As a financial instrument born without regulation, Bitcoin quickly turned into an iterative exploration of precisely why each financial regulation exists. A “trustless” system attracts the sort of people who just can’t be trusted.
Many crypto scams are quite complex; some are simpler than you might expect. Many are everyday dodgy investment opportunities but with Bitcoin. It can be difficult to distinguish malice from incompetence. The general problem is that you don’t know who or where these people are, and they routinely just disappear with everyone’s money.
Scams common to the cryptocurrency world include:59
Ponzi schemes: in which early investors are paid using money from later ones. These are so attractive to crypto fans that when Ethereum took blockchains and added “smart contracts” (programs that run on the blockchain), the first thing people did was write automatic “honest” Ponzis.
High-yield investment programmes: a variety of Ponzi scheme. You might think it obvious that no investment scheme could pay 6% interest per week sustainably, particularly when it claims a “secret” investment strategy, but what worked on Bernie Madoff’s victims works on Bitcoiners.
Coin doublers: send it a small amount of bitcoins and you’ll get double back! (No reason is given why anyone would just double your money.) Send a larger amount straight after and … you won’t. You’d think people would catch on, but years later these keep popping up and finding suckers.
(There’s another layer of scam in there: the “doubler” never sends back coins. But it’s publicised with a “warning” about the scam. Others think “hold on, if I only send coins once it’ll never see me as a repeat user!” They send in a small amount of coins, which of course is not doubled. It’s a scam which relies on the sucker thinking they’re the scammer. A similar scam ran in the game RuneScape.)
Mining software: if you aren’t designing your own mining chips and running them off super-cheap power, you won’t have been able to break even mining Bitcoin since late 2013. But people keep claiming you can still mine on your PC. The software frequently includes malware.
Mining hardware: there are real sellers of mining hardware (though you are unlikely to come out ahead of costs). The scam is to run it for months “testing” it: customers pay for hardware, you use their money to build it and you mine with it for the few months it’s viable before you send it to them. Butterfly Labs was the most notorious culprit, but far from the only one. (Butterfly’s co-founder turned out to have a conviction for mail fraud; Bitcoin scammers are often serial scammers.)
Cloud mining: you invest in remote mining hardware. Many such schemes appear indistinguishable from Ponzis; there is generally no evidence the money-printing machine you’re renting even exists.
Scam wallets: sites offering greater transaction anonymity, but which just take everyone’s bitcoins after a while.
Biased “provably fair” gambling: “Provably fair” gambling sites generate their random numbers in advance then send you a cryptographic hash of the sequence of numbers, so you don’t know the numbers ahead of time but you can verify the hash afterwards.64 Some sites, if you don’t grab the hash, then use a biased sequence of numbers instead.65
Scam versions of normal services: exchanges, bitcoin mixers, shopping deal sites and so on. You have no idea who these people are, and every now and then they’ll just take your bitcoins or link you to phishing or other scam sites, possibly including the gift of malware.
Fortunately, Bitcointalk.org deals harshly with scammers: it may add a “scammer” tag to someone’s forum name, or list their site in the “List of Bitcoin Scam Sites” thread.
Many Bitcoin advocates consider the scammers worth it to be free of government regulation. Anarcho-capitalist Jeffrey Tucker wrote an amazing apologia, “A Theory Of The Scam,” in which he admits Bitcoin is suffused with fraud, but posits that “scam artists are the evil cousins of genuine entrepreneurs” and are actually a sign of health for an area – so, since good things had scams, this scam-riddled thing must therefore be good! (With all this horse poop there’s gotta be a pony in here.) No doubt subprime-mortgage- backed collateral debt obligations, Business Consulting International and Bernard L. Madoff Investment Securities LLC were just severely underpriced investment opportunities.