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October 2, 2022
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Is Bitcoin a Criminal Tool? Facts and Myths. –

Bitcoin and other cryptocurrencies often have to grapple with the reputation of a scam or a tool mainly used by scammers and criminals. This stereotype, although false at its source, came from somewhere. In this article, we will examine the main allegations against the most popular cryptocurrency, and we will also try to deal with the judgments imposed on Bitcoin.

This article is part of a larger cycle dedicated to security in the cryptocurrency environment. In the previous installment, we presented the most popular types of cryptocurrency scams and explained what can be done to reduce the risk of being cheated. You can find this article here.

Is Bitcoin a scam? What is Bitcoin?

The first question we need to ask ourselves is, is Bitcoin itself a scam? In the simplest answer – no. But let’s develop it. Bitcoin is a form of digital currency. It was created by an anonymous developer (or a group of developers) under the pseudonym Satoshi Nakamoto. Bitcoin is a type of cryptocurrency.

Cryptocurrency, on the other hand, is digital money, secured by cryptography. Relying on encryption makes it almost impossible to counterfeit or double-spend cryptocurrencies. The vast majority of cryptocurrencies (including Bitcoin) function as decentralized networks based on blockchain technology – a distributed registry managed by a network of different computers. The most important feature of cryptocurrencies is that they are not issued by any public and central authority. As a result, they are, in principle, independent of government restrictions and manipulation.

Bitcoin is a flagship example of a cryptocurrency. There are no physical Bitcoins, only settlements between wallets, kept in a publicly available transaction register – a digital settlement ledger. Each Bitcoin transaction is verified by a huge amount of computing power. Again – Bitcoins (BTC) are not issued or endorsed by any bank or government organization. Nor can they be considered a commodity.

The Bitcoin network, which is the infrastructure that maintains transaction processes between individual accounts, is based on decentralized blockchain technology. The entire code behind Bitcoin is publicly available – we can check exactly what information and cryptographic principles Bitcoin works on. Of course, to fully understand the principles of Bitcoin, you must have adequate IT knowledge. It is not always necessary to fully understand each mechanism. Just as we do not need to know the mechanisms of operation of banks’ transaction systems in order to use their services. The most important thing is to be aware of the risks and know how to protect your cryptocurrencies.

Is Bitcoin a Scam?

While the technology behind BTC may seem complex, it is completely transparent. The assumptions behind Bitcoin, such as openness, publicity, decentralization, transaction irreversibility, anonymity and privacy, have led to the creation of an automatic and fair system that can “self verify”.

Bitcoin, then, as a technical creation, is not a scam. It is a means of payment, based on decentralized technology, independent of central issuers, which we can safely send over long distances while maintaining anonymity and privacy.

Altcoins and Shitcoins

Bitcoin has gained immense popularity in a relatively short time (compared to other traditional forms of money). On the wave of this popularity, many other cryptocurrency projects based on similar technological principles began to emerge. We call all cryptocurrencies after Bitcoin collectively altcoins. The entire cryptocurrency market is estimated at $ 1.7 trillion. This capitalization is created by a total of over 8,600 cryptocurrencies – and this number is constantly growing. Popular altcoins are e.g. Ethereum, Litecoin, Cardano, etc.

However, not every altcoin works the same as Bitcoin. Some cryptocurrencies break with some of the features of Bitcoin in order to implement other assumptions. Some of them may be centrally broadcast, may not have limited supply, may not be anonymous. Very often, such projects (especially the less popular ones) function like startups – but even they give the opportunity to invest on cryptocurrency exchanges and earn money on changing the rate. Unfortunately, among the altcoins, there may be so-called shitcoins – cryptocurrencies with no real useful value / purpose, or scams that claim to be cryptocurrencies. The scammers behind them most often count on a profit from the contributions of investors attracted by the popularity of Bitcoin.

Very often, projects advertised on the web may in fact turn out to be financial pyramids that do not even have a real cryptocurrency. Examples of Polish and global financial pyramids trying to deceive investors with the vision of cryptocurrency wealth were:

  • Netleaders: with his Dascoin project;
  • FutureNet and FutureAdPro: FuturoCoin “cryptocurrency”;
  • Bitconnect: a loud financial pyramid that pulls on the “cryptocurrency” of the same name.

Bitcoin and investment risk

Bitcoin as an investment asset can bring investors unusually large returns. We are talking about returns at the level of even several hundred percent per year. However, we should always remember that investments involve the risk of losing money. Of course, this risk varies from type to type of investment. Usually, the higher-risk investments also promise higher returns.

Traditionally, the safest form of investment is treasury bonds and bank deposits. Usually, however, this type of return on investment allows only to possibly avoid the effects of progressive inflation.

Then, we can consider an investment in commodities, real estate and equity equities as moderate risk investments. In this case, the investor, after choosing the appropriate investment strategy, can count on a chance of a satisfactory return on investment, while limiting the risk resulting from price movements on individual markets.

The third and most risky group of investments are investments in derivatives (options, futures, etc.).

