Tracking Bitcoin Scams

Interesting paper: “There’s No Free Lunch, Even Using Bitcoin: Tracking the Popularity and Profits of Virtual Currency Scams,” by Marie Vasek and Tyler Moore.

Abstract: We present the first empirical analysis of Bitcoin-based scams: operations established with fraudulent intent. By amalgamating reports gathered by
voluntary vigilantes and tracked in online forums, we identify 192 scams and categorize them into four groups: Ponzi schemes, mining scams, scam wallets and fraudulent exchanges. In 21% of the cases, we also found the associated Bitcoin addresses, which enables us to track payments into and out of the scams. We find that at least $11 million has been contributed to the scams from 13 000 distinct victims. Furthermore, we present evidence that the most successful scams depend on large contributions from a very small number of victims. Finally, we discuss ways in which the scams could be countered.

News article.

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Posted on February 4, 2015 at 7:02 AM • 33 Comments

Comments

Katrina L • February 4, 2015 7:48 AM

I can only imagine how much of a problem this will be in the coming years and the majority of the general population gets more comfortable with virtual currency. Interesting read.

Clive Robinson • February 4, 2015 8:42 AM

@ Winter,

The biggest scam: Those early in the Bitcoin game own a very disproportionate slice of the total bitcoin pie.

If I remember correctly this is a side effect of one of the design parameters of BitCoin which is there to avoid an issue that arrises from nearly all fiat currences.

However the extream nature of the imbalance suggests that somebody misunderstood the issues that would arise.

I’ve been told that mining BitCoins is nolonger profitable, in that the cost of the energy required for a general computational platform –like a PC with graphics cards– is greater than the value of the coins it will mine.

Which might account for the odd story or two that went around about free apps hiding mining code that sent the BitCoins found back to the writter of the app.

MikeA • February 4, 2015 10:20 AM

The only folks I know of making money off BitCoin are the ones selling mining machines. The spirits of James Lick and Levi Strauss are smiling.

Anura • February 4, 2015 12:07 PM

@Clive Robinson

If I remember correctly this is a side effect of one of the design parameters of BitCoin which is there to avoid an issue that arrises from nearly all fiat currences.

However the extream nature of the imbalance suggests that somebody misunderstood the issues that would arise.

BitCoin was based on two principals: Inflation is inherintly bad, and no one should have control over the money supply. The thing is, this basically created the exact problem that FIAT money tries to avoid: You have massive deflation and are better off hoarding money than spending it. In essence, this prevented BitCoin from being anything more than a speculative commodity, and unless it becomes more it will run the risk of losing popularity, which will, in turn, lead to the value dropping and all of the late-comers losing nearly everything they invested.

One concern with FIAT money is that the way currency enters the system pretty much benefits only the wealthy. This is true in how it is implemented today, but only when we are signfiicantly inflating the money supply (which we have been). The thing is, bitcoin doesn’t solve that problem with FIAT currency except in the very beginning when it was cost-effective to mine; now, pretty much the only people seeing any significant gains from new bitcoins are wealthier people with large mining operations. FIAT money could get around the issue with QE basically just leading to asset inflation without spuring any economic growth by simply changing the way some of that money enters the system: by paying for a small portion of government spending with newly minted currency instead of debt.

u38cg • February 4, 2015 12:10 PM

I did a bit of number crunching on Bitcoin last October for the company I worked for at the time. Back then, mining hardware was reasonably profitable at the current price, especially if you used low cost locations and so on.

However, if you attempted to lock in pricing through forwards it became unprofitable. Given the current price, it’s now obvious why!

Tony H. • February 4, 2015 2:34 PM

Marijuana grow-ops often enough steal the electricity to power their lights, so why not Bitcoin miners. Certainly in some countries this is a lot easier than others.(Granted, the electricity theft is often not to save money, but to avoid curve-perturbing consumption that attracts attention from electricity suppliers; a non issue with quite legal Bitcoin mining.) There are also some places where electricity is much cheaper than others. Hydro-electricity in most of Quebec is very much cheaper than anywhere else in North America, to the point that electric space heating is actively encouraged. Quebec has had dreams of attracting Google or Facebook size data centres based on this for a while, but those have high-bandwidth data connectivity requirements that Bitcoin miners don’t. Maybe Quebec small towns should try to encourage small scale community miners to replace the long lost iron ore and asbestos “bricks & morter” mining, and aluminum smelting that once sustained the province.

