Con Watch: Use Caution with Cryptocurrencies Like Bitcoin

Are cryptocurrencies legitimate and, if so, should you be investing in them?

Cryptocurrency coins

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Cryptocurrency coins

Steve Weisman is a lawyer, college professor, author and one of the country’s leading experts in cybersecurity, identity theft, and scams. See Steve’s other Con Watch articles.

With the incredible rise in value in the last year of bitcoin and other cryptocurrencies, many people are asking themselves if cryptocurrencies are legitimate and, if so, if they should be investing in them.

A significant number of investment gurus, such as the legendary Warren Buffett, believe cryptocurrencies are not a good investment but, rather, are a bubble that will burst, leaving unwary investors with tremendous losses. However, many other investors see increasing value in cryptocurrencies. As with any investment, be sure to follow the primary rule: Never invest in anything unless you understand what you’re investing in.

What Is Cryptocurrency?

Cryptocurrencies first appeared in 2009 on the heels of the international financial meltdown. Bitcoin was one of the first to be developed, but there are more than a thousand others. Cryptocurrencies are entirely digital in nature; there are no physical tokens. As the “crypto” part of their name suggests, they use cryptography for security. Cryptocurrencies are not issued or regulated by any government authority.

Hacking Threats

Digital currencies such as bitcoin carry the same inherent vulnerabilities of anything digital and are susceptible to being hacked. On August 2, 2016, $78 million worth of bitcoins were stolen through a data breach at the popular Hong Kong bitcoin exchange Bitfinex, which resulted in a 20 percent drop in the value of bitcoin. In the last year, there have been increasing attacks on cryptocurrency exchanges by hackers from North Korea.

Hackers have a number of different methods for stealing cryptocurrencies: They take over the accounts of unsuspecting cryptocurrency owners who fail to change their initial default login credentials. They establish malicious trading sites and lure in unsuspecting cryptocurrency investors. Or they use a specific type of malware called CryptoShuffler. CryptoShuffler works with numerous types of cryptocurrency, including bitcoin, Ethereum, Zcash, Monero, and Dash. When downloaded onto your cellphone or computer, most often through clicking a link in an infected “spear phishing” email, it will wait to see when you are paying for something with a cryptocurrency and then automatically transfer the amount to a wallet controlled by the criminal. There are security software programs that can protect you from CryptoShuffler.

Investor Threats

The highly unregulated nature of cryptocurrency has led to a number of scammers taking advantage of consumer interest. Trendon Shavers was convicted and sentenced to prison on charges of securities and wire fraud in relation to his offer to investors of 7 percent weekly interest on bitcoins deposited with his Bitcoin Savings and Trust Company. This promise of an annual percentage interest of 3,641 percent managed to lure investors to turn over 740,000 bitcoins, valued at the time at $4.5 million. Shavers advertised his scheme on the internet bulletin board “Bitcoin Forum” and other online discussion groups. He claimed that by using his market-arbitrage strategy, which included lending and trading bitcoins online, he could achieve these incredible returns. Shavers’ Ponzi scheme initially appeared to be legitimate by paying profits to early investors. However, as with Ponzi himself, there were no profits, and the early investors were paid with the funds provided by newer investors to make the phony investment scheme appear legitimate.

With cryptocurrency receiving increased consumer attention, Initial Coin Offerings (ICOs) are particularly attractive to people who think that any cryptocurrency involves huge investment payoffs. What many investors fail to understand is that an ICO is merely the issuing of virtual tokens by companies raising capital without having to register the investments with the Securities and Exchange Commission (SEC). While in some instances, these ICOs do not need to be registered with the SEC, in other cases, the SEC is bringing legal action against the companies, arguing that the ICOs are not exempt from securities regulation laws.

SEC Chairman Jay Clayton cautioned investors about ICOs, saying, “if a promoter guarantees returns, if an opportunity sounds too good to be true, or if you are pressured to act quickly, please exercise extreme caution and be aware of the risk that your investment may be lost.”

Protecting Your Cryptocurrency

If you do decide to invest in bitcoin or any other cryptocurrency, it’s important to take the steps necessary to store it securely because cryptocurrencies will always be a prime target for hackers.

  1. Use a strong password that is unique to your cryptocurrency account. Do not use the same password that you use for other accounts that may end up in the hands of hackers due to data breaches elsewhere.
  2. Use dual-factor authentication so that even if your password is compromised, your cryptocurrency tokens will not be in danger.
  3. Encrypt your software wallet and back up your entire wallet on a physical device, such as a portable USB drive that is not connected to the internet. You may even wish to use a hardware wallet that stores your private keys in a secure hardware device that is not susceptible to viruses and malware that can attack your software wallet.
  4. Update your bitcoin or other cryptocurrency software as soon as the latest security patches become available.

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