Bitcoin, the first and most well-known cryptocurrency, has experienced a meteoric rise in popularity since its inception in 2009. With its increasing adoption and growing value, Bitcoin has also become a prime target for scammers.
This article aims to provide a comprehensive overview of common types of Bitcoin scams, recent examples, and essential preventive measures. Raising awareness and adopting secure practices are crucial to safeguarding investments and ensuring the integrity of the cryptocurrency market.
Securing Bitcoin: Investments, Market, and Community
Personal Finance
Financial Security: Bitcoin scams can lead to substantial financial losses. Awareness of common scams and red flags can prevent individuals from falling victim and losing their hard-earned money.Psychological Impact: Beyond financial loss, falling prey to scams can have severe emotional and psychological effects, causing stress, anxiety, and a sense of betrayal. The psychological impact of falling victim to scams extends far beyond financial loss, leading to significant emotional and mental health challenges. A study found that around four in ten (40%) online scam victims have felt stressed and three in ten (28%) have felt depressed as a result of being scammed. These statistics highlight the extensive emotional toll that scams can take, which can sometimes require psychological counseling to overcome.
Integrity
Investor Confidence: A market riddled with scams can deter potential investors and undermine confidence in Bitcoin and other cryptocurrencies.Market Stability: Scams can lead to sudden market fluctuations, affecting the value of Bitcoin and causing instability in the broader cryptocurrency market.
Community
Community Trust: Awareness and preventive measures help build a trustworthy and secure community where investors can feel safe participating in the crypto economy.Innovation and Growth: A secure environment encourages innovation and growth in the cryptocurrency space, attracting more legitimate projects and investments.
How can we increase awareness of such issues?
Education and Training
Understanding Bitcoin: Knowledge of how Bitcoin and blockchain technology work is the first line of defense against scams. Investors should educate themselves on the basics and stay updated on new developments.Recognizing Scams: Awareness programs should focus on identifying different types of scams, understanding their tactics, and recognizing warning signs.
Utilizing Secure Practices
Secure Wallets and Exchanges: Use reputable and secure wallets and exchanges to store and trade Bitcoin. Look for platforms with strong security measures and good user reviews.Two-Factor Authentication (2FA): Enabling 2FA adds an extra layer of security to accounts, making it harder for scammers to gain access.
Due Diligence
Research the Projects: Before investing in any Bitcoin-related project, conduct thorough research to verify its legitimacy. Read this detailed guide on how to differentiate between good and sham Bitcoin projects.Verify Sources: Always verify the authenticity of emails, websites, and social media accounts before engaging with them.
Community Engagement
Reporting Scams: Report any suspected scams to relevant authorities and platforms to help prevent others from falling victim.Sharing Information: Engage with the crypto community to share experiences, tips, and warnings about potential scams.
Now, let’s move on to the types of scams that are quite prevalent and also the incidents that occurred.
Types of Bitcoin scams
Phishing Scams
Phishing scams are fraudulent attempts to obtain sensitive information such as usernames, passwords, and private keys by masquerading as a trustworthy entity in digital communications. In the context of Bitcoin and other cryptocurrencies, phishing scams often involve fake emails, websites, or messages that appear to come from legitimate sources like cryptocurrency exchanges, wallet providers, or even known contacts.
Phishing scams typically follow a few common tactics:
Email Phishing: Fraudulent emails that appear to come from legitimate sources, often containing urgent messages or enticing offers, prompting the recipient to click on a malicious link or download an attachment.Clone Phishing: Creating an identical or near-identical copy of a legitimate website or email. Users are directed to these fake sites, where they unwittingly enter their private information.Spear Phishing: Highly targeted phishing attacks tailored to a specific individual or organization, often using personal information to appear more convincing.
Below are some of the recent Bitcoin Scams:
A coordinated social engineering attack targeted Twitter employees and gained access to high-profile accounts, including those of Elon Musk, Bill Gates, and Barack Obama. The compromised accounts tweeted a Bitcoin giveaway scam, asking followers to send Bitcoin to a specified address with the promise of doubling their money.
The scammers collected over $100,000 worth of Bitcoin in a few hours before Twitter intervened. This incident highlighted the susceptibility of even major platforms to phishing attacks and the widespread impact such scams can have.
Ledger Data Breach (December 2020)
Ledger, a well-known hardware wallet provider, suffered a data breach that exposed customer information, including email addresses and contact details. Scammers used this data to launch phishing attacks, sending fake emails that appeared to be from Ledger, instructing users to download a malicious update to secure their wallets.
Many Ledger users fell victim to this scam, resulting in significant financial losses. This breach underscored the importance of verifying communications, even from seemingly legitimate sources, and being cautious with personal information.
Ponzi Schemes
A Ponzi scheme is a fraudulent investment operation where returns to earlier investors are paid out from the capital contributed by newer investors rather than from profit earned by the operation. The scheme leads new investors to believe that profits are coming from legitimate business activities when, in reality, it is the influx of new capital that sustains the scheme. This setup creates a cycle of deception and false promises, as the scheme requires a constant flow of new money to continue.
Below are some of the recent Ponzi Schemes:
BitConnect promised high daily returns through a proprietary trading bot and volatility software. It operated a lending program where users could lend their Bitcoin in exchange for interest payments.
BitConnect attracted thousands of investors and amassed billions of dollars before collapsing in January 2018. The shutdown revealed that it was a classic Ponzi scheme, resulting in substantial financial losses for investors and multiple legal actions against its promoters.
Pincoin and iFan (2018)
Pincoin and iFan were ICOs run by Modern Tech, a Vietnamese startup. They promised high returns through their social media platforms and digital advertising technologies.
Both ICOs raised around $660 million from approximately 32,000 investors. In April 2018, the operators disappeared with the funds, causing widespread financial losses and sparking protests from investors.
PlexCoin claimed to be a revolutionary new cryptocurrency that would yield a 1,354% profit in less than a month. The ICO was heavily marketed, attracting significant investment.
The U.S. Securities and Exchange Commission (SEC) intervened, charging the founder with fraud and freezing the assets. The scheme had raised $15 million before being shut down, demonstrating the potential for substantial financial damage from fake ICOs.
Bitcoin ATM Scams
Bitcoin ATMs are machines that allow users to buy and sell Bitcoin using cash or debit cards. These ATMs have become increasingly popular due to their convenience and ease of use. However, as the number of Bitcoin ATMs grows, so too does the prevalence of scams associated with them. Scammers exploit these machines in various ways to deceive users and steal their funds. Some notable Bitcoin cases made the news.
Calgary Bitcoin ATM Scam (2019)
Scammers in Calgary, Canada, tampered with several Bitcoin ATMs to steal funds. They redirected transactions to their own Bitcoin addresses by altering the ATM software.
Victims lost significant amounts of money, and the incident highlighted vulnerabilities in Bitcoin ATM security.
Scammers posing as IRS agents called victims, claiming they owed back taxes and demanding payment through Bitcoin ATMs. The victims were instructed to withdraw cash and deposit it into a Bitcoin ATM, sending the Bitcoin to the scammer’s address.
Several victims lost thousands of dollars, underscoring the effectiveness of social engineering tactics.
Let’s have a look at a case study regarding a Bitcoin scam.
Examining a Bitcoin Scam in Detail
The PlusToken scam, one of the largest Bitcoin Ponzi schemes, defrauded investors out of millions of dollars. This case study explores how the scam operated, its impact, and the investigation that followed.
Background
Platform: PlusToken was a cryptocurrency wallet and investment platform that promised high returns to its users through a sophisticated investment strategy.Promise: The platform claimed it could generate profits through cryptocurrency arbitrage trading, offering returns of up to 10% monthly.
The Scam
Ponzi Scheme: PlusToken operated as a classic Ponzi scheme, using funds from new investors to pay the promised returns to earlier investors. This unsustainable model eventually collapsed when new investments slowed down.Growth: Launched in mid-2018, PlusToken quickly gained popularity, particularly in Asia. By early 2019, it reportedly had over 3 million users and amassed over $2 billion worth of cryptocurrencies, including Bitcoin, Ethereum, and EOS.
Operation
Recruitment: PlusToken aggressively recruited new members through social media, seminars, and word-of-mouth. It incentivized users to bring in new investors by offering referral bonuses.Investment: Investors were required to deposit cryptocurrencies into their PlusToken wallets, with the promise of significant returns on their investment.Exit Scam: In June 2019, users began experiencing difficulties withdrawing their funds. Shortly after, the PlusToken team disappeared, and the platform went offline, leaving investors unable to access their funds.
Source: siliconangle
Impact
Financial Loss: The collapse of PlusToken resulted in estimated losses of around $3 billion, affecting millions of investors.Market Impact: The scam had a noticeable impact on the cryptocurrency market. Large sell-offs of stolen funds by the scammers contributed to significant price volatility.
The PlusToken scam, one of the largest cryptocurrency Ponzi schemes, defrauded investors of approximately $3 billion by promising unrealistically high returns. This case highlights critical lessons for investors, such as the danger of “too good to be true” promises and the necessity for transparency in investment platforms. The scam’s collapse not only resulted in massive financial losses but also significantly impacted the cryptocurrency market, demonstrating the importance of vigilance and the potential benefits of regulatory oversight in maintaining market integrity.
Keeping in mind the growing scams, let’s dive into some of the preventive measures that can be practiced to keep ourselves safe while handling finances online.
What to do if you have lost money to a scam?
Losing money to a scam can be distressing, but taking the right steps can help you recover your funds. Here’s a guide to investigating and potentially recovering your lost assets using advanced crypto investigation services:
Bitquery’s Investigation Service is tailored to assist individuals and organizations in proving the legitimacy of their funds, especially when accounts or wallets are frozen due to suspicious activity. This service offers a comprehensive solution that includes fund tracing, legal assistance, and collaboration with authorities to ensure a complete resolution.
1. Consultation: Understanding Your Case
Upon submitting details, Bitquery conducts an in-depth analysis, considering factors like the scale of the issue, jurisdiction, and other relevant details. Bitquery identifies a tailored recovery strategy, providing a clear understanding of the steps involved and the potential success rate.
2. Investigation: Tracing Assets with Coinpath
Expert investigators utilize Bitquery’s Coinpath® MoneyFlow tool to meticulously trace your cryptocurrency assets across various transactions and addresses. The team generates detailed reports that map out the origin and movement of your funds through the blockchain until they reach an exchange or an identifiable entity.
3. Resolution: Asset Recovery and Legal Closure
Bitquery works closely with law enforcement and cryptocurrency exchanges to facilitate asset recovery. Continuous legal support is provided throughout the process, ensuring all necessary documentation and expert guidance are available. Read this case study on a previous investigation.
Bitquery’s Investigation Service delivers a complete solution for proving fund legitimacy and recovering assets, combining cutting-edge tracing technology, expert investigation, and legal expertise to navigate the complexities of cryptocurrency fund recovery.
Important Note: Never share your seed phrase with anyone.
Tracing Bitcoin Scams
The Moneyflow tool streamlines the task of tracking fund flows. It allows for the tracking of fund sources and destinations while also ensuring wallet compliance. In a recent investigation, the tool helped trace $4 million in fraudulent cash transmitted to exchanges.
With support for over 40 blockchains, the Moneyflow tool makes it easy to track crypto addresses, transactions, entities, and VASPs. It also enables in-depth examination of DeFi, DEXes, bridges, and coin mixers, as well as the tracking of commingled money across several chains.
Address Labeling and Entity Resolution
Entity resolution involves identifying and linking real-world information to blockchain addresses. For instance, it allows us to determine that Address X belongs to a centralized exchange (CEX) or that Address Y is associated with Tornado Cash. By resolving these entities, we can understand the purpose and behavior behind each address, enhancing our ability to monitor transactions and detect illicit activities.
The Moneyflow tool not only visualizes fund movements but also aids in labeling addresses and connecting multiple wallet addresses associated with the same entity. It leverages advanced algorithms to analyze transaction patterns and user behaviors, grouping wallets under a single entity. This capability is crucial for identifying Tornado Cash, mixers, and other previously flagged wallets.
Filtering transactions based on amounts and key indicators helps identify and prevent illicit activities. Key indicators include unusual transaction sizes, rapid fund movement, and transactions involving high-risk jurisdictions.
Auto-Trace from/to an Address
Manually tracking funds on the blockchain can be labor-intensive due to its decentralized nature and inherent anonymity. However, with Bitquery’s Moneyflow tool, the auto-tracing feature simplifies this process, allowing you to effortlessly follow the movement of funds across multiple addresses while maintaining a clear view of the flow’s direction.
By leveraging these tools and following the outlined steps, you can significantly improve your chances of recovering lost funds and addressing potential security breaches effectively.
Preventive Measures and Best Practices
Below are some of the tips to identify potential Bitcoin Scams:
Regulatory Compliance
Check for Registration: Verify if the ICO or cryptocurrency platform is registered with financial regulatory authorities. While this is not always a guarantee of legitimacy, it adds a layer of credibility. Read more on analysing ICOs here.
Review Legal Documentation: Legitimate projects provide comprehensive legal documentation, including terms of use and investor rights. Ensure these documents are thorough and transparent.
Use Trusted Platforms
Research the Platform: Ensure the platform hosting the ICO or cryptocurrency exchange is reputable and has a history of supporting legitimate projects. Look for user reviews and feedback.
Community Feedback: Engage with the cryptocurrency community on forums like Reddit and BitcoinTalk to gather insights and opinions about the project or platform.
Protect Personal Information
Secure Transactions: Use well-lit, secure locations when using Bitcoin ATMs or making transactions. Be cautious of people loitering near the machine who might be trying to observe or interfere with your transaction.
Avoid Sharing Details: Never share your private keys, passwords, or personal information with anyone. Bitcoin transactions do not require revealing such details.
Moving forward, let’s explore some best practices for securing Bitcoin investments:
Use Secure Wallets
Hardware Wallets: Store your Bitcoin in hardware wallets like Ledger or Trezor. These devices keep your private keys offline, providing robust protection against online threats.
Cold Storage: For long-term storage, consider cold storage solutions that keep your Bitcoin completely offline, away from potential hacks.
Enable Two-Factor Authentication (2FA)
Enhanced Security: Use 2FA on all accounts related to your Bitcoin investments, including exchanges and wallets. This adds an extra layer of security by requiring a second form of verification in addition to your password.
Be Cautious with Online Wallets and Exchanges
Reputable Platforms: Only use well-known and reputable exchanges and online wallets. Check reviews and ensure they have strong security measures in place.
Minimal Funds: Keep only a small portion of your Bitcoin on online exchanges for trading purposes. Transfer the bulk of your holdings to a secure offline wallet.
As Bitcoin continues to gain popularity and value, it has become increasingly targeted by scammers, making awareness and preventive measures crucial for safeguarding investments and maintaining the integrity of the cryptocurrency market. Protecting personal investments from Bitcoin scams not only prevents substantial financial losses but also mitigates the psychological impacts of stress and anxiety.
Ensuring market integrity is vital for maintaining investor confidence and market stability, which can be severely affected by fraudulent activities. Building a safe crypto ecosystem fosters community trust and encourages innovation and growth in the cryptocurrency space. Key strategies for prevention include education and training on Bitcoin and blockchain technology, utilizing secure practices such as reputable wallets and two-factor authentication, conducting due diligence on projects and sources, and engaging with the community to report scams and share information. By adopting these measures, investors can help create a secure and thriving environment for cryptocurrency investments.
10 Common Bitcoin scams and how to avoid them? was originally published in Coinmonks on Medium, where people are continuing the conversation by highlighting and responding to this story.