Bitcoin Scam Defense: How to Spot and Avoid Common Bitcoin Scams
“Bitcoin scam” is a broad umbrella term for all kinds of scams that take place in the bitcoin space. Since bitcoin is a relatively new concept, there are scams at almost every stage of its life cycle. To a certain extent, some people have even asked themselves, “Is bitcoin a scam?”
We can assure you on good authority that bitcoin is absolutely not a scam it’s far from being one. In fact, it is a currency that liberates people who are susceptible to getting scammed by fiat currencies. There are, however, many scams associated with bitcoin, such as production-related scams, mining scams, wallet scams, etc. There are also scams specific to platforms like Coinbase scams or Binance scams. This is likely why people may misunderstand bitcoin as being a scam. Here at Paxful, we also sometimes witness attempts on our platform, but we quickly identify them and take every measure necessary to mitigate them.
Below are some common types of bitcoin scams that we often encounter and scams specific to peer-to-peer bitcoin marketplaces.
Cloud mining scams
In the very beginning, there were not many people in the mining scene, so mining was extremely profitable. But now with new and bigger players entering the market with more powerful equipment, mining is not profitable for an average Joe anymore. Furthermore, since GPU (Graphics Processing Unit) was discovered to be surprisingly efficient with mining, mining on a global scale has started consuming more electricity than Switzerland, as GPUs consume a lot of electricity. The energy requirements for mining bitcoin are so high that crypto news channel iHodL calculates the return on investment as a mere 0.71.
Cloud mining companies claim to have discovered a solution to this problem: they will allow you to rent hashpowers from their powerful equipment and in return make money with the blocks you’ve mined. It’s a win-win situation, right?
Unfortunately, that’s not always the case. Like all offers that are too good to be true, this solution comes with a major caveat. Usually these mining contracts factor in the difficulty of mining, so your earnings would be less if the level of mining difficulty increases. However, you’d make more profit if bitcoin sells at a higher exchange rate, but bear in mind that these are directly proportional. For instance, when the exchange rate increases, the mining difficulty also increases. This means that while you earn more money from your exchange, you also have to pay mining companies more money because of the high difficulty in mining. It’s not that profitable after all.
As a result, many people have begun to believe that cloud mining schemes are nothing but ponzi schemes. It might just be that there are not remote server farms with high computing power lined up at your service, but rather scammers who use pyramid scheme tactics to pay out old subscribers from new subscribers’ earnings. For instance, bitminer.com was particularly notorious for luring their users into mining scams, which resulted in dozens of unhappy, one-star reviews for their business.
Even when you join a seemingly legitimate cloud mining company, you need to accept that the house always wins. These companies will set difficulty and clouding rents in such a way that maximizes profit for them, but leave a very narrow corridor for your investment to drive towards profit.
Prevention: Do not invest in cloud mining companies. If you decide to do so, make sure to read all of the offer documents very carefully.
Bitcoin email scams
In this day and age where breach of privacy seems to be the new Internet norm, it is really easy to create fear, uncertainty, and doubt in people, leading to mass paranoia. Even a simple email with a false blackmail claim was able to scam a lot of people in the past. Take this sample featured on Malwareremoval.com for example:
This is my first time here and after seeing the site I’ve realised that I’m in the right crowd to seek help about my problem. couple of weeks a go I received an email saying that the person knows my password (I’m not sure where I used that password, but it looked like something I would have used some time) and he (because after around a week later the email the person called me on my phone number and wanted to talk to me) asked me to pay him money, $1800. Here it is, the email I’ve received:
I know your password is: 32413241jobs
You got infected with my malware, RAT (Remote Administration Tool), while browsing the web where my iframe was placed, in the background you got redirected to my exploitpack, your browser wasn’t patched so you got infected!
My malware gave me full control over your computer and access to all your accounts (see password above)!
I COLLECTED ALL YOUR PRIVATE DATA!
YOU KNOW WHAT I MEAN – I KNOW ALL YOUR SECRETS – YOU KNOW THAT THIS ISN’T A JOKE!
After that I removed my malware, to not leave any traces.
If you don’t pay me exactly 1800$ in bitcoin (BTC), I will PUBLISH ALL YOUR DATA, send it to all your contacts, over email, post in on social network!
