Protect Your Wallet: 8 Bitcoin Scams to Watch Out For

Learn how to protect yourself from some of the worst scams out there.

One reason why so many people invest in Bitcoin and other cryptocurrencies is the potential for out-of-this-world returns. Despite the risks, they’ve seen the headlines and want in on what could be a large payoff.

That is what helps make the crypto market a prime space for scammers looking for easy money. To help keep your investment safe, beware of the following Bitcoin scams.

1. Fake exchanges

In 2017, the South Korean government spotted one of the most well-known examples of a fake Bitcoin exchange. BitKRX named itself after the Korea Exchange, KRX, the largest trading platform in the country, and posed as a branch of the platform to lure investors in and take their money.

To avoid being a victim of this scam, beware of aggressive invitations to use an exchange, especially with promises of high returns or a guaranteed rate of return. No investment can offer that, least of all in the volatile crypto markets. Scam exchanges also tend to charge high initial fees.

2. Ponzi schemes

Just like its stock market equivalent, a crypto Ponzi scheme takes the funds of a new investor to pay existing investors. Once new investments dry up, the scheme crumbles as investors can no longer retrieve their money.

In 2019, the U.S. government arrested a group of men who’d been running the scam BitClub Network, which lured investors with promises of big returns for investing in Bitcoin mining. Instead of investing funds, the scammers simply manipulated "earnings" and paid investors with funds from new recruits. They also manipulated a huge drop in earnings when they were ready to cash out and "retire."

Always be leary of investments presented as guaranteed high returns with low risk -- that’s a classic too-good-to-be-true scenario.

Consistent returns are also a red flag. Investments should naturally have fluctuating returns from week to week, especially in rapidly changing crypto markets. If an investment provides returns without that fluctuation, be suspicious.

3. Fake currencies

In 2019, the U.S. government arrested the operator of the fraudulent cryptocurrency company My Big Coin. The company claimed the "My Big Coins" it sold was a fully functioning currency backed by gold. That turned out to be a lie.

Thousands of cryptocurrencies exist, and new coins are developed regularly. With names like Dogecoin and OMG attached to legitimate currencies, it’s no wonder would-be investors can have a tough time spotting this and other fakes.

To vet a new currency, start by looking into the team behind its development. Note their history and trustworthiness. You can also read the whitepaper created for the currency’s initial coin offering (ICO) to vet more details.

If you’re unsure or don’t want to take the time to research coins you haven’t heard of, stick with investing in the top cryptocurrencies, including Bitcoin, Ethereum, Litecoin, and Cardano.

4. Calls from "the IRS"

This old-school scam has been a way for bad actors to steal credit card information for years, and some scammers have updated to jump on crypto trends.

The scam is this: You’ll get a call from the IRS or a private company telling you that you owe money for taxes or debt. The caller states you can clear the debt right away by making a payment over the phone, in this case via Bitcoin. They give you a wallet address, and you transfer your currency, with no way to trace or retrieve it.

This scam is easy to avoid. Don’t ever give identifying or financial information to someone who calls you asking for it. No one from the government will call you about money owed; you’ll always get that information in the mail.

If the caller claims to be with a private company, hang up, find the company’s contact information and call the company yourself to ask whether they contacted you.

5. Pump and dump

Just like we see with the pump-and-dump scheme in the stock market, some scammers will inflate the value of a currency by scamming investors into buying in, then sell their own shares while the price is high.

The premise is that creating a bunch of demand for an asset -- by convincing a lot of people to place orders for it -- raises the value of that asset. When those in the know then sell their positions for a big profit, the artificial value quickly drops, and everyone left holding the asset loses out.

Sometimes these schemes are orchestrated by a group of nefarious investors deliberately manipulating the market for their collective profit. Sometimes the investors are unwittingly pumping the value of a currency that a scammer convinced them is the next hot investment. Unaware of the scheme, they fail to sell before the price drops, and only the scammer profits.

To avoid falling victim to this scheme, don’t ever invest in something based on a tip from someone who was paid to tell you about it.

6. Twitter hack

In July 2020, the FTC reported on a Bitcoin scam in which scammers hacked into Twitter accounts and contacted the accounts’ followers asking for money in Bitcoin.

If you ever receive an unexpected message from someone on social media asking for payment in any form, be wary. Contact the person on another platform to confirm the request before sending money. If their account was hacked, they’ll be grateful to you for making them aware!

You can also check whether the wallet address someone gives you for sending a crypto payment is connected with a scam through the Bitcoin Abuse database.

7. Blackmail emails

For years, scammers have been sending blackmail emails, usually to men, claiming to know a secret they’re keeping from their wives. To keep them from sharing it, they demand payment in Bitcoin.

Reports of the scam spiked in April 2020 again, according to the FTC. This was likely in connection with a data breach around that time. Scammers gained access to email addresses as well as passwords they could use to "prove" to targets that they had access to their browser history or computer.

If you get an email like this, don’t send money. Instead, report it to the FTC.

8. Chain referral schemes

Chain letters have been around for a long time, with email only compounding their ability to invade our lives.

With this referral scheme, people pay in cryptocurrency to join online programs. They believe that if they recruit others to join, they'll earn big rewards. The FTC reported on two of these schemes in 2018, which had people pay to join using Bitcoin and Litecoin.

Avoid chain schemes and other online scams by deleting these emails as soon as you receive them. And don’t give your money to a stranger who reaches out with an unsolicited opportunity -- they almost always stand to gain from your inevitable loss.

Protect yourself from Bitcoin scams

The complexity and relative newness of cryptocurrency investing makes the space ripe for scammers taking advantage of new investors.

The best way to protect yourself from scams is to do your research before putting your money anywhere. Only use reputable cryptocurrency exchanges and understand the potential risks and reasonable rewards of your investments.

Don’t believe any claim that promises guaranteed returns; free money; or extremely low-risk, high-return investments. Legitimate investment takes time and patience.

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