Making Sense of Cryptocurrency

October 7, 2022

Warnings about cryptocurrency scams are all over the news. But just what is cryptocurrency? October is National Cryptocurrency Month and a good time to learn more about digital currencies.

Kaspersky, an internet security company, defines cryptocurrency as “any form of currency that exists digitally or virtