A guide to identifying and avoiding Bitcoin scams

By Zachary Gruskin Bitcoin, Scams, Escrow, Paper wallet, Security

Criminal activity has become a pandemic in the Bitcoin world. Ever since Bitcoin's explosive price rise criminals have been targeting Bitcoin users. Dozens of new Bitcoin related scams are reported each day, and often the criminals are never caught since it's possible to stay anonymous on the internet with the right expertise. There are a multitude of different Bitcoin scams, and it is important to understand them to keep your money safe. This article will discuss how to identify and avoid Bitcoin scams.
Bitcoin Security
Numerous Bitcoin scams occur when buying and selling Bitcoin. Despite the existence of several major Bitcoin exchanges, a lot of Bitcoin trading activity is peer to peer. The reason for this is it often takes a few days to buy Bitcoin through an exchange, so if someone needs Bitcoin instantly they need to buy it from someone that already has Bitcoin. Also, several Bitcoin exchanges have collapsed in the past, causing major losses for people who were buying or selling Bitcoin on those exchanges at the time. This makes Bitcoin users inherently wary of using exchanges. Additionally, when using exchanges you need to divulge all of your personal information, and many Bitcoin users prefer to be anonymous.

The biggest Bitcoin peer to peer marketplaces include Bitcointalk, Localbitcoins, Reddit, and Bitcoin-otc, and all of these places have serious scam problems. Usually peer to peer Bitcoin trading markets have built in reputation systems, and it is important to only trade with reputable members. There are indeed many reputable traders on each of these marketplaces, and most trades occur without a hitch. However sometimes people will risk trading with members who have little to no reputation, and that's when problems arise. A common scam is for someone to buy Bitcoin but demand that the seller send the Bitcoin first. The scammer will then cut off all contact after receiving the Bitcoin, and since Bitcoin transactions are irreversible there is no way for the seller to get their Bitcoin back. It is crucial to never send Bitcoin first, unless you are selling to someone you've done business with for a long time. If a customer demands Bitcoin be sent first always suggest using escrow. An escrow is a third party who receives the Bitcoin from the seller, and releases the Bitcoins to the buyer only after payment is received. Common escrows include localbitcoins, mitm.io, and several reputable members on Bitcointalk. Often a scammer will stop communicating after escrow is suggested, since they will realize there is no way their scam is going to succeed. Another common scam during peer to peer trades is a scammer will pose as a Bitcoin seller. Most of the payment methods Bitcoin sellers accept are irreversible, such as Western Union, Moneygram, Vanilla Reload, Moneypak, cash in the mail, money orders, etc. A scammer will ask for payment before sending Bitcoin, and then they will disappear. This makes it important to use escrow when buying Bitcoin from someone you don't trust.

Another attack vector for scamming someone during peer to peer trades is using reversible payment methods. Reversible payment methods include PayPal, Google Wallet, Amazon Payments, and anything else which accepts credit cards. Credit card transactions can be reversed up to 180 days after purchasing something. A scammer using reversible payment methods will have no problem sending payment first, and they will often buy Bitcoin from their victim for a month or longer. Then one day the scammer calls their credit card company and reports that all their purchases were unauthorized, and all the money the Bitcoin seller received from the scammer is reversed. Nearly 100% of the time there is no chance of stopping a credit card chargeback which involves Bitcoin, even if you have a scanned copy of the buyer's ID. Escrow wouldn't help either, since payments can be reversed well after the escrow received payment and releases the Bitcoins. This makes it important to use irreversible payment methods when selling Bitcoin to someone you don't know, or you will likely find yourself broke after a month or two of doing business.

When using an escrow for Bitcoin transactions it is crucial you are 100% sure that the escrow is legitimate. Often scammers will suggest using escrow, and then they will create a fake escrow. Official Bitcoin escrows include localbitcoins, mitm.io, and some trusted members on Bitcointalk. There are many sites imitating localbitcoins and mitm.io, and when a scammer initiates escrow you will get an email from one of these imitation sites asking you to deposit Bitcoin or send money. If you send your Bitcoins/money it will go directly to the scammer and you'll never hear from them again. Check the spelling of the escrow's email address or website url very carefully, fake escrow sites usually only have 1 letter different from the real site. Also only use Bitcoin escrows for Bitcoin transactions, not a fiat escrow site like escrow.com. It is easy for scammers to manipulate sites like escrow.com.

