Risky Bitcoin Dealings and How to Avoid Them

By Jumpy Bitcoin, Escrow, Scams

Bitcoin is an amazing tool both for executing new types of commerce that were, various reasons, impossible before or completing the existing types of transactions in a superior fashion. Bitcoin affords flexibility, security, and anonymity and is powerful in the hands of users with the proper understanding of how it works and how to use it. 

An unfortunate side effect of bitcoin's simplicity is that it can be easy for the uninitiated to fall into traps set by nefarious users. Bitcoin is anonymous, so in many transactions there is little recourse in the case of a scam. The general path for one who has fallen prey to this type of activity is to get a vindictive community to crowdsource 'doxing' of the wrongdoer. The goal of a dox attack is to uncover the identity of the target and either force them to make good on the transaction in question or bring some sort of equitable harm to him/her. Depending on how careful the perpetrator has been, the goal of successfully uncovering his/her personal details falls somewhere between difficult and impossible. Obviously, the vigilantism of doxing comes with significant downsides and makes the bitcoin economy a bit of a 'wild west.'

The key to avoiding these sorts of interaction is to use common sense in your transactions, limiting your exposure to bad actors. 

First of all, be skeptical of everyone you deal with. A common mistake is to trust the validity of websites with subjective measures of their 'legitimacy' such as a professional design, the appearance of a high volume of business or even a history of successful transactions. A famous example, Mt. Gox, illustrates all of these points. Mt. Gox had a slick website with functional code and huge amounts of data verifying the highest volume of transactions in the BTC exchange industry. They even had public identities of key figures and a registered business that could be found legally liable for problems. Even so, Mt. Gox users are struggling to recoup pieces of their assets that were tied up in the site when bit coins suddenly went missing. The point is, trust no one and protect your bitcoins.

A great way to protect yourself from risk is the use of an escrow service. An escrow is an unbiased third party that holds a prepayment for the goods or services until the buyer has signaled that they have received them. At that time, the escrow provider releases the payment to the seller. The escrow needs to be trusted by both parties and is generally a member of a community that has verified a lengthy history of successful transactions with a variety of bitcoin users. It is important to remember that even using an escrow does not fully protect you from counterpart risk, as your coins can still be absconded with by the provider. However, a good rule of thumb is to never trust someone with more coins than they have been entrusted with at one time in the past. This will mean that they have at least withstood that level of temptation once in the past.

The bottom line is to be aware that the bitcoin economy works differently than fiat economies and that digital transactions with little accountability require a bit more trepidation than you might be used to. The good news is that the economy and community are constantly growing stronger and that if you keep your wits about you, you will enjoy the greater flexibility and power of cryptocurrency.