In 2009, the value of today’s most popular and successful cryptocurrency, Bitcoin, was just US $0.05. One could get hold of it quite easily and in large quantities. Although it’s getting much more difficult and expensive to mine bitcoins today, this digital currency is worth thousands of dollars (over $20,000 at the end of 2017) and is officially gaining more traction as a means of payment.
There are varying views on investments in blockchain startups. Still, the high volatility of this market results in even higher yields, albeit associated with certain risks.
Impressive opportunities to make money quickly cause a tremendous buzz and interest in digital currencies. However, this also attracts a lot of sophisticated adventurers and outright scammers to this industry.
Fraud with the purchase and sale of digital currency
Cryptocurrency beginners wishing to buy digital coins are often tricked in a very simple way: they are lured with huge returns. There is no shortage of accidents like this. In Moscow alone, a buyer lost $250,000 in one transaction in January 2018 while another unfortunate crypto trader in USA lost $600,000 when purchasing bitcoins. Scammers rented an office, accepted the payment through the cashier and ran away through the back door with the money.
When selling cryptocurrency, scammers usually disguise their fake resource as an established and successful business which helps them to collect large amounts of electronic money. That done, they disappear without paying cryptocurrency sellers back.
An ICO is used to raise funds which are supposed to be allocated to develop the startup products and pay returns to investors. Cooperating with the world sports stars or well-known and respected politicians is a marketing trick to raise more investment. However, celebrities may not even know if the startup that pitched them is real.
Potential investors risk investing in a beautifully sold bubble. The industry has seen a lot of such scams. One of the most gruesome examples is Benebit. Fraudsters stole about $2.5 to $4 million from its investors during the token sale.
Less than 10% of thousands of innovative ICO projects across the world are profitable and backed by real demand.
Yet another risk factor investors should consider while providing funds for the ICOs is a rapid growth of phishing (fake) webpages that are almost impossible to tell from the original. Fake webpages raise funds through their own crypto wallets and steal personal data of their investors along the way.
Cryptocurrency pyramid schemes
MyCoin blockchain exchange incorporated in Hong Kong promised its users up to 250% returns annually. One day in 2016, it disappeared from the Internet having stolen almost $390 million worth of its investors’ funds.
Thousands of users who invested in BitConnect, Bitcoingolem and the Trinity cryptocurrency management system – all of which turned out to be pyramid schemes – have also lost millions of dollars.
One can always spot a financial pyramid. Unrealistic promises and super-high dividends are amongst the first signs signaling that the project is a scam. However, the hope that it’s not going to happen in this particular case together with notorious human greed often outweigh the fear of loss.
Theft of the mining equipment
Just 3 or 5 years ago, one could mine digital coins using a regular gaming laptop. However, the value of the solved block code has decreased over time while the time costs, power, equipment and complexity of the search algorithms have skyrocketed. Today, one needs large farms coupled with enormous reserves of power capacity to mine the digital money.
Equipment such as graphics cards and Antminer S9, the most popular module farm for collecting digital assets, is no longer relevant. Today, cryptocurrency mining occurs almost entirely via special devices called ASIC.
$2 million was stolen from the mining farms in Iceland in March 2018. Similar expensive equipment worth over $35,000 was stolen from a mining farm in Novosibirsk.
Companies that manufacture mining equipment are also the targets of scammers. Disguised as a seller of the popular Bitmain products which are well-known among crypto enthusiasts, the fake site "sold" the equipment with discounts. It is still unknown just how many buyers were lured with this offer and what their losses amounted to.
The risks of cloud mining
Cloud mining is one of the ways to make a passive income in the digital market. This is investing in the dark because investors do not even know where the mining farm they invest in is located.
However, they do not need to waste their time on mining cryptocurrency or use their own computers. All they have to do is to check their account balance from time to time. Obviously, their income corresponds with the volume of power the investor has bought. Established and credible resources provide their users with a stable income.
However, beginners are often lured to join the short-term fake services and face “technical problems” when trying to withdraw their funds or returns. The number of these short-lived platforms significantly outperforms credible services. However, one can tell the platform is a scam by its overly attractive investment terms.
Theft of the personal data
The security factor is one of the most vulnerable points for the crypto industry. The personal data of the owners of the blockchain companies can be stolen in a number of ways. Hacker attacks is the most obvious option. Other possibilities include phishing web resources of consultancies that advise during the process of buying shares, unscrupulous traders and scam software applications.
Still, the most ridiculous and saddening thing is sharing one’s phone number on social media, then counting on the security of one’s keys, passwords and other digital data.
Hacker attacks targeting cryptocurrency exchanges
Bitcoin is one of the official currencies in Japan. In 2017 alone, 150 cyber-attacks targeting the cryptocurrency exchanges in this country were recorded, despite the top-level security of the blockchain trading platforms.
The amount of stolen bitcoins exceeded $6 million while the high- tech Coincheck exchange lost 500 million units of NEM, another digital currency.
Remember, this happened in Japan where two-factor encryption is used by exchanges to identify users. You can imagine what can happen in other countries…
Dubious owners of the digital currency exchangers
Unscrupulous and openly fraudulent exchanges lure unfortunate customers with low withdrawal and conversion fees of their cryptocurrency funds. Sometimes they even orchestrate a hacker attack targeting their own trading platform. As a result, users may lose their personal data and digital money.
When buying or selling any of the cryptocurrencies, be it Bitcoin (BTC), Litecoin (LTC) or Ether (ETH), one should not be tempted by the low prices as well as study the history of this token in advance.
In theory, cryptowallets and transactions traveling through them are anonymous. However, cybercriminals are looking for large transactions. A top-level security program offered to the owner of the digital wallet, while appearing to be useful, can in fact turn out to be a virus which scammers use to steal funds. According to the international insurance company RSA, there are over a hundred malicious applications like this.
Having been lured by the prospect of an easily gained income, one should not make a decision based on emotions, and believe in obsessive claims promising huge returns. It is always worth checking out the sources.
The blockchain system as well as investments in startups are quite complicated: only 10% to 15% of projects turn out to be profitable. The times when a loner could make a fortune mining are long gone. Complex and rapidly changing digital market requires its participants to make rational decisions, calculate and acquire special knowledge and skills.