WE BOTH KNOW – this is a very good price – compared to LIVING HELL!
YOU GOT 2 DAYS TIME TO GET THE BITCOIN (BTC) AND PAY!
My bitcoin wallet is: 1GmebPccNzPrkFiWknizbsCfzgXv27JGZP
Copy and paste my wallet, it’s (cAsE-sensetive)
After receiving the payment, I will delete all your data and you can life your live in peace like before.
If you get this email multiple times, it’s to make sure you read it.
You will make everything worse, if you show this email to anyone – this should stay our little secret!
If you receive an email like this, please block the sender and report the account and do not succumb to their demands! They are simply bluffing. These type of scammers play numbers games and mail thousands of people in the hopes that someone will fall into their trap. Most of the time, they use a bot to automate their scamming intentions.
The situation with these emails has gotten increasingly horrendous after the infamous 2017 Wannacry ransomware attack on computers operating with Microsoft Windows demanding ransom payments in bitcoin. While Wannacry was particularly malicious in nature, all these emails of a similar nature are nothing but hoaxes with the aim of pressuring victims into sending bitcoin to their wallets.
Prevention: Do not react to these emails. Simply forward them to your junk folder.
Fake bitcoin scams (exchanges)
There are some websites that set up fake exchanges to make gullible people think that they have invested in cryptocurrency these transactions never get written in blockchain, thus people lose their money to the scammers. One of these examples is BitKRX, which rendered itself as a subsidiary of South Korean exchange KRX, the largest financial trading platform in the country. This large-scale scam was exposed in 2017.
Prevention: Only buy and sell on government-regulated exchanges.
Bitcoin investment scams
These scammers lure unsuspecting people to their seemingly professional websites through Facebook, Instagram, Telegram, etc. They often fill their sites with false schemes that are too good to be true.
Mine Bitcoin Daily For Free With Your Phone Or Computer
They use psychological intimidation techniques like inviting potential victims to a call or a meeting and assuring them that their first investment went well. Scammers then try to convince users to invest more money or even invite their friends and family along the way. More sweet returns are promised and more money is lost in the scam. As soon as the scammers receive the money, you know what they’ll do—they flee and the poor victims will not have a clue where the scammers, or their money, have gone!
Prevention: Never make any investments that sound too good to be true. Conduct extensive research and invest only when you are completely aware of the risks.
Fake bitcoin wallet scams
Bitcoin users are most vulnerable to these types of scams when generating a QR code to share their BTC easily. Wallet provider Zengo conducted some research and came to the conclusion that 4 out of 5 top google results for the phrase “Bitcoin QR generators” are culprits of staging this scam.
When you search for online text-to-QR code converters, the scammy ones do not convert your actual wallet address to a QR code. Instead, they design their converters in a way that prints their wallet on the QR code instead of yours. This means that whatever funds sent to that QR code go directly to their wallet and not yours.
Nowadays, scammers are increasingly smarter while using this tactic. They go as far as creating similar looking addresses when a user tries to verify their wallet address.
Prevention: Don’t google QR code converters—use something that has a good reputation, such as Paxful’s bitcoin wallet.
Phishing bitcoin scams
Scammers often create phishing website that look nearly identical to major exchanges/marketplaces to try and obtain personal information from similar-looking input fields. They also try to lure unsuspecting people through email. Please secure your bitcoin wallet through two-actor authentication so that you’ll receive a notification on your phone every time someone breaches the security of the wallet.
Bitcoin scams specific to P2P platforms like Paxful
At Paxful, we go through different scams on a regular basis, and these scams can be sorted into following categories:
Coin locking extortions
Coin locking—which is holding a seller’s bitcoin in a trade escrow without the intention to make a payment—in itself is not a scam but the extortion which the scammers attempt after the coin is locked in the escrow is a pitiful scamming tactic.
There are two types of coin locking: innocent coin locking and malicious coin locking. New users who do not know much about the platform may end up opening a trade they don’t want to and mark it as paid. However, when the coins are locked, a moderator has to intervene and look into the dispute and it is likely that the bitcoin will be released back to seller.
There are malicious scammers who use extortion to bait sellers into selling/releasing their bitcoin. Some scammers make it a numbers game and start with small trades, hoping that someone will eventually release bitcoin out of pressure. Some scammers, however, try to take hostage of a big amount in escrow until the dispute is resolved and blackmail sellers into selling small amounts of bitcoin before they remove themselves out of the trade.
