First empirical analysis of Bitcoin-based scams

Scientists from the Southern Methodist University (Dallas, Texas) have published the first academic paper analyzing Bitcoin scams, dubbed There’s No Free Lunch, Even Using Bitcoin: Tracking the Popularity and Profits of Virtual Currency Scams.

The researchers identified 192 scams occurring between 2011 and 2014. In about 21% of cases, they were able to track payments into and out of the scams, finding that “at least $11 million were stolen by the scammers from 13,000 distinct victims,” but also that “the most successful scams depend on large contributions from a very small number of victims.”

The paper identifies four distinct kinds of scams:

  • Ponzi schemes: promise investors outlandish interest rates on deposits. “Of all the scams, this type has taken in the lion’s share of money from victims,” say the researchers. Such schemes often collapse within 37 days, but are then replaced with a new program, often run by the same criminals.
  • Mining scams: taking orders and money from customers but never delivering any mining equipment. “These retailers typically endure for 145 days,” note the researchers.
  • Scam wallets: the service offers greater transaction anonymity. “If the deposit is small, scammers leave the money, but if it rises above a threshold, scammers move the money into their wallet,” describes the paper.
  • Fraudulent exchanges: they offer PayPal and credit card processing at a better exchange rate than competitors. “Customers soon find out they never get Bitcoin or cash after making payment. Longer-lived exchange scams survived about three months.”

The paper nevertheless underlines the inherent relative transparency of Bitcoin: “Fortunately, the block chain creates an opportunity in that transactions may often be tracked, which could make it easier to assess the true risk posed by scams and make it harder for scammers to hide.”

“Scams pose serious dangers to the Bitcoin ecosystem. First, there is the direct harm imposed on the victims who pass money to the scammers, never to see it again. Second, and perhaps more substantially, there is indirect harm imposed on all users, even those who don’t fall victim to scams. This harm manifests in damage to the reputation of legitimate operations and the undermined trust of users who become more reticent to try out new services,” conclude the researchers.

One word of advice could be that, in the Bitcoin universe as everywhere else, what seems to be “too good to be true” usually is.


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