Ben R • February 4, 2015 2:47 PM

A drop in bitcoin value can’t make mining unprofitable, because the difficulty of the proof-of-work hash is automatically adjusted based on the rate that new blocks are added to the chain. If the mining reward drops enough that it’s no longer worth it for the 10% of miners with the highest electricity costs or least efficient hardware, then they stop mining, the rate of mined blocks goes down by 10%, and mining is soon made 11% easier to compensate, so the remaining miners get 11% more bitcoin per unit time.

San Diego • February 4, 2015 5:48 PM

@ Ben R

Bicoins are theoretically closer to ‘commodity’ than our present day definition of ‘currency.’ Its demand is largely based on survivalship of darkweb markets. Thus, value of bictoins are market driven, governed by laws of supply-demand, very low incentive for manipulation, with vendors of competing currency as possible exception.

In a pure commodity market, hoarding is nonsensical, sometimes suicidal.

Anura • February 4, 2015 5:57 PM

@San Diego

In a pure commodity market, hoarding is nonsensical, sometimes suicidal.

That’s not true. You hoard when you have reasonable expectation that prices will go up. Once prices go up, you are incentivised to sell. When prices are dropping and you expect them to go back up, you are incentivised to hang onto what you have to avoid a loss. You can see this in all commodities markets, including bitcoin. Initially there was a lot of hoarding as people expected prices to rise over time. If bitcoin does what it is designed to do, that is be a deflationary currency, then that will also lead to hoarding.

San Diego • February 4, 2015 6:39 PM

@ Anura
“You hoard when you have reasonable expectation that prices will go up. Once prices go up, you are incentivised to sell.”

That’s more like ‘holding.’ By ‘hoarding’ there is intent to affect price by creating scarcity, according to an online definition (as you are welcomed to yours):

DEFINITION of ‘Hoarding’
The purchase of large quantities of a commodity with the intent of pushing up the price. An investor hoping to increase the price of a commodity can do so by leveraging his or her demand for it, and buying physical inventory as well as purchasing futures contracts for that commodity. Hoarding can also take place in financial instruments like bonds.

Let me ask this in a different way. Do you look at bitcoin as a currency, a commodity, or both? and what do you think about the theory that its demand, as I proposed above, is largely hinged on survivalship of dark markets?

Dirk Praet • February 4, 2015 6:52 PM

Furthermore, we present evidence that the most successful scams depend on large contributions from a very small number of victims.

Something Bitcoin scams seem to have in common with more classic financial scams, like the fake Chinese bank we discussed a couple of threads ago. Some useful tips for BC afficionados to avoid getting scammed:

  1. Check if the entity you’re dealing with has been publicly audited, e.g. with a proof-of-reserves cryptographic audit.
  2. If possible, do your own background checks. You can DuckDuckGo a company’s WHOIS information. It should show the name under whom the company is registered and how long it has been on the market. If it’s private, it’s probably dodgy.
  3. Look for transparency and best business practices with the people you’re dealing with.
  4. Recognise if a scam is not just mismanagement or incompetence.
  5. Use common sense. If something sounds too good to be true, it probably is.

Anura • February 4, 2015 7:14 PM

@San Diego

Don’t really feel like getting into a terminology debate.

Let me ask this in a different way. Do you look at bitcoin as a currency, a commodity, or both? and what do you think about the theory that its demand, as I proposed above, is largely hinged on survivalship of dark markets?

Right now it’s a commodity, with its value is being derived entirely from speculation. Dark markets don’t put much demand on bitcoins, and it doesn’t get its value from them. The expectation is that in the future, there will be a lot of websites opennly using bitcoin, e.g. paying for a website membership or the like. The thing is, this still won’t make it a real currency. Real currencies derive their value from an economy, that is the price is based on the amount of money in circulation, the rate it changes hands, and the products you can purchase with them.

In the event that bitcoin does see wide use, it will be some sort of odd half-currency, half-commodity hybrid; it’s more of a payment method than a currency, really. The value will be determined by the volume of currency exchanges as people buy bitcoins to immediately exchange for products, and companies immediately exchange their bitcoins for domestic currency. When businesses first start to see widespread use of bitcoins, you could see massive inflation as businesses sell off bitcoins almost immediately after acquiring them. This will stablize at some point once the exchange volume reaches its peak; after this, as the bitcoin market grows, you will see deflation which will encourage hoarding, which will risk sending the markets into a deflationary spiral.

