Whether you’re new to Bitcoin or an old pro, it’s easy to get scammed by someone who’s clever. Everyone is vulnerable and wants to protect themselves, but as more and more media attention starts to happen, more and more scammers will appear and try to get someone to pay them for nothing. This doesn’t only apply for Bitcoin, but also for other cryptocurrencies out there. We decided to focus only on Bitcoin this time.
There was my friend, the one we’ll call Carl (though that’s not his name) who was selling his mostly-new AMD video card to someone who wanted to pay in Bitcoin. Carl looked it up. The guy was actually giving exactly the amount that the card was worth. But Carl had never dealt with Bitcoin before, and thought I was the only one crazy enough to want to trade in the virtual cash. And he did need the money. But the problem was, he didn’t ask any questions. He didn’t verify the funds, and only asked me which program I would recommend as his wallet so that this trade could go through. The transfer began, the other guy said. Carl sent the card, and made sure it had a tracking number.
The following day, he checked on the transfer. The funds just weren’t in his wallet, so he called me about what to do. He hadn’t verified the sender’s public account ID, so he had no way of tracking it. He spent €30 and had the shipment reversed. At least he didn’t completely lose the card. He turned around and sold it to a friend for 90% of its original price, where before he was selling it for 50%. The friend took pity on the fact that he almost got ripped off, and I could validate the whole story. A month later, the funds have never arrived.
The current scams with Bitcoin are limited, but they do exist. Generally, scams are about trying to get something for nothing, and take advantage of a person’s lack of knowledge about how things really work. So we’re going to teach people the basics of how to avoid scams.
1. The Mechanics: Like any malware, there are hundreds of creative ways to get this onto someone’s computer. But ultimately, it requires the user to do something which cooperates with the scammer’s wishes in order to get the software onto your computer.
2. Avoidance: ALWAYS check things through official channels. If something is a little too convenient, confirm the convenience through official channels. If something is new and you haven’t heard of it, confirm it through official channels. If your bank wants you to click on links in your emails, try logging in through the web site normally to confirm whatever is being said (you will almost always have a notice in the account login which verifies any contact your bank has with you). It takes a little more work, but it will save you a metric tonne of headaches.
3. The Bank Closed Your Bitcoin Account: If anyone ever mails you to inform you that your Bitcoin account is closed, and provides you with a link to unlock it, you can disregard their message. The truth is that nobody can close a Bitcoin address once it’s opened.
1. The Mechanics: The web link provided in these emails leads to a web site that asks to run java on your machine—which is actually a downloader which puts a Trojan in place that then looks in common locations for your bitcoin wallet. If your wallet is not password-protected, the thieves have access to your account forever after. Another application might be malware which runs a miner on your system to make the scammers money.
2. Avoidance: The easy way to avoid this is to learn to ignore it. I don’t think anyone’s fallen for this yet, but it bears mentioning because it’s a variation on the fake bank email scam, and rather an inventive one. But it plays on fear and greed. Consider that the banks don’t control Bitcoin—it’s controlled by 50.1% of all of the bitcoin users as a collective body. Nobody can close a Bitcoin address… it just keeps going, and can receive forever. If you’re really that worried about it, create a new address and all transfer money to the new address you created, then delete the old one. And be sure to keep your wallet password-protected!
4. PayPal for Bitcoins: PayPal is sent for cash, then Bitcoins are to be issued. With Bitcoins once they are send, they cannot be received back unless the person who owns the bitcoin address you send the coins to, sends it back to you.
1. The Mechanics: Usually innocent, though some malicious people are trying to claim others
PayPal accounts on the mistaken belief that the funds in the account are irrefutably theirs.
2. Avoidance: Don’t use PayPal for buying or selling Bitcoin. Really, the best option is to use one of the existing exchanges which allow you to do this as a part of their service.
5. Escrow Services: A person has something up for sale, or wants to buy. But can they trust the other side of the transaction? Whether you buy or sell, escrow services add a layer of verification which is not built into Bitcoin at all.
1. The Mechanics (Buying): The buyer and the escrow agent are secretly in cahoots for this version’s mechanics. The buyer claims to have a long history of transactions with this individual who can hold the funds in escrow. Buyers insist on this one agent—the scam relies on the seller agreeing to use this one agent. The funds are transferred and can be seen in the account of the person holding the funds. The seller ships, proves that the shipment is underway (usually with a non-reversible carrier, such as the postal service), and waits for the funds to clear. They never do, and the account with the funds in it either disappears or the person associated with it does. The buyer may also complain of being ripped off. But in any case, the buyer makes off with free (stolen) merchandise.
2. The Mechanics (Selling): The seller and the escrow agent are secretly in cahoots for this version. The seller insists on using a particular agent for the transaction. Again, the funds are transferred but this time the seller uses a reversible carrier (such as UPS or DHL) who will gladly recall a shipment for a hefty fee based on the weight of the item, which may in fact be something worthless like shredded newspaper. Alternately, they might try to make a fake shipment number and claim to not know why it can’t be tracked on the web site.
3. The Mechanics (Lone Agent): For this version, neither the buyer nor the seller is in cahoots with the agent. But the buyer and seller agree that this person “seems legit” and so they use the advertised services. The lone agent is actually a scammer, and makes off with the fee, then moves off to another account which was created months or years ago to give the impression of credibility. Rinse, lather, repeat.
4. Avoidance: The main way to avoid this is to use the correct forums and to find people who have a lot of credibility in the community, if you’re going to use an escrow agent. The Bitcoin Talk forums are filled with people who have been around a very long time, who have posts which seem to be thoughtful and even kind at times (kindness is an indicator of conscience, though it should be balanced with the ability to say “screw you” if there is something wrong). Of these users, a few offer escrow services for a small fee, and even for no fee. So long as you’re willing to cover the BTC฿0.0005 fee two times, your transaction can go through fairly quickly. Find someone well-established who is willing to be the middle-man.
There are likely to be other scams out there. In the world of Bitcoin and other cryptocurrencies, “caveat emptor” (Latin for: “let the buyer beware”) reigns supreme. When those funds are paid, there is no reversal of the transaction, no appeal to any authority, no controls to make it work like anything but cash.
The systems which are in place must necessarily work with one another, however, and so Bitcoin will be outside of regulation for a while. However, almost every government in the world regulates conversion of cash to and from any kind of resource. Exchanges are under close scrutiny for evidence of money laundering schemes, and would necessarily keep a watchful eye on large-scale transfers (as the law requires them to do). But really, the way that this money is protected is necessarily dependent on Bitcoin users themselves.
Which means you.