Cryptocurrency Scams

It’s Already Begun and Arrests Have Already Been Made

The entire virtual currency market has reached a capitalization of nearly $2 trillion dollars in just 12 years. By the end of 2017, the price of a single bitcoin reached $13,889.99. It is no coincidence that just a few weeks later the first three lawsuits against cryptocurrency scammers were filed by the U.S. Commodity Futures Trading Commission (CFTC). The charges the scammers are accused of includes fraud, misrepresentation and misappropriation in connection with bitcoin trading.

Bitcoin Scammers Have Been Busy for a Long Time

James McDonald, the CFTC’s Director of Enforcement, said that one of the scammers “sought to take advantage of that public interest, offering retail customers the chance to use Bitcoin to invest in binary options, when in reality they were only buying into a Ponzi scheme.”

Another of the alleged scammers were said to have “engaged in a deceptive and fraudulent virtual currency scheme to induce customers to send money and virtual currencies,” but the supposedly expert, real-time virtual currency advice that was supposed to be provided in return never was and the investors “never saw those funds again.”

Details of the case against the third scammer were not disclosed when the suit was filed.

Five Different Cryptocurrency Scams

Investors have been victimized by at least five different types of cryptocurrency scams.

  1. Pump and Dump: A veteran scam perfected by Jordan Belfort in The Wolf of Wall Street, the scammers “pump up” or promote an “altcoin” they own in bulk in order to be able to sell it off once the price peaks due to the increased demand they themselves have generated. The explosion in under-sold Bitcoin alternatives (there were 45 of them by the end of 2017) has made Pump and Dump especially viable for scammers and especially dangerous for investors. By the way, Belfort has called cryptocurrencies “a wolf in sheep’s clothing” and said that initial coin offerings (ICOs), the initial price for a new cryptocurrency, were “the biggest scams ever.”
  2. Investment Clubs: The only ones who profit from these online “clubs” are the scammers who run them. Their sites certainly look legitimate and, like binary options sites they’re also sure to feature photos of satisfied members who claim to have made megabucks by trusting the hidden cryptocurrency pros who stand behind the curtain. Just like with binary options scams, the last time you see your money will be when you hand it over to them.
  3. Fake Exchanges: They’re all over cyberspace, and for first-time investors they’re hard to distinguish from the legitimate ones. In December 2017, Korean authorities closed down one of them, BitKRX. What was particularly pernicious was that BitKRX usurped the last three letters of its name from KRX, the Korean Stock Exchange, in order to purposely misrepresent itself.
  4. Fake Wallets: This scam is custom-made for cryptocurrencies. Since “altcoins” are bytes of data, rather than metal, they have to be parked somewhere online in what is euphemistically called a “digital wallet.” Innovative scammers with good marketing skills set up their own digital wallets, advertise aggressively for customers to come along and once they deposit their cryptocurrency in them, it disappears forever.
  5. Ponzi and Pyramid Schemes: If cryptocurrency investments are, as they say, guaranteed to quickly appreciate in value at a skyrocketing rate, why would someone offer you a higher interest than the market currently bears? The most obvious answer is because the offer is a red light for a cryptocurrency Ponzi or pyramid scheme. One of them, GladiaCoin, which promised to double the value of all Bitcoin deposits within 90 days, collapsed from its own weight in June 2017. The phenomenon will continue, since other such online schemes (and there are at least three of them) employ the same 200%-in-90-days business model, and are bound to collapse as well. The main difference between the operators of these sites and Charles Ponzi, for whom the scheme is named, is that these guys, unlike Mr. Ponzi, are anonymous.

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