Cryptocurrency is gaining momentum, so much so that a new report found scammers stole a record-breaking $14 billion of crypto last year. By now, you’ve probably heard about it and may be wondering what it is, how it works and how scammers are using it to their advantage. Before you use or invest in cryptocurrency, it’s important to understand how it differs from cash and other payment methods, and how to spot related scams.
What is Cryptocurrency?
Cryptocurrency is a type of digital currency. It does not come in the form of a physical coin or bill unless you use a service where you are able to cash in cryptocurrency. The most common way to exchange cryptocurrency with someone is online, with no “middle man” involved, such as a bank. There are well over 2,000 types of cryptocurrencies, but the most well-known ones are XRP, Litecoin, Ether and the one that started it all, Bitcoin. And new ones continue to emerge as they are constantly being created.
How is Cryptocurrency Used and Where do you get it from?
Cryptocurrency is used to make payments quickly and to avoid the fees for transactions that banks usually charge. While others use cryptocurrency as an investment, in hopes that the value only increases.
The two most common ways to buy cryptocurrency is through an online exchange platform or a peer-to-peer network where you can purchase and sell different digital currencies. Using an exchange platform, you’re able to deposit your cryptocurrency and withdraw funds in the currency of your choice. The downside to this option is it takes four to six days to be deposited into your account so it’s not exactly instant. With a peer-to-peer network, it’s quicker, but you use real money to buy crypto. Once your real money becomes crypto, you’re able to sell your crypto to someone else in exchange for the real money in order to cash out. Then you can either transfer those funds to your bank account, or you can choose to buy more crypto.
Alternatively, a way to earn cryptocurrency is through a complex process called “mining,” which requires advanced computer hardware to solve highly complicated mathematical problems, which in turn, creates more coins and validation on transactions that are in process.
Where and How is Cryptocurrency Stored?
Cryptocurrency is stored in a digital wallet – which can live on your phone, online, on a piece of hardware or right there on your desktop. The downside to storing your cryptocurrency is if something occurs unexpectedly – the online exchange platform you use goes out of business, you accidentally send cryptocurrency to the wrong person, or your digital wallet is stolen or compromised — you’ll likely find there is no one to help you recover your funds. And, with no “middle man” or bank involved, there is often no one to turn to if you are faced with such a problem.
How does Cryptocurrency Differ from U.S. Dollars?
Cryptocurrency accounts are not insured by a government, like U.S. dollars deposited into a bank account are. If you store cryptocurrency with a third-party, and they are hacked or go out of business, the government is not obligated to help you get your money back. Another difference is the value of cryptocurrency – it is constantly changing and can vary rapidly, even by the hour. It depends on a number of factors, including supply and demand. For example, an investment worth thousands of dollars today may only be worth hundreds tomorrow and if the value goes down, it’s not guaranteed it will go up again.
Paying with Cryptocurrency
- Legal protections are not included when you pay with cryptocurrency. Most of us know that credit and debit cards have legal protections if something wrong happens. For example, if your credit card was stolen and you need to dispute a purchase, your credit card company has a process in place to reverse the purchase and get your money back. Cryptocurrencies typically do not.
- Cryptocurrency payments are typically not reversible. Once you make a payment with cryptocurrency, you can usually only get your money back if the person you sent it to, sends it back. Before you buy something using cryptocurrency, review the seller’s reputation, where they are located, and how to contact someone if there’s a problem. Do your research before you pay!
- Some information about your transactions will be public. People believe cryptocurrency transactions are all anonymous, but it is not that simple. All cryptocurrency transactions are recorded within a public digital ledger, called a “blockchain” which is basically a database that stores information in blocks. Depending on the cryptocurrency, that information can include transaction details like the amount and the sender’s and recipient’s digital wallet addresses, which consists of a mix of numbers and letters that links to your digital wallet. It’s possible to use transaction and digital wallet information in order to identify people involved in specific transactions.
How to Avoid Cryptocurrency Scams
Scammers are constantly discovering new ways to steal your money using cryptocurrency. One definite sign of a scam is anyone who says you must pay with cryptocurrency. In fact, anyone who advises you to pay using alternate payment methods like a wire transfer, gift card, or cryptocurrency is most likely a scammer. Remember, if you use one of those payment methods, there’s almost no way to get that money back – which is what the scammers are “banking” on. Here are some cryptocurrency scams to be aware of:
- Investment and business opportunity scams
- Scammers will promise that you’ll earn a lot of money in a short period of time and achieve financial freedom.
- Some scammers try to convince you to pay in cryptocurrency in order to recruit others into a program. If you do so, they’ll tell you that you’ll receive rewards paid in cryptocurrency. They’ll promise you that the more you pay, the more money you’ll make. These are fake promises and false guarantees. Remember, nobody can guarantee a set return!
- Some scammers start with unsolicited offers from “investment managers.” They say they can help grow your money if you send them the cryptocurrency you’ve already purchased. Once you log in to the “investment account” they opened, you’ll find that you aren’t able to withdraw your money unless you pay a fee.
- Some scammers send unsolicited job offers to help recruit investors who can sell or mine cryptocurrency, or help convert cash to bitcoin. They’ll also list phony jobs on job websites where they promise you a new job (for a fee), but wind up stealing your money or personal information instead.
Before you invest, do your research. Google the name of the company, the cryptocurrency name, and add words like “review,” “scam,” or “complaint” and read the search results thoroughly. See what others are saying and read more about other common investment scams so you’re aware and informed.
- Phishing Scams
- Scammers will send an email that appears to be from a legitimate company or someone you may know that includes a suspicious link or says they have personal information about you. They’ll threaten to expose you unless you pay them in cryptocurrency, but don’t do it! This is a scam.
- Social Media Scams
- If you receive a message on social media from someone that tells you to send cryptocurrency, it’s a scam. Even if the message came from someone you know, or a celebrity you follow, it’s very likely that their social media accounts have been hacked. Report the scam and account to the social media platform immediately. Read our blog, “How to Protect Your Identity on Social Media” for more ways to stay safe on the different social media channels.
How to Report a Cryptocurrency Scam
Remember, no one from the government, law enforcement, or a utility company will ever ask you to pay them with cryptocurrency. If someone does, it’s a scam so don’t fall for it! If you find yourself in a situation where you need to report fraud, a scam and other suspicious activity involving cryptocurrency, reach out to the following resources immediately – Federal Trade Commission, Federal Bureau of Investigation, Commodity Futures Trading Commission, U.S. Securities and Exchange Commission and the cryptocurrency exchange platform you used. For more information and educational articles, read our Privacy & Cybersecurity blogs to learn about specific scams so you can keep yourself, your personal and financial information safe.