Anura • February 4, 2015 7:22 PM

Correction “as the bitcoin market grows” should be “as the use of bitcoins to make purchases grows.”

Danny • February 5, 2015 1:09 AM

Bitcoin is the worst choice to have for illegal shenanigans. The transactions are all public and can be traced for decades.

A Nonny Bunny • February 5, 2015 1:22 AM

@ Ben R

A drop in bitcoin value can’t make mining unprofitable, because the difficulty of the proof-of-work hash is automatically adjusted based on the rate that new blocks are added to the chain. If the mining reward drops enough that it’s no longer worth it for the 10% of miners with the highest electricity costs or least efficient hardware, then they stop mining, the rate of mined blocks goes down by 10%, and mining is soon made 11% easier to compensate, so the remaining miners get 11% more bitcoin per unit time.

Except that the mining reward in bitcoins per block decreases exponentially over time (in stages), to the effect the number of bitcoins that can ever be mined is limited 21 million.
So it cannot remain profitable unless either the value of bitcoins keeps increasing, or people pay for transactions (or both).

David S. • February 5, 2015 1:58 AM

“after this, as the bitcoin market grows, you will see deflation which will encourage hoarding, which will risk sending the markets into a deflationary spiral.”;Anura

If bitcoin is a medium of exchange， then there is little to none deflationary concerns. There is no fractional reserve banking, by which inflates, with bitcoins. Even if there is one, it will swiftly go the MtGox way. Therefore, deflation, or contraction of money supply, can only occur when bitcoins are marked off, by theft or accident.

Winter • February 5, 2015 2:21 AM

@David S
“Therefore, deflation, or contraction of money supply, can only occur when bitcoins are marked off, by theft or accident.”

No, deflation occurs when the volume of goods purchased increases while the volume of money stays fixed. See the famous equation:

MV = PT
http://www.investopedia.com/articles/05/010705.asp

If the money supply M stays fixed, and the volume of transactions T increases, either the prices P must decrease or the speed of money circulation V must increase. For V to increase, you need banks and credit, lots of it. In practice, this means that prices in Bitcoin decrease, i.e., deflation.

David S. • February 5, 2015 2:58 AM

@ Winter

What you describe is called ‘price deflation’ not ‘deflation’, if you want to stay consistent with Austrian school of thoughts. Your M stays fuxed, no deflation.

green7 • February 5, 2015 10:05 AM

@Danny

re bitcoin being public:
That’s totally correct, and a great danger that is becoming more and more apparent. For instance, a well known bitcoin exchange has been cancelling accounts based on tracing what their customers’ bitcoins were used for.

There are a number of alternate currencies addressing that very problem. The most promising seems to be Monero, which is private by default, but a wallet owner can decide to make a wallet public, or any particular transaction only (I’m not 100% sure on that last one). That family of currencies goes beyond the mixer/tumbler band-aid by using ring signatures (derived from group signatures but without a group manager) to ring-sign “slices” of your payments with past payments. Definitely keeping an eye on it for “post bitcoin”.

paul • February 5, 2015 10:47 AM

None of this is particularly new. If you look through at past couple hundred years at small countries, or countries in turmoil, having a currency that functions simultaneously as a medium of exchange and medium of speculation is a fairly common thing. You also see it with plenty of real-world industrial commodities where there are very active trading markets. In general, that kind of situation is bad for economic growth, because the people who are using the currency or the the commodity in daily business have to deal with the added risk imposed by the speculators, and often aren’t in a position to hedge their holdings effectively. Usually what happens is that they gravitate toward some more stable medium of exchange (think, for example, of all the tiny countries where dollars used to be the de facto currency; nowadays it’s that or the euro). Or with commodities people figure out ways to use less of the unstable ones whenever possible.

Anura • February 5, 2015 12:07 PM

@David S

What you describe is called ‘price deflation’ not ‘deflation’, if you want to stay consistent with Austrian school of thoughts. Your M stays fuxed, no deflation.

