Cryptocurrency: Risky, unregulated and appealing to scammers

Reports have been skyrocketing of people losing a lot of money in cryptocurrency transactions or simply being scammed in them. Two things people should know about cryptocurrency: it is risky and not well regulated, said Amin Shams, assistant professor of Finance at Ohio State University. "You can see all sorts of phishing scams that might not be legal in other markets, but in crypto, it's a gray area so people do it. And then some people lose their money," Shams said. So you should avoid cryptocurrency if you do not thoroughly understand it and do not have much money, Shams said. Reports to the Better Business Bureau of fraudulent cryptocurrency activity have tripled in the past three years. The cryptocurrency payment method accounted for $750 million in losses in 2021, the second-highest total reported to the Federal Trade Commission. It only slightly trailed losses involving bank-to-bank wire transfers. The actual number of cryptocurrency victims is believed to be much higher because most fraud victims do not report it, the Better Business Bureau reported. Cryptocurrency is a form of digital money in which encryption technology can enable anyone anywhere to send and receive payments. It does not exist in a physical form such as paper money, but as lines of computer code, supported by a decentralized computer system known as blockchain, and stored in a "crypto wallet." Bitcoin, developed in 2009, is the most popular form of cryptocurrency, available for purchase at Bitcoin ATMs and increasingly accepted as payment in certain retail transactions. Ethereum is the second most common cryptocurrency. The beauty of the blockchain technology of cryptocurrency is that it is almost unhackable and immune to manipulation, Shams said. Thousands of cryptocurrencies have been developed for various services and purposes. That's the good side of the technology, Shams said. Then there are the downsides. "As with any other technologies, like the dotcom bubble in early 2000s, late '90s, or any other technologies, when people get super excited, they get too excited about the technology, they start investing their money carelessly, and of course the market is not as regulated yet, (so) you see a lot of fraud, a lot of phishing scandals going on in the market, and the crypto market is basically the same," Shams said. Even when no fraud is involved, the crypto market is volatile. "The volatility of cryptocurrencies is orders of magnitude larger than stocks," Shams said. "It's very easy to see annualized volatility of 100% for cryptos, which is much larger, like five to ten times larger than the volatility of stocks." "So if you have some bitcoin, prices can go up by like 10% tomorrow or go down like 10% tomorrow. It's highly volatile," he said. "So there is a chance that you make some money overnight. There's a good chance you can lose money overnight." And while the blockchain technology itself is almost unhackable, there are exchanges in the cryptocurrency market which can be hacked and where people's money gets stolen, Shams said. Popular scams Cryptocurrency is an attractive venue for scammers with its relative lack of regulation. Funds used in it are not subject to the same protections as bank deposits or credit card transactions. Transactions are relatively anonymous, the Better Business Bureau reported. So once funds are lost, they are difficult to recoup. Many victims report that after purchasing cryptocurrency, they were directed to websites where they had to create an account in order to monitor their investments. The websites are sophisticated, with many offering live customer service chats. But victims who want to withdraw their "earnings" are told they must contribute more money to cover taxes, commissions or other fees, the Better Business Bureau reported. Ultimately, they can never withdraw money. "A consumer told the Better Business Bureau (BBB) that she began learning about Bitcoin investing in the summer of 2021, reaching out via WhatsApp to an investing service she saw mentioned repeatedly in the comments of a YouTube video about Bitcoin. The woman was instructed to buy $1,500 in Bitcoin via CashApp; 10 days later, she received a screenshot displaying an account balance of more than $7,300," the Better Business Bureau reported. "However, when she decided to withdraw her earnings, she was told to pay a 10% commission and a broker's fee of more than $800. After she paid both, she received an email instructing her to pay an additional sum of nearly $1,200 to withdraw her money. She concluded it was a scam and reported it to BBB." Scams most commonly originate on social media, the Better Business Bureau reported. Scammers may impersonate a victim's friends to tell them about their success in crypto investing, or they may make Facebook posts promising big gains. Cryptocurrency also plays a prominent role in other scams. Romance scammers convince their victims to invest in cryptocurrency via fake apps, and then disappear with the money when the victim attempts to withdraw proceeds, BBB and police have reported. Ransomware scams also demand cryptocurrency as payment in many cases, the Better Business Bureau reported. Cryptocurrency also is a commonly requested payment method in fraudulent online sales, advance fee loan scams, employment scams, extortion scams, government impostor fees and more.