Bitcoin Fraud – What is it and How Do I Protect it from Fraud?
Bitcoin is the original cryptocurrency – a decentralized electronic payment system designed to eliminate the need for intermediaries and allow people to exchange money quickly, efficiently, and independently over the internet. In just a few years, Bitcoin, and similar cryptocurrencies, have steadily grown in popularity and substantially increased in value. With the amount of attention and value associated with these currencies increasing daily, they have become a prime target for thieves and fraudsters looking to take advantage of Bitcoin’s skyrocketing price and exploit the poor security habit of new users.
If you are considering owning Bitcoin or any other cryptocurrency, it is critical to have an understanding of how these currencies work so you can protect yourself and your investment. Bitcoin is made up of two core components: the blockchain and the wallet.
Blockchain is a publicly shared paper trail that records all Bitcoin activity and transactions. The blockchain is one of the biggest strengths of cryptocurrencies, as all transaction history is stored, shared, and validated between all Bitcoin users using this publicly available ledger. Whenever a Bitcoin is moved from one person to another, this transaction is permanently recorded in the blockchain: once a transaction is completed and recorded, it can never be reversed or faked.
The second core component of Bitcoin is called a wallet, which is essentially a Bitcoin bank account. It consists of a pair of keys: one public and one private. The public key acts as a wallet’s address – this is how Bitcoins are sent from one wallet to another. The private key acts as the wallet’s password; anyone with access to a private key has control over the funds in a wallet.
Keeping a wallet’s private key secure is the only thing keeping your Bitcoins safe, and consequently, it is the number one way for fraudsters to steal Bitcoin.
Common Bitcoin Fraud
The primary way fraudsters attack Bitcoin users is by obtaining private key information for wallets and using it to access and steal their balances. All transactions made with Bitcoin are permanent and essentially anonymous; once fraudsters access your wallet and steal your funds, there is no risk for them to be tracked and no recourse for you to get your Bitcoins back. It’s important to make sure you choose a secure wallet storage method, such as a hardware wallet, to make it difficult or even impossible to steal your private key and gain access to your Bitcoins. Wallets stored in the cloud or on your computer are vulnerable to hackers as they are often secured with a simple password. If your computer or password is compromised, so are your Bitcoins.
Another common Bitcoin fraud focuses on significant Bitcoin exchanges and websites. There are a large variety of websites that offer a one-stop-shop to buy and trade Bitcoin via online wallets. Users can purchase Bitcoin with money on an exchange, hold it in online wallets operated by the exchange, and quickly sell or trade it for other cryptocurrencies through the exchange. When you hold Bitcoin balances on one of these websites, you essentially hold an IOU – the website still controls the private key information and therefore is the holder of the Bitcoin assets. Although these exchanges are convenient and an easy way to get into Bitcoin, they are major targets for fraudsters. A hacker who can compromise an exchange will have access to all the private keys and Bitcoins held within, taking massive amounts of Bitcoins for themselves and leaving wallets empty. With over a million Bitcoins stolen from exchanges since 2011, they are a clear and common target for hackers.
When purchasing Bitcoins and trading them through an online exchange, it is an excellent practice to diversify where you store your Bitcoins across multiple wallets. Just as it is a risk to hold all your assets with a single bank or investment, it is a risk to hold all your Bitcoins within a single wallet. If you plan on holding onto your Bitcoin for an extended period, transfer them to a wallet which you fully control.
Bitcoin and other cryptocurrencies are new and exciting technologies for enthusiasts, investors, and fraudsters alike. Before investing in any cryptocurrency, take the time to learn how each system works and best practices for buying, storing, and selling these virtual assets.
- Make sure you understand the different wallet types available and choose one which is secure and will protect your private key information.
- Be wary of holding all your Bitcoin on exchanges; Bitcoin held on an exchange is not under your control and is at risk to hacks or data breaches.
- Bitcoins are the original but far from the only cryptocurrency. This is a speculative investment with incredible volatility and an ever-growing number of competitors and alternatives.
If you have questions on how to protect yourself from bitcoin fraud, contact me today to discuss.