Cryptocurrency Fraud

En español | Even if you don’t know Bitcoin from blockchain, it’s likely you’ve heard something about cryptocurrencies. Also known as virtual currencies, digital assets such as Bitcoin, Ether and hundreds more are a hot commodity in online trading, and it’s possible for a smart investor to make a big profit. But the prospect of quick riches can blind some people to the risks and enable crooks to lure them into scams.

What is cryptocurrency? According to the U.S. Commodity Futures Trading Commission (CFTC), it’s a digital representation of value that isn’t backed by any government or central bank. Even so, this virtual money can be used to make purchases, and it can be exchanged for U.S. dollars or other conventional currencies. 

But unlike government-backed money, a virtual currency’s value is driven entirely by supply and demand. That can create wild swings that produce big gains for investors, or big losses. And cryptocurrency investments are subject to far less regulatory protection than traditional financial products like stocks, bonds and mutual funds. (The CFTC does oversee virtual currency options and futures contracts, because it considers digital money to be a tradable commodity. The Securities and Exchange Commission has called for applying securities law to cover cryptocurrency exchanges.)

For all virtual currency’s high-tech gloss, many of the related scams are just newfangled versions of classic frauds. The CFTC has warned about “pump and dump” scammers who use messaging apps and chat rooms to plant rumors that a famous business mogul is pouring millions of dollars into a certain digital currency, or that a major retailer, bank or credit card company is going to partner with it. Once they’ve lured investors to buy and driven up the price, the scammers sell their stake and the currency plummets in value.

Some cryptocurrency crooks run virtual variations on the old Ponzi scheme, peddling nonexistent opportunities to invest in digital currencies and creating the illusion of big returns by paying off old investors with new investors’ money. Others pose as legitimate virtual currency traders or set up phony exchanges to lure people into giving them money. Another con involves fraudulent sales pitches for “IRS approved” individual retirement accounts in cryptocurrencies. There are also straight-up hackers who break into the “digital wallets” where people store their virtual currency.

If you want to dip into this brave new world of money, take these precautions to avoid being ripped off.

Warning Signs

• Someone you don’t know sends you a message out of the blue about a virtual currency investment opportunity. 
• The pitch claims that a virtual currency investment involves no risk and surefire profits.