Bitcoin lending has become popular in recent times, and it is a great thing for most of the people who utilize it. Bitcoin lending allows borrowers around the world to get loans instantly, and it gives people with Bitcoin an opportunity to make extra money. The most popular Bitcoin lending sites include BTCjam and BitLendingClub, and there is also a significant amount of lending activity on Bitcointalk and Reddit. Unfortunately these sites have become infested with scammers. There are reputation systems built into these sites to minimize scams, but often scammers will build up reputation by taking several loans and repaying them. Then when they get a big loan they disappear. Usually these scams result in losses of 1-5 Bitcoin, but sometimes extremely trusted members will run away with 50+ Bitcoin. This is why it is suggested that borrowers give you collateral under any circumstances, since if they default you can pay yourself back with the collateral. Unfortunately this has resulted in people scamming for the collateral itself. The scammer will offer a loan but demand collateral first, and when they get the collateral they will disappear without sending the loan. Thus, only participate in Bitcoin lending if you can afford to lose the money you lent. Also, only loan to people who you know and trust personally.

There are many Bitcoin 'investment' sites on the internet which promise hourly or daily profits on any amount of Bitcoin you deposit. These sites are known as high-yield investment programs (HYIPs) or ponzi schemes. They often say their profits are from arbitrage or trading in general, but in reality they pay off investors with deposits from new investors. These schemes always collapse, leaving many unhappy investors. Some people get out early and make profit, but more often than not people will keep re-investing their earnings into the ponzi to earn more profits, and end up with nothing in the end. Most Bitcoin HYIPs/ponzi schemes last less than a month, but sometimes they can last years if they become popular enough. The most infamous example is Bitcoin Savings and Trust, which stole 500,000 Bitcoins from users, which was worth $5 million at the time but is worth $310 million today. The moral of the story is don't invest into anything that guarantees unrealistic profits, especially if they don't have a clear business plan. It is more likely than not a scam.

There are hundreds if not thousands of alternative cryptocurrencies, which are based on Bitcoin but have their own unique attributes. Investing in alternative cryptocurrencies can be quite profitable if you invest early and that cryptocurrency becomes popular. This has led to people investing into almost any new cryptocurrency in the hope of striking it rich, and this unfortunately has led to another attack vector for scammers. There have been several alternative cryptocurrencies created solely by scammers in order to get investor's money. Perhaps the most common alternative cryptocurrency scam is the initial public offering (IPO) scam. During a cryptocurrency IPO the developer offers shares of their new cryptocurrency in exchange for Bitcoin, and if their cryptocurrency is unique it is common for people to invest tens of thousands of dollars of Bitcoin. The developer will then run away with the Bitcoin and never release the coin they promised. Some of the most infamous IPO scams are StackCoin, EdgeCoin, and NFD-Coin. Due to this it is essential that you use an escrow when investing in a cryptocurrency IPO. Another common alternative cryptocurrency scam is a developer will release a new cryptocurrency, but take a large premine to 'fund development'. Often the premine is 1-5% of all the coins in existence for that cryptocurrency. Once the cryptocurrency gets popular the developer will dump the premine on the market and crash the price, and then they will disappear. More often than not in this situation the cryptocurrency will have major code issues, and when the developer disappears there is no one that can fix it. This leads to the cryptocurrency losing nearly all of its value. In the case of White Coin and Asia Coin investors lost millions of dollars. Another infamous alternative cryptocurrency scam was Dafuq Coin. Anyone who installed Dafuq Coin was at risk of losing their Bitcoin, since code inside the Dafuq Coin program would take over wallets and send Bitcoin to the hacker. Thus, it is important to only use/invest in new cryptocurrencies which have reputable developers, otherwise you put your money at risk of being stolen. 

