What you need to know about cryptocurrency and scams

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Confused about cryptocurrencies like bitcoin or Ether (related to Ethereum)? You're not alone. Before you use or invest in cryptocurrency, learn how it differs from cash and other payment methods, as well as how to recognise cryptocurrency scams or spot cryptocurrency accounts that could be hacked.

What is cryptocurrency?

Cryptocurrency is a type of digital money that exists solely in an electronic format. Cryptocurrencies are usually purchased using your phone, computer or a specialised cryptocurrency ATM. Bitcoin and Efirium are the most well-known cryptocurrencies, but there are many others, and new cryptocurrencies appear regularly.

How do people use cryptocurrency?

Cryptocurrency is used for a variety of purposes. Some use it for quick payments and to avoid the transaction fees of traditional banks, while others value it for providing a certain level of anonymity. Some view cryptocurrency as an investment, hoping for an increase in its value in the future.

How do I get cryptocurrency?

Cryptocurrency can be purchased on an exchange, through special apps, websites or cryptocurrency ATMs. It can also be earned through a process called mining, which requires the use of advanced computer equipment to solve complex mathematical problems.

Where and how do I store cryptocurrency?

Cryptocurrency is stored in digital wallets, which can be online, on your computer or on an external hard drive. Each digital wallet has a unique address, which is a long string of numbers and letters. If something happens to your wallet or funds - whether it's the exchange platform crashing, sending cryptocurrency to the wrong recipient, losing your password, or your wallet being hacked - it's likely that no one will be able to help you recover your lost funds.

Where to buy bitcoin?

How is cryptocurrency different from the US dollar?

Cryptocurrency differs from traditional currency such as the US dollar in several key ways:

  • Lack of government backing: Cryptocurrency accounts are not insured by the government. Unlike the US dollar placed in an FDIC-insured bank account, cryptocurrency has no government insurance. If something happens to your cryptocurrency wallet or funds, such as the company providing storage for your wallet goes out of business or is hacked, the government is not obligated to step in and help get your money back.
  • Value Volatility: The value of cryptocurrency is subject to frequent and significant changes. It can fluctuate hourly, which depends on many factors including supply and demand. Cryptocurrencies tend to be more volatile than traditional investments such as stocks and bonds. An investment that's worth thousands of dollars today may only be worth hundreds tomorrow. And if the value drops, there's no guarantee it will rise again.

How to pay with cryptocurrency?

Paying with cryptocurrency has its own peculiarities and differs from paying with a credit card or other traditional methods:

  • Lack of legal protection: Cryptocurrency payments do not have the same legal protections as credit or debit cards. For example, if something goes wrong when paying with a card, the card company has a procedure in place to help you get your money back. Cryptocurrencies generally don't offer this protection.
  • Payment irreversibility: Cryptocurrency transactions are usually not reversible. After sending cryptocurrency, you can only get your money back if the recipient agrees to return it. Therefore, it is important to check the seller's reputation before making a payment.
  • Transaction publicity: Cryptocurrency transactions are recorded in a public ledger known as the blockchain. This ledger contains information about all transactions, including the amounts and wallet addresses of the sender and receiver. Although transactions are considered anonymous, in practice it is possible to identify participants from transaction data and additional information such as the shipping address.

These differences make cryptocurrency a unique form of digital currency that requires an informed approach and understanding when using it.

How do I avoid getting scammed when investing in cryptocurrency?

Scammers are constantly coming up with new ways to scam you and steal your money using cryptocurrency. To protect yourself from cryptocurrency investing scams, it's important to be aware of the main signs and methods of being scammed. Here are some key tips to help you avoid cryptocurrency fraud:

  • Demand cryptocurrency payment: Only scammers demand payment in cryptocurrency. Legitimate businesses will never ask you to transfer cryptocurrency in advance, either to purchase goods or to protect your funds. If you are asked to do so, rest assured that it is a scam.
  • Profit Guarantees: Beware of promises of high profits. Scammers often guarantee high profits or quick returns on cryptocurrency investments. Do not trust such promises as cryptocurrency markets are volatile and cannot guarantee returns.
  • Online dating and investing: Never mix online dating and investment advice. If you meet someone on a dating site or through an app and that person offers to invest in cryptocurrency or asks you to send them cryptocurrency, it's almost certainly a scam. These schemes often use the trust that is built up in a romantic relationship to defraud you financially.

