How to Spot a Cryptocurrency Scam

Bitcoin Pros, Cons, and Scams

First, a quick and low-tech primer on “cryptocurrency.” According to Google Search’s built-in dictionary, a cryptocurrency is “a digital currency in which encryption techniques are used to regulate the generation of units of currency and verify the transfer of funds, operating independently of a central bank.” The key phrase that makes cryptocurrency so exciting to banks, speculators, and crooks is, “operating independtly of a central bank.”

For banks and Wall Street investment firms, that means “no regulations or enforcers,” something they can really get excited about! For criminals, it means “untraceable money without pillowcases full of hundred-dollar bills.” For con artists, it means “unlimited opportunity to fleece unlimited sheep.”

You may be more familiar with Bitcoin because of its connection with ransomware. When a ransomware infection locks a computer's files, the scammers typically demand payment in Bitcoins, because they are virtually untraceable.

How Bitcoin Is Doing Today

As of this writing, a Bitcoin is worth about $575. That’s not just some guy’s opinion; you really can trade a Bitcoin for that many U.S. dollars right now.

Bitcoins now have value to honest people, too. You can use them to buy things other than illegal drugs, weapons, and p**n. Dell, Microsoft, and Amazon are just three places where you can spend Bitcoins. But don’t think that any of these companies accepts direct payment in Bitcoins.

What really happens, usually behind the scene, is that you give your Bitcoins to an intermediary currency exchange such as CoinBase or BitPay. The exchange converts your Bitcoins into U. S. dollars and gives those dollars to Microsoft, Dell, Amazon, and other merchants.

The exchange takes the risk that the value of a Bitcoin may plummet precipitously, as it has done many times. The exchange’s reward (profit) is a fee that may be paid entirely by either party to the transaction (i. e., you and Microsoft) or split between them somehow; I really don’t know, because companies don’t publicize details of their arrangements with Bitcoin exchanges.

Arguably, Bitcoin may be considered a full-fledged cryptocurrency. You can buy or earn it, and trade it for ordinary, legal things. Ethereum is another legitimate cryptocurrency that seems to be gaining popularity. But other cryptocurrencies may be just window dressing for scams.

Signs of a Cryptocurrency Scam

Many of these warning signs are common to most scams; those near the end of my list are peculiar to cryptocurrencies. Also note that all of these cautions apply to "forex" or foreign exchange scams that operate in similar fashion.

An opportunity to make lots of money quickly is presented to you, unsolicited; in other words, you are supposed to believe that a total stranger (or, at most, casual acquaintance) wants to help you get rich, fast, out of the goodness of his or her heart.

The deal sounds too good to be true. Very few investment returns beat the averages of well-known stock and bond indexes, such as the Dow Jones Industrial Average or Standard & Poors Index. If double-digit monthly returns are promised, or even implied, it’s a scam.

You cannot find any independent verification of the claims made. “We’re in stealth mode” makes no sense; why is the stranger telling you about it, then?

Basic pieces of information are unavailable, such as the street address of the company’s HQ and the names of its owners. Of course, the company is not registered on any known stock exchange.

The company’s operations are located in a foreign country, making it seem exotic. Conveniently, it may be a country that speaks a language you don’t understand. Or it may be a country that has little regard for the rule of law.

The company professes to be dedicated to a noble, altruistic cause, with fabulous profits being a mere side effect.

You can buy a higher rate of return by investing more money. Investors in Google or General Motors receive exactly the same return per dollar whether they invest one dollar or one million dollars. The idea behind “levels of commitment” is to extract as much money as possible the first time, before the mark gets suspicious.

There is a “compensation plan.” Only salespeople need compensation plans with multiple quotas of “production” and higher commission payouts. Investors don’t sell.

The emphasis is on recruiting more “investors.” If the person presenting an opportunity presses you to learn who you know and to “share” the opportunity with them, it’s a scam. If the “compensation plan” heavily rewards recruiting, it’s a scam.

There is no tangible product. “Educational programs” don’t count. In most cases, the only real education you’ll get is on how to recruit more people.

There are only vague allusions to the technology behind the cryptocurrency; the location of the servers that “mine” or create cryptocurrency; or who controls the cryptocurrency’s creation and record-keeping.

There is no open exchange for the cryptocurrency. If you cannot convert a cryptocurrency into traditional currency, there is no reliable proof that it exists.

It is ridiculously easy to fake the existence of a cryptocurrency, complete with a Web site that appears to show people trading it, spending it, and withdrawing it. (Especially true for forex scams.) But all of that may be only as real as the monsters in a video game.

My primary concern about cryptocurrency is the possibility that the exchanges (which are complex software systems) can be hacked, or that these unregulated currencies may be more susceptible to fraud. Both have happened already.

So be very, very careful of cryptocurrency investment opportunities. Your thoughts on this topic are welcome. Post your comment or question below...