Many people unfamiliar with cryptocurrency may find it helpful to learn about what bitcoin is—and why you might want to avoid it. Cryptocurrency is digital money, which means there’s no physical coin or bill—it’s all online. You can transfer cryptocurrency to someone online without a go-between, like a bank or other financial institution. Bitcoin and Ether are well-known cryptocurrencies, but new cryptocurrencies are cropping up all the time.
Why do people use cryptocurrencies?
Some use cryptocurrencies for quick payments and to avoid transaction fees. Others purchase cryptocurrencies as an investment, hoping the value goes up. You can buy cryptocurrency with a credit card and the “money” is typically stored in a digital wallet, online on your computer or on other hardware.
Investing in cryptocurrency
As with any investment, before you invest in cryptocurrency, know the risks and how to spot a scam. Here are some things to watch out for as you consider your options. Remember this: Like the stock market, no one can guarantee you’ll make money. So there is risk involved. Anyone who promises a guaranteed return or profit is likely a scammer. Just because an investment is well known or has celebrity endorsements does not mean it is good or safe.
- Cryptocurrencies aren’t backed by a government.
Cryptocurrencies are not insured by the government like U.S. bank or credit union deposits are. This means that cryptocurrency stored online does not have the same protections as money in a bank account.
- A cryptocurrency’s value changes constantly.
A cryptocurrency’s value can change by the hour. An investment that may be worth thousands of U.S. dollars today might be worth only hundreds tomorrow. If the value goes down, there’s no guarantee that it will go up again. On the flip side, it can also go up, which is what the main attraction is for investing in them.
- Not all cryptocurrencies—or companies promoting cryptocurrency—are the same. Perhaps the most well-known cryptocurrency is Bitcoin. There are some things you might want to know about the safety and security of investing in this and others like it. As with everything, the scammers get ahold of new technologies and trends and find ways to scam people. Bitcoin is no exception.
Common cryptocurrency scams
Millions of cryptocurrency investors have been scammed out of massive sums of real money. In 2018, losses from cryptocurrency-related crimes amounted to $1.7 billion. The criminals used both old-fashioned and new-technology tactics to swindle consumers through schemes based on digital currencies exchanged through online databases.
Watch out for anyone who:
- guarantees that you’ll make money.
- promises big payouts that will double your money in a short time.
- promises free money in dollars or cryptocurrency.
- makes claims about their company that are not clear.
Beware of these six crypto scams:
- Fake Bitcoin Exchanges – Beware of a fake exchange BitRKX, a large exchange that has taken many people’s money. Stick with popular, well-known Bitcoin exchanges and forums so that you get news of fakes quickly.
- Fake Cryptocurrencies – A common scam is to present alternatives to Bitcoin. Luring people in by saying it’s too late to cash in on Bitcoin, but here’s a new cryptocurrency you can buy. Scammers can take your investment money and funnel it into their own personal accounts.
- Ponzi Schemes – Basically a pyramid scheme whereby new investors’ money is paid to previous investors.
- Old School Scams – Someone emails you from the “IRS” and says you owe back taxes to be paid immediately. Instead of money transfers, the fraudsters ask for money to be transferred with Bitcoin. The Federal Trade Commission (FTC) offers some advice to follow: If you see a tweet (or a text, e-mail or other message on social media) that tells you to pay with Bitcoin, it’s a scam.
- Malware – If your Bitcoin is connected to the Internet, scammers can use malware to gain access to your accounts and drain your funds. So avoid this risk by not clicking on links in e-mails, etc.
- Pump and Dump Scams – Oftentimes related to celebrity endorsements, scammers will get together and buy up penny stocks, market them to you as a great deal and then drain your funds.
Cryptocurrencies are volatile investments. Don’t fall prey to the above scams—if your curiosity is peaked, do your research and invest only a small amount. Stay alert and trust your instincts. If something seems too good to be true…it probably is.
Resources: FBI.gov, FTC.gov, Thebalance.com, Heimdalsecurity.com, Theconversation.com