downsides of new investors entering the market is the increase in the number of scams, frauds, and stories of retail investors who lose their coins to shady ventures. From ICO scandals to wallet theft and fraud, regular consumers can fall prey to crime easily.
It may seem as though it’s the Wild West for investors, but it does not have to be. While there are certainly risks in the market, the opportunities may be irresistible for some. However, being cautious is always a must, and there are clear signs of scams that investors can look for. By avoiding these traps, users can better their chances of success and protect their investments. These are some of the most common scams and how they can be avoided.
One common scam, exposing bitcoin users to theft, is the sale of a hardware wallet with a compromised pre-configured seed phrase, which allows hackers to steal funds. Since Bitcoin exchanges are unregulated, fraudulent exchanges can trap investors with the promise of unrealistic prices and heavy discounts on use.
Bitcoin investors can increase their odds for success by identifying common scams such as Ponzi schemes, fake ICOs, and fraudulent exchanges. Websites featuring fake ICOs instruct users to deposit funds into a compromised wallet through their site, resulting in the theft of funds.
Hardware Wallet Theft
For users who are concerned with security and privacy, a hardware wallet—a physical device that stores their private keys—is an increasingly popular option. Usually, as small as keychain USB drives, these wallets offer an offline way to help crypto investors protect their bitcoin even further. However, there have been reports that some of them possess built-in vulnerabilities that open them to hackers that could easily steal all a user’s holding.
This creates a backdoor that allows hackers to drain funds once a wallet is activated. These scams are becoming more common, but they can easily be avoided by only accepting wallets from trusted sources
Despite their decentralized nature, most cryptocurrencies are still bought and sold at an exchange or exchanges. While this makes it easier to find the coins investors desire, there is still no regulatory body overseeing these exchanges in many countries. Thus, many investors have been left penniless when the exchanges they signed up for turn out to be traps. In December of 2017, several South Korean exchanges were exposed, leading to promises of stiffer regulations by the Country’s Authorities.
These scams are not hard to spot but can be costly if not avoided. One of the biggest red flags is the promise of unrealistic prices. Exchanges that promise heavy discounts on bitcoin use this strategy to lure in unsuspecting victims.
Additionally, users can check exchanges’ URLs. Web addresses should always begin with HTTPS, a sign that traffic is encrypted. Visiting unsecured websites is a bad idea, but alert investors can avoid losing thousands by looking for the right signs.
Fake Initial Coin Offerings(ICOs)
One of the best results of the Cryptocurrency boom has been the rise of the initial coin offering as a way for companies to raise capital. With thousands of new blockchain-based companies entering the market with unique ideas and exciting projects, users can now back their favourite businesses easily. However, this massive explosion of ICO opportunities has inevitably raised the spectre of fraud.
There are several ways scammers can separate investors from their bitcoin. One popular method involves creating fake websites that resemble ICOs and instructing users to deposit coins into a compromised wallet. Other times, it is the ICOs that are at fault.
Centra Tech, for example, a blockchain venture backed by several celebrities, has been sued in the US. The company stands accused of portraying fake team members, misleading investors and lying about their products. The best way to avoid these scams is close research that involves picking apart the white paper, reviewing the team behind the venture, key board members, and investors. Before making any investment, it’s vital to learn as much about the company as possible to avoid any unpleasant surprises.
Cloud Mining Schemes
Mining is the only way to extract new bitcoins without buying or exchanging them, but it has become an incredibly resource-intensive activity. Due to the unique way new coins are mined, it takes massive amounts of processing power and electricity, and thus money, to mine a coin. However, many companies now offer regular users the ability to rent some server space to mine coins for a set rate.
Some companies offer “lifetime contracts” that keep costs the same and supposedly offer outstanding returns. However, as the difficulty of mining increases, the same investment will return smaller amounts each time.
Moreover, some companies make bold claims regarding their returns without being transparent about the true costs and diminishing returns. Others operate Ponzi schemes that can lead to massive losses. It’s vital to look into opportunities and understand the risks and costs associated with mining before investing.
Please note that this summarized write-up is not to scare prospective or long time investors from investing in Bitcoin. Rather it is for investors to be aware of the risks involved and precautions to take. Investors should not only look on the smooth sailing promises of this investment. They should also look out for red flags online when transacting with other investors in order to avoid bitcoin fraud and scam.