Risky Cryptocurrencies

Even so, even above derivatives, we would place the cryptocurrency market as a type of investment with a particular level of risk. This is for several reasons. The cryptocurrency market is not subject to as detailed regulations as other capital and financial markets. Due to the partial anonymity of cryptocurrency users, we are unable to control who and to whom the cash flows go. This can lead to market movements, manipulations and speculations that would not be possible in a traditional capital market. One example of such manipulation is the use of the pump-and-dump scheme, normally banned in the traditional market.

Bitcoin risk

Second, the cryptocurrency market, despite the amount of cryptocurrencies in circulation, is still a young and unstable market. Bitcoin holds approximately 60% dominance in total cryptocurrency market capitalization, Ethereum 11% and Cardano 3%. This is a gigantic disproportion in value between individual assets. It also shows how much different cryptocurrencies differ in terms of value. The “smaller” an asset is, the more susceptible it becomes to price movements. And so, Bitcoin, but especially other, smaller cryptocurrencies, can surprise us with price jumps and drops of up to 50% per day. Unlike stocks, we do not invest in a company that brings specific returns year by year. Bitcoin in its application is therefore compared more to gold – only with lower capitalization and higher risk.

Bitcoin as a tool of criminals

Dark Web

So where did the belief that Bitcoin is a scam come from? We need to look for the answer in some of the features of the “king of cryptocurrencies”. It is about being relatively anonymous when submitting transactions. Due to the fact that Bitcoin can be sent at any value over an unlimited distance, without revealing the identity of the sender and addressee, the first cryptocurrency gained considerable popularity on the black market and in the gray market. It turned out that the above feature is perfect for conducting settlements in the case of trade in illegal weapons, drugs and stolen goods.

In fact, Bitcoin in this context became famous in 2013, when US law enforcement closed Silkroad – one of the largest darkweb markets for the purchase of illegal goods and services. As you can easily guess, settlements in BTC were also carried out on this market.

So we can say that while some features of Bitcoin facilitate the functioning of the gray economy, this does not mean that cryptocurrencies are bad in themselves. Bitcoin is still a completely new technological money proposal, the features of which can facilitate illegal trade. Remember, however, that awareness of bitcoin and its verification in the mainstream has significantly improved since 2013. As a result, its importance and possibilities of using it on the black market are effectively limited.

Scammers and tricksters

The second trait of Bitcoin that is often used by fraudsters is its private nature. At every stage of functioning in the BTC network, the user is directly responsible. We have to keep an eye on the password to our wallet and we will lose (irreversibly) funds if we lose this password or transfer BTC to the wrong address. This is the price to be paid for removing from the value exchange system the banks that have so far acted as a transaction intermediary – now all responsibility (identifying the addressee, maintaining account security, etc.) depends on us. It is this aspect that is most often used in the world of cryptocurrencies by scammers, hackers and hustlers.

In the case of Bitcoin, we can very often find posts, comments, pages that try to tempt users with a high win if you transfer a symbolic amount in BTC to a specific address. As you can easily guess, there are no awards, and the account set up in social media is, of course, a fake. So how do you avoid such a scam? Absolutely, never send your cryptocurrencies to any address unknown to us – be it for “verification” or “claiming” purposes. In 90% of cases, this is usually another attempt at extortion.

We wrote more about scams in the previous article of the series.

Hooks and thefts

At some stage of investing in cryptocurrencies, we will most likely come into contact with an intermediary in the purchase of cryptocurrencies. The largest of them are cryptocurrency exchanges. The vast majority of them are specialized companies that, through their platform, allow users to buy and sell various digital assets in various pairs (crypto-crypto, crypto-fiat). Exchanges such as Bitbay, Binance, Coinbase, Huobi and others create an account on our behalf in which our portfolio is kept balanced. We, however, entrust direct control of the funds to an external entity.

Currently, large exchanges care a lot about their security levels, but despite this, there are still cases where exchanges are robbed of their cryptocurrency deposits. The consequence may then be the loss of stock exchange liquidity, which ultimately leads to the closing of the entity’s operations. It is also a loss of money for users.

The biggest cryptocurrency scandal in history is considered to be the collapse of the Mt.Gox exchange, the first large cryptocurrency exchange, which as a result of hacking attacks and poor management suffered losses of several hundred thousand BTC. Investors who lost their money have not recovered their money to this day. In Poland, we also have a history of Mt.Gox. In 2019, the Polish Bitmarket exchange collapsed. The reason was a loss of liquidity due to mismanagement and the concealed loss of funds due to hacking attacks.

Facts and Myths

Bitcoin itself is not a scam. This is a fact. Unfortunately, this new and revolutionary technology, which is still so difficult for many people to understand today, can be very easily exploited for criminal activities. Therefore, if you decide to invest in cryptocurrencies, you must accept the high risk associated with such an investment. From hackers waiting for the money of intermediaries (exchanges), to ordinary frauds and hustlers who will try to frame you in their scam.

Therefore, first and foremost, remember about safety.

  • Only invest what you can afford to lose.
  • Do not keep your funds in the stock market longer than necessary.
  • Do not share passwords for cryptocurrency wallets, electronic banking and other services with anyone.
  • Never send funds to unknown wallets.

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