Just to be clear, when most people talk about deflation, they are not talking about a reduction in money supply, they are talking about a reduction in prices. Of course, if people are hoarding money, that’s equivalent to a reduction in the money supply and your usage of “deflation.”

Ray Dillinger • February 5, 2015 4:23 PM

One thing that Bitcoin offers is a more complete lack of privacy. And this is arguably a good thing, which itself is a very puzzling thing. Financial privacy was good. But it’s over, and we can’t get it back.

We have already reached the situation where most of us have no financial privacy. That is, anyone with sufficient power and resources can find out how most of us spend pretty much every last dollar we earn. And this is bad. Not only have we lost privacy, but we’ve created a(nother) power imbalance.

Bitcoin democratizes the loss of privacy by eliminating the power & resource requirement. It would mean that everybody’s financial information – including that of the wealthy and powerful – is no longer solely the property of the powerful and wealthy, but of everyone. It would force society to deal with and make rules about what you can and can’t do with other people’s financial info, and hopefully those rules would be as binding on the wealthy and powerful as on the ordinary citizens. It wouldn’t as good as getting financial privacy back, but it might turn out to be better than what we have now.

Ray Dillinger • February 5, 2015 4:30 PM

For what it’s worth, while it’s true that early adopters hold an astounding fraction of the total coins, the single largest holder – Satoshi Nakamoto himself – will never, ever, spend his coins. So… effectively the money supply isn’t as large. While each of those other 926 therefore has a larger fraction than might otherwise have been supposed, the group that has “half the bitcoins” is effectively considerably larger than 927.

Dave • February 6, 2015 8:22 AM

“However the extream nature of the imbalance suggests that somebody misunderstood the issues that would arise.”

It’s also quite possible the deflationary nature of Bitcoins was completely intentional – what better way to reward early adopters, especially but not limited to the guy who started the whole thing? That effectively turns the entire thing into a pyramid scam, where the early adopters get rich off of all the later-adopter suckers who mistakenly believe they’re onto something valuable and are willing to exchange things that are actually valuable (government-backed currency, real estate, illegal drugs, etc) for something that is now hard to get but not all that useful (a block of bits).

Mikael Thomas • December 7, 2017 8:34 AM

Staying completely anonymous is difficult, unless you buy locally from someone in cash through a person-to-person marketplace. Make sure to check if the exchange follows Know Your Customer (KYC) and Anti-Money Laundering (AML) laws in your country. If they do, then some identity information will have to be sent to them before buying more on this here.

Seema Kumari • May 24, 2020 11:56 PM

Even with cryptocurrency, investigators can follow the money anyone could buy or sell anything with Bitcoin and never be tracked, let alone first Bitcoin securities fraud case—and 30-year-old Frenchman Mark Karpelès. Bitcoin, the Internet currency beloved by computer scientists, libertarians, and criminals, is no longer invulnerable. As recently as 3 years ago, it seemed that anyone could buy or sell anything with Bitcoin and never be tracked, let alone busted if they broke the law. “It’s totally anonymous,” was how one commenter put it in Bitcoin’s forums in June 2013. “The FBI does not have a prayer of a chance of finding out who is who.” If you are looking for cyber security course then visit: https://www.cetpainfotech.com/technology/ethical-hacking-training

xcv • February 26, 2021 4:51 AM

@ Ray Dillinger

the single largest holder – Satoshi Nakamoto himself – will never, ever, spend his coins. So… effectively the money supply isn’t as large.

That’s what I can’t figure out. Some middle-aged or older Japanese man slinging a purse around — very reclusive, I wouldn’t say “queer” or “LGBT” or anything like that — it’s an attention-getter symbolic of the electronic “cryptocurrency” he’s selling.

I’m from way out in the country in Alaska. I don’t trust bitcoin. You’re going to waste resources, “mine” for something, you may as well be panning for gold.

The sun shines at a certain angle, you can see gold nuggets on the river banks.

One troy ounce of gold = 480 “grains” =~ 31.1 “grams”.

One troy pound is equal to 12 troy ounces or 5760 grains, whereas one pound “avoirdupois” is equal to 16 ounces avoirdupois or 7000 of the same “common grain”.

Gold is or last was $1,776.74 USD per troy ounce.