Investment scams

Investment scams often promise high returns with minimal risk. Their activities may begin on social media, dating sites, or through unexpected messages and calls. In such schemes, cryptocurrency acts as both an investment and a means of payment.

Where to buy Ethereum?

Examples of common investment scams:

  • An unexpected call from an ‘investment manager’: A person calling themselves an investment manager writes to you, promising to multiply your money if you buy cryptocurrency and transfer it to their online account. The website they direct you to may look realistic but is actually fake. When you try to withdraw your funds, you will either have to pay a high fee or you won't be able to do it at all.
  • Scammers posing as celebrities: If someone posing as a celebrity offers you to multiply your cryptocurrency, it's a scam. Real celebrities will not approach you through social media with such offers. Transferring cryptocurrency through a sent link or QR code will result in losing your money.
  • Online Romantic Interest with Investment Tips: If a new acquaintance from a dating site suggests you invest in cryptocurrency or asks you to send money, it's almost certainly a scam. Scammers use the trust built in a romantic relationship to defraud you financially. The funds transferred will be lost forever.
  • Profit guarantees or large payouts: Scammers promise high profits or large payouts with guaranteed income. In reality, no one can give such guarantees, especially in the short term. Cryptocurrency investments are not low risk. Even if you are shown celebrity endorsements or positive reviews, it's easy to fake it.
  • Promises of free money: Any promises of free money or cryptocurrency are always fake. Scammers use such tricks to extort funds.
  • Loud claims without details: Scammers make loud claims about investment returns without providing details. Real investment managers always share information and provide details.

How to protect yourself from cryptocurrency investment scams

  • Legitimate businesses and government agencies will never ask you for money through emails, texts or social media.
  • Don't click on links in unexpected messages, even if they appear to be from companies you know.
  • Don't pay anyone who contacts you unexpectedly and demands payment in cryptocurrency.
  • Don't pay for work. If someone demands payment upfront or offers payment in cryptocurrency, it's a scam.

Blackmail scams

Scammers may threaten to release compromising photos, videos or personal information about you if you don't pay them in cryptocurrency. Do not fall for this. This is blackmail and a criminal offence. Report such cases to law enforcement authorities.

Summary

Scammers are constantly improving their methods of deception, so it is important to be vigilant and cautious. Following these tips will help you protect your funds and avoid getting scammed when investing in cryptocurrency.

FAQ

What is cryptocurrency?
A digital or virtual currency protected by cryptography.
How do people use cryptocurrency?
Fast payments (cheaper than bank transfers); Anonymity (depends on the type of cryptocurrency); Investment (potential increase in value); Payment for goods and services (not all companies accept).
How do I get cryptocurrency?
Buying on an exchange (for fiat money); Mining (solving complex problems using computers); Receiving as payment; Earning (fauces, rewards programmes).
Where to store cryptocurrency?
Digital wallets: Software (on computer/mobile device); Hardware (physical devices); Paper (private keys on paper); Exchange (on cryptocurrency exchanges).
How is cryptocurrency different from US dollars?
Decentralisation (not regulated by a central bank); Anonymity (depends on the type of cryptocurrency); Volatility (sharp fluctuations in the exchange rate); Irreversibility of transactions.
Jonathan Rowe

Jonathan Rowe

The creator and main author of the site is Jonathan Rowe. Trader and investor with many years of experience. A graduate of the Massachusetts Institute of Technology with over a decade of experience developing applications for financial and investment institutions.

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