Deliberate payment reversal (chargebacks)
Payment methods like Paypal, credit cards, debit cards, and certain online wallets are reversible in nature, meaning the payment can be reversed if the platform finds the trade to be suspicious. Of course, the definition of suspicious is open to interpretation and may vary for different platforms.
Bitcoin transactions, however, are irreversible in nature. If the buyer of the bitcoin can somehow convince the representative of a certain payment method that the transaction is suspicious in nature, the funds get sent back to the buyer, leaving the seller empty-handed without bitcoin or money.
Some payment methods are not bitcoin-friendly and will flag a transaction if they feel their platform has been used for buying/selling digital currencies. PayPal is among the companies that have a harsh stance against trading bitcoin.
Paxful encourages all users to take maximum precaution while dealing with these payment methods. For example, buying only from trusted vendors and not explicitly disclosing the purpose of the transaction as buying bitcoin.
Peer-to-peer bitcoin marketplaces like Paxful, in true essence, are essentially escrow services that safeguard funds until the pre-specified conditions have been met. In simple terms, we hold the bitcoin hostage until the requirements of the transactions have been met. For example, imagine a seller trying to sell bitcoin through PayPal. Once the trade starts, we keep the bitcoin in escrow until both parties are satisfied, meaning the seller has received the payment. If any of the concerned party—either buyer or seller—is dissatisfied, they can raise a dispute and our moderators will investigate to decide who is in the wrong and resolve the dispute accordingly.
Scammers have realized escrow can not be breached so they use manipulation tactics to convince buyers to make deals off escrow. Once you make off-escrow deals, there are two scenarios that can no longer be guaranteed: the buyer may not make their payment using the seller’s payment method and the seller may not release bitcoin after the buyer has paid.
Scammers usually ask users to contact them on WhatsApp or on other messaging platforms and conduct business there; this is usually a tell-tale sign that someone is trying to scam you. Note that trading off-escrow is against Paxful’s Term of Service and our moderators may not be able to intervene as the evidence for this kind of dispute can be very blurry and subject to manipulation. We do not support off-escrow trades.
Prevention: If someone tries to lure you to trade off escrow, please report the user.
Inducing panic for a faster release
Like all bitcoin transactions, Paxful’s transactions are irreversible in nature. Once the bitcoin in escrow is released, there is no way to get it back unless the other party agrees to send it back. Some scammers pretend they have already made the payment and pressure sellers into making a fast release. As a seller, you should never release bitcoin before you have confirmed that the buyer has paid the designated amount in the trade.
Prevention: Only trade after the conditions in the offer have been met.
Fake proof of transaction
Any photo or video can be manipulated with knowledge of photo editing software and a small amount of time. Often times, scammers spend time and energy on trying to make false proof documents look like they are legitimate. This can be debunked by digging deeper and checking records, because they can only fake proof on their end, not ours. Our experienced moderators are smart enough to spot these quickly and award the dispute to the victim.
Prevention: There is not much you can do to avoid this scam but if you trade only with reputed traders, it’s highly unlikely that you will find yourself in this situation.
Asking you to send a different (usually more) amount than what is listed in the offer terms
This is a very malicious type of coin locking extortion. During a trade, scammers often ask for more money before releasing the bitcoin from escrow. New users often fall for this trick and feel pressured to give more money than they were supposed to. Never feel pressured to send more than what’s stated in the offer terms. If a seller asks you to do so, immediately ask them to honor the terms. If they fail to do so, start a dispute. It will take no time for our moderators to see that it’s a scam and you will be awarded with the funds.
Prevention: Only send the exact amount you agreed upon when the trade was started and start a dispute if the other party requests otherwise.
Asking you to use a different payment method than what is listed in the offer terms
Scammers often go into random trade offers and pressure buyers into using a different payment method. This violates the integrity of the offer and makes it very hard for our moderators to intervene. If you want to switch offers, please select a different offer altogether and don’t request any changes regarding the payment method in the trade chat. As a seller, if somebody asks you to do so, do not succumb to the buyer’s wishes.
Prevention: Only trade using the payment method specified in the offer.