A couple of days ago, I received the following from a friend: “Some guy from Poland asked my mother to receive Western Union money and then transfer it into bitcoin to send to Australia. This sounds like a scam. Have you heard of anything like this? Is this a money mule type of thing?”
Say no more. The answer is yes. It’s a scam. One of many, probably thousands, in the Bitcoin sector.
This one was especially painful because the man perpetrating it had befriended a lonely widow over a period of weeks. She enjoyed the special attention. They were getting along famously. Then he dropped the bomb on her.
She smelled a rat and called her son, who saved her from losing money. Then he “tried to throw a guilt trip on her because she didn’t want to do it.”
Ouch. As a fan of the technology, that hurts personally. Like so many others, we desperately want this sector to be clean of rackets. Go away scammers.
Rackets Chase Innovations
That said, I don’t regard the presence of scams in the crypto industry as discrediting of the technology. It’s the opposite. Scamsters represent the dark side of entrepreneurship. They go where the money is, the money tends to follow the newest coolest thing.
Think of the railroad industry in the 1870s. Scams were everywhere: stock fraud, theft, embezzlement, swindles, cons, and rackets of all sorts. And, yes, political scandals. They follow every new technology. Sometimes it is hard to tell the real thing from the fake one.
Bitcoin and crypto in general are especially susceptible to shady operations. People assume two things about this sector: 1) it is too hard for normal people to understand, and 2) if you are not in, you are missing out. This is a perfect opportunity for the con man!
How can we recognize them? It’s not always easy. But there are certain patterns we’ve seen again and again.
Five Main Ways
1. Mining contracts. Here you will hear wild claims about the money you will make if only you send Bitcoin right away. They will make your money work for you. You buy into it and, whoops, the fake company runs off with your money. You feel like an idiot but you have no idea how to go about getting your money back. There are real mining pools you can join but it is never as easy as sending crypto to a public address and then getting rich.
2. Bad Wallets. This is pretty simple: download this wallet and transfer your holdings into them. Poof, the money disappears. They sometimes take names similar to real wallets, as was the case with Electrum Pro, which was a version of the real Electrum wallet. Fake wallets have appeared and disappeared on legitimate download sites.
3. Evil Forking Schemes. When a blockchain hardforks, existing owners can get their new tokens. But it is not as easy as entering your private keys online. You do that and you are likely to have both the old and new funds stolen. As Veksler says, the only safe way to claim forked tokens is to move your old tokens to a new wallet first. It’s not rocket science but you have absolutely to know what you are doing.
4. Fake Exchanges. Many if not most crypto owners have no clue about the basic issue: do you own keys or not? If you have a private wallet or a hard wallet, you do. (Please, please, write down your seed words and put the paper in a safe place.) If you are using an exchange and storing funds there, you do not own your private keys. People use exchanges to buy and sell crypto and that’s great, but you are ultimately in the position of trusting the exchange. Not all are trustworthy. Scam exchanges will take your money and then give you the runaround when you try to move the money you supposedly own.
5. Wallets for sale. I have to admit I had never of heard of this. According to Veksler, scammers sell wallets that are supposedly filled with tokens but then claim that they forgot the password. So sad. The way to avoid this is simple. Only convert dollars to crypto by receiving your purchase into your own private wallet or through a legitimate exchange.
Now, you might notice something in common about the above. They all want you to precomit money. That itself should be a sign to watch out. Fortunately, most everything you need to know about crypto schemes is available with a quick Internet search. The crypto community has been absolutely fantastic, actually, about policing itself. These people know full well that government will never be effective in preventing fraud in this space.
Consider the Western Union scam that almost robbed my friend’s mother. It is detailed with complete transcripts here. It doesn’t necessarily have to involve Bitcoin either. Money transfer scams have been around a very long time.
Of course there are plenty of people who assume that Bitcoin itself is fishy or maybe an outright Ponzi scheme. The presence of rackets in our midst only encourage incredulity. For everything real in this sector, there are dozens more that are not.
By chance, as I was writing this article, I just got a scam on email pushing me to adopt a new token, available only to me because I’m allegedly famous and influential. Hey, they have a white paper! It must be legit!
A version of this article appeared on Forbes. Disclosure: the author has investments in the crytoasset sector.