Do cryptocurrencies, like bitcoin and Ethereum, mean anything to you? You are not alone. Before using or investing in cryptocurrencies, know how they differ from cash and other payment methods, and how to spot cryptocurrency scams or detect cryptocurrency accounts that might be compromised.
What you need to know about cryptocurrencies
What is Cryptocurrency?
Cryptocurrency is a type of digital currency that usually only exists in electronic form. There is no such thing as a physical coin or note unless you are using a service that allows you to exchange cryptocurrency for a physical token. You usually trade cryptocurrency with someone online, with your phone or computer, without going through an intermediary like a bank.
Bitcoin and Ethereum are well-known cryptocurrencies, but there are many other cryptocurrencies , and new ones are created all the time.
How do people use cryptocurrencies?
People use cryptocurrencies to make quick payments, to avoid transaction fees that regular banks charge, or because they provide some anonymity. Others hold cryptocurrencies as an investment, hoping their value will rise.
How to get cryptocurrencies?
You can buy cryptocurrencies on an online exchange . Some people earn cryptocurrencies through a complex process called “mining,” which requires advanced computer equipment to solve very complicated mathematical puzzles.
Where and how to store cryptocurrencies?
Cryptocurrencies are stored in a digital wallet, which can be online, on your computer, or on an external hard drive. But if something unexpected happens – your online exchange goes bankrupt, you send cryptocurrency to the wrong person, you lose your digital wallet password, or your digital wallet is stolen or compromised – you may find that no one can intervene to help you recover your funds.
And, because you typically transfer cryptocurrency directly without an intermediary like a bank, there’s often no one to turn to if you run into a problem.
How are cryptocurrencies different from traditional currencies?
There are important differences between cryptocurrencies and traditional currencies.
Cryptocurrency accounts are not backed by a government
Cryptocurrency accounts are not government insured like common currencies deposited in a bank account. If you store cryptocurrency with a third-party company and that company goes bankrupt or gets hacked, the government has no obligation to step in to help you get your money back.
The value of cryptocurrencies is constantly changing
The value of a cryptocurrency can fluctuate rapidly, even change from hour to hour. It depends on many factors, including supply and demand. An investment that is worth thousands of dollars today may be worth only a few hundred dollars tomorrow. And if the value goes down, there is no guarantee that it will go up.
Pay with cryptocurrencies
If you plan to pay with cryptocurrencies, be aware that it is different from paying by credit card or other traditional payment methods.
Cryptocurrency payments do not come with legal protections
Credit and debit cards offer legal protections if something goes wrong. For example, if you need to dispute a purchase, your credit card company has a process to help you get your money back. This is generally not the case with cryptocurrencies.
Payments in cryptocurrencies are generally not reversible
Once you’ve paid in cryptocurrency, you can usually only get your money back if the person you paid sends it back to you. Before you buy anything with cryptocurrencies, know the reputation of the seller, their location, and how to contact them if there is a problem. Confirm these details by researching before paying.
Some information about your transactions will likely be public
People say that cryptocurrency transactions are anonymous. But the truth is not that simple. Some cryptocurrencies record certain details of transactions on a public ledger, called a “ blockchain ”. This is a public list of every cryptocurrency transaction, both on the payment side and on the receiving side.
Depending on the cryptocurrency, the information added to the blockchain may include details such as the transaction amount and the sender’s and recipient’s wallet addresses. A wallet address is a long string of numbers and letters linked to your digital wallet. Although you can use a fake name to register your digital wallet, it is possible to use transaction and wallet information to identify those involved in a specific transaction.
And when you buy something from a seller who collects other information about you, like a shipping address, that information can be used to identify you later.
How to Avoid Cryptocurrency Scams
Scammers are always finding new ways to steal your money using cryptocurrencies. A person telling you that you have to pay in cryptocurrency is a sure sign of a scam. In fact, anyone who asks you to pay by bank transfer, gift card or cryptocurrency is a scammer.
Of course, if you pay, there’s virtually no way to get that money back. This is what scammers rely on. Here are some cryptocurrency scams to watch out for.
Investment and business opportunity scams
- Some companies promise that you can earn a lot of money in a short time and achieve financial freedom.
- Some scammers tell you to pay in cryptocurrency for the right to recruit other people into a program. If you do, they say, you’ll get recruiting rewards paid in cryptocurrencies. The more you pay in cryptocurrencies, the more money they promise you to earn. But these are only false promises and false guarantees.
- Some scammers start with unsolicited offers from so-called “investment managers”. These scammers say they can help you grow your money if you give them the cryptocurrencies you bought. But once you log into the “investment account” they have opened, you will find that you cannot withdraw your money unless you pay a fee.
- Some scammers send out unsolicited job offers to recruit cryptocurrency investors, sell cryptocurrency, mine cryptocurrency, or help convert cash to bitcoin.
- Some scammers post fraudulent job offers on job sites. They promise you a job (for pay), but end up taking your money or your personal information.
Look for statements like these to help you spot companies and people to avoid:
- The scammers guarantee that you will make money. If they promise you will make a profit, it is a scam. Even if there is celebrity endorsement or testimonials. (These are easily forged).
- The scammers promise big payouts with guaranteed returns. No one can guarantee a fixed return, say, double your money. And even less in a short time.
- Scammers promise free money. They promise it in cash or cryptocurrencies, but promises of free money are always fake.
- Scammers make big claims without details or explanations. Smart businessmen want to understand how their investment is working, and where their money is going. And good investment advisers want to share that information.
Before investing, check. Search online for the name of the company and the name of the cryptocurrency, as well as words like “review”, “scam” or “complaint”. See what others are saying.
Scammers often send emails saying they have embarrassing or compromising photos, videos, or personal information about you. Then they threaten to make them public unless you pay them in cryptocurrency. Don’t. This is blackmail and an attempt at criminal extortion. Report it immediately to the police.
Social Media Scams
If you read a tweet, text, email, or receive a message on social media that asks you to send cryptocurrency, it’s a scam. This is true even if the message is from someone you know or was posted by a celebrity you follow. Their social media accounts may have been hacked. Report the scam to the social media platform immediately.