Bitcoin/cryptocurrency exchanges have often been the site of major scams. Some exchanges are created for the sole purpose of stealing deposits, such as Coinopend. Coinopend had the appearance of being a real exchange, except all the market data was fake. Prices on Coinopend were lower than anywhere else, which lured people into trading there. Once a customer deposited Bitcoin or any other cryptocurrency onto Coinopend there was no way to withdraw it. Another scam exchange was ShareXcoin, which built up reputation for awhile, and one day shutdown without warning and stole all funds. Essentially the scammer behind ShareXcoin waited until there was a large amount of money on their exchange to attack. Oftentimes it isn't so clear cut as the exchange owner being a scammer however. Exchanges occasionally get hacked, and if the hacker steals enough funds the exchange becomes insolvent. It is rare that exchanges shutdown right after a hacking and admit what happened. Instead they will keep running the exchange with funds from new deposits, in the hope that eventually their profits will make up for what the hacker stole. This happened to Cryptorush, Vircurex, and Mt. Gox, which were all popular exchanges. These exchanges were able to operate for awhile after the hacking, but ultimately were forced to shutdown due to lack of funds. In the case of Mt. Gox investors lost hundreds of millions of dollars. I consider this to be a scam, since these exchanges weren't honest to investors after they were hacked, leading to more victims and property loss. It is important to only use well known exchanges when trading Bitcoin/cryptocurrency. The most reputable exchanges include Bitstamp, BTC-e, Houbi, Cryptsy, Mintpal, and Bittrex. Never keep your funds on an exchange for an extended period of time either, even the most reputable exchange can be hacked and then you'll lose your money.

Another common attack vector for scammers is stealing Bitcoin directly out of people's wallets. If a hacker gains access to your Bitcoin wallet.dat file, and your wallet.dat is unencrypted, then it is easy for the hacker to send your Bitcoin to themselves. Hackers make programs which upload your wallet.dat file to their server, and if your wallet is unencrypted you will see your Bitcoins disappear soon after downloading such a program. Hackers have also created key logger programs, and if you download it the hacker will be able to steal your Bitcoins even if you encrypt your wallet. It is also possible for hackers to figure out your password through a brute force attack, where they go through every possible combination of letters/numbers until they find the right password. It becomes exponentially harder to brute force attack a password the longer and more complex it is. This makes it important to use a long and complex password when encrypting your Bitcoin wallet. Never download programs from strangers on the internet, only download programs which are made by reputable developers. Due to the dangers of storing Bitcoin in a digital wallet, many people choose to use paper wallets. A paper wallet has both the public and private keys printed on it, so you can deposit and withdraw the Bitcoins. When you deposit Bitcoins to a paper wallet it takes them offline, out of the reach of hackers, as long as you don't store any images of the paper wallet on your computer/the internet.

Finally, when buying products or services with Bitcoin be sure you are dealing with reputable merchants. Bitcoin transactions are irreversible, so if you send Bitcoin to a scammer there is no way to get your money back if they don't send the product. There are numerous reports of people getting scammed out of products or services when buying with Bitcoin, although most transactions occur without a problem when customers use proper precautions and common sense.

Thus, the Bitcoin world is infested with scammers, and the scams come in many different forms. When buying and selling Bitcoin it is important to only deal with reputable people, otherwise you can easily lose your money. Using an escrow is recommended when trading Bitcoin with someone who has little to no reputation, and it is crucial to check that the escrow you're using is legitimate since scammers often create fake escrow sites. Bitcoin lending sites have also been the source of numerous scams. Scammers will build up reputation on lending sites by paying off a few loans, and then they'll run away with a big loan. Only loan Bitcoin to people you've known for a long time, and requiring collateral is recommended.  Avoid all Bitcoin sites which promise guaranteed profits just for depositing Bitcoin, these are often ponzi schemes, and end with the investors losing their Bitcoin. When investing in new alternative cryptocurrencies be sure that the developer is well-known, since several alternative cryptocurrencies have been made just to scam investors. When trading on exchanges only use the most reputable exchanges, since sometimes exchanges end up being scams. Also never keep Bitcoin on an exchange for extended period of time, sometimes even reputable exchanges get hacked and then you'll lose your money. Properly encrypting your wallet is of the upmost importance when storing Bitcoin on your computer, and paper wallets are recommended when storing significant amounts of Bitcoin. Never download programs from unknown developers, since there are numerous programs out there which are made solely to steal Bitcoin. Although Bitcoin scams may seem overwhelming when reading about them in an article like this, you can keep your Bitcoin safe if you exercise the correct precautions. Understanding the various Bitcoin scams and how to avoid them is essential if you're going to use Bitcoin.