And Bitcoin hit $55,971.50 USD last Sunday, and now it’s down to $46,680.30, a guy’s basically out ten grand for a bitcoin in less the week if I have this right.

But gold is still gold, as it has been since Biblical times without regard to EMP-vulnerable computer technology.

People are more or less paying the worth of an entire kilogram of pure gold for a worthless bitcoin.

MarkH • February 26, 2021 11:39 AM

Re deflation:

If I make any assertion consistent with the “Austrian school,” it will surely be by accident, because I regard that doctrine as a load of ideological palaver disconnected from data-based economics.

Per Dave’s trenchant observation, Bitcon is de facto a pyramid scheme, whether it became so by design or as an unanticipated consequence.

A great friend of mine — and a life-long engineer — has noted how many technology products and systems have gruesomely bad operator interfaces, which are confusing, laborious and counter-intuitive for most people to use.

When he sees such a failure, he says, “that must have been designed by an engineer.” Such designs often made sense to people looking at the problem wrong-way-round (from the internals of the technology to the outside world).

Taking the initial representations about Bitcon at face value, my interpretation is that its inventors:

• fundamentally misunderstood how money works (engineers are almost always baffled by monetary theory, which is completely at odds with the kind of analysis most of them are trained in),

• based on that false understanding, made some absurd misdiagnoses of what’s wrong with conventional money, and

• designed a monstrously inefficient set of “solutions” to those imaginary faults.

It’s making good profits for some participants!

xcv • February 26, 2021 2:12 PM

@MarkH

If I make any assertion consistent with the “Austrian school,” it will surely be by accident, because I regard that doctrine as a load of ideological palaver disconnected from data-based economics.

You’re taking the Communist Party line position of the Fed along with the cult of John Maynard Keynes, i.e. the “Keynesian” or Marxist school of economics.

The other side of the argument (represented by Ludwig von Mises) being that a solid or stable economy needs to be based on something of hard value rather than a government bureaucracy based on a party line ideology of data collection, measurement, central government planning, control, and manipulation of interest rates and issuance of soft currency for a centrally planned economy as opposed to free market Capitalism.

xcv • February 27, 2021 1:44 AM

@Clive Robinson

Do you know what that “Hard value” is supposed to be?

There’s gold, silver, other precious metals, gemstones, etc. — not so much from the point of view of vanity or personal adornment — but from that of small items of considerable worth or value, to include coins, bars of precious metals, etc.

Also the unalienable rights of self-defense with weapons including firearms, without which there cannot really be any private ownership of or ability to keep hold of anything of “hard” or real value.

Oh and stop conflating sensible societal managment with “Communism” it immediatly tells people of your cognative biases.

You’re talking “sensible societal management” as if that is not Hitler’s National Socialism or Marxist, Stalinist Communism by any other name, in that people need to forcibly compelled to do things they do not want to do, and forcibly restrained from doing things that they do want to do in a society of free and independent trade, business, and work, if that isn’t the slavery and “state’s rights” of the Confederate South of the Civil War in the U.S.

And as to “cognitive biases” you might be referring to so-called “cognitive behavioral therapy” as opposed to “dialectical behavioral therapy” or other forms of behavioral control or coercion that often involve involuntary drugging or incarceration and torture at places like Bethlem Royal Hospital, a.k.a. Bedlam. And for that matter, how is that any different from the Nazi Holocaust and the Soviet pogroms which incarcerated people and “worked” them to death in concentration camps, gas chambers, labor camps, gulags, and similar places of man’s inhumanity to fellow man?

@MarkH

based on that false understanding, made some absurd misdiagnoses of what’s wrong with conventional money, and

designed a monstrously inefficient set of “solutions” to those imaginary faults.

It’s making good profits for some participants!

This is true, in regard to Bitcoin and other cryptocurrency. There has to be something of real or “hard value” to the currency of trade or commerce. As far as the Fed goes, we’re looking at “legal tender” Federal Reserve Notes with a “soft” promise by the government not to print too many of them and debase their value so much that we’re no longer able to pay our bills or buy the things we need to get along in this life.

There’s really nothing of “hard value” to speak of to a hash function like SHA256 — given the ease of finding solutions to certain equations with methods such as classical or quantum annealing, or the Viterbi algorithm for turbo codes, which can be used or adapted fairly easily to crack hash functions to find pre-images or collisions.

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