Scams around Bitcoin and how to avoid them – Ting Wang

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Is Bitcoin itself a scam?

The Cambridge English Dictionary defines a scam as ‘an illegal plan for making money, especially one that involves tricking people’.

Bitcoin is, by popular consensus, a digital asset that is designed to operate as a medium of exchange that utilises the Blockchain network. As such, it is far from the truth to label Bitcoin as a scam itself. On the contrary, our team sees Bitcoin as digital gold and, provided a few hurdles are overcome, can become a contender to revolutionise the financial system.

The fact that Bitcoin is often associated with scams is that, like many new ideas and concepts, there are cunning, malicious actors behind these scams who try to make a quick profit by targeting the innocent and unsophisticated newcomers.

Popular Bitcoin scams and ways to avoid them

High yield investment schemes

When you are provided the promise of the possibility of doubling your money within 5 days with no work needed from you, it may sound too good to be true because guess what? It is.

High yield investment schemes have been around for a long time before the invention of Bitcoin. The creation and popularity of Bitcoin has simply added fuel to the fire. Given the transferability and pseudonymity of Bitcoin, it makes such schemes much easier to implement than before.

Luckily, these schemes are very easy to identify and avoid. Typically, they are marketed very heavily, dependent on a lucrative referral system, and typically generates the promised returns initially. However, when scrutinised further, one can always find a few flaws: 1) there isn’t really a sound business model from which the money is being made; 2) the identities of the founders are generally hidden carefully; 3) the yield or interest rates are abnormally high, typically exceeding 100% per annum; and 4) there is a ‘hype’ and ‘frenzy’ that is clouding the judgement of the platform participants. If one does their research thoroughly, they should rarely (if ever) fall victim to these schemes.

Man in the middle scams

This scam involves three parties, the scammer, the victim and the innocent Bitcoin seller. However, it is common practice that only the scammer is in contact with the victim. We have encountered a number of real-life examples, one of which we are going to share below in order to better illustrate the scam than just a simple explanation.

The victim has contacted the Scammer regarding an advertisement for a puppy that is up for adoption. The advertisement is fairly legitimate, except for the fact that the puppy is not located locally. A $500 vaccination fee is required in order to bring the puppy into the country. The victim is more than happy to pay the vaccination fee as they are overwhelmed by the cuteness of the puppy!

Unknowingly to the victim, the scammer is simultaneously talking to a Bitcoin seller in order to purchase $500 worth of Bitcoin. Everything seems to check out for the Bitcoin seller who happily provides their bank details to the scammer.

Upon obtaining the bank details, the scammer then passes on the details to the victim who gladly deposits the $500 into the account, thinking it is payment for the vaccination fee. Upon receiving the money, the Bitcoin seller releases the Bitcoin to the scammer, who then disappears, leaving the victim out of pocket and puppy-less.

If you think that the story above is cunning and scary, the real-life example goes a few steps further. The scammer actually doesn’t stop there. Further contact was made to the victim requesting payment for a ‘Level 2’ quarantine fee, a larger amount than initially requested. This trend continues until the victim finally realises that it is a scam or simply runs out of money.

How to avoid the scam?

· Be sure to verify that the identity of the person that you are talking to online matches their profile.

· If they claim to be ‘X’ but want you to deposit money into someone else’s bank account, that is usually not a good sign.

· Be sure to read all email correspondences and other messages carefully.

· Furthermore, calling the other party if possible is very important. Although some scammers are fluent in English, it is a second language to a lot of them and there can be obvious grammatical mistakes.

· Lastly, don’t be greedy! When something seems too good to be true, it generally is.

Nigerian prince

The Nigerian prince scam, similar to high yield investment schemes, has been around for a long time. Bitcoin is not the cause of the scam but is used (only recently) to make the scam more feasible for the perpetrators.

For those who are not familiar with the scam, it typically involves a polished, handsome young man who develops a romantic relationship with the unsuspecting victim, often through online chatrooms or dating sites. In addition to being young and handsome, this person also poses as a member of a high-profile family, e.g. a prince. The victim then falls in love with this prince and quickly the romantic relationship develops into promises of marriage.

However, it is not long before the prince contacts the victim claiming that he is in a foreign country and is in need of some money. The reason behind the sudden need for money can vary, but they include a troubling situation, a bad injury, or a situation where he is chasing a large sum of money, e.g. an inheritance, however, requires some upfront cash to unlock it, e.g. an administration fee. The only catch is that the payment must be via Bitcoin given that the banking system in the foreign country isn’t reliable.

At this stage, the victim is 100% confident that they have found their true love, buys the Bitcoin with no hesitation whatsoever and sends it across. It is then obvious what happens from there.

How to avoid this scam?

· Make sure you meet your prince in person before trusting him, especially when money is involved, no matter how concrete the reasons are.

Money mule

Money laundering has been in existence for years, and the mastermind behind it all often needs ‘mules’ to place the money into the financial system.

It is widely known that Bitcoin has been used to facilitate money laundering activities. A typical process involves the following steps:

1) Person A wants to launder their illicit cash proceeds into the financial system so that they can buy a luxury apartment.

2) Person A then finds Mule B, Mule C and Mule D and gives them $100k each to deposit into their bank accounts.

3) Person A then locates a Bitcoin dealer. Person A then instructs Mule B, Mule C, and Mule D to open accounts with this Bitcoin dealer and purchase Bitcoin from them.

4) Mule B, C, and D then sends the Bitcoin into a wallet address as instructed by Person A. Person A then uses a digital currency exchange in a country that has low requirements regarding anti-money laundering laws, to ‘cash out’ on the Bitcoin.

5) The illicit cash proceeds are now part of the financial system and Person A describes it as returns on investments. Person A can then use this money to buy luxury goods, etc.

How to avoid this scam?

· Always be wary when approached by strangers to deposit money and/or forward money, especially when asked to convert them into Bitcoin. These are typical signs of a money laundering network attempting to recruit a ‘money mule’.

These are not technically scams but not recommended for beginners:

– Initial Coin Offerings: stay clear unless you are very confident about the project. This is extremely high risk.

– Margin trading for digital currency: once again, extremely high risk and known to be subject to price manipulation.

– Alternative coins: many alternatives to Bitcoin are far less secure and much riskier.

– Online digital currency wallets: it is always recommended that each user should have their own hardware wallet. There are many online digital currency wallets that turn out to be scams and the coins disappear with the platform.

– Other novelties such as crypto ‘collectibles’: novel ideas may sound fun and all, but they can turn very ugly when money and greed are involved.

Interested in Bitcoin and wondering where you can get it?

It really depends on where you are located. However, we list a few below:

Binance.com is the largest cryptocurrency exchange by trading volume.

Kraken.com is known for their powerful trading engine and customer-friendly interface.

Liquid.com is suited for advanced traders, given the breadth of functionalities it has, including margin trading and lending abilities.

Coinstash.com.au is the newest platform in Australia to buy and sell Bitcoin, more suited to new traders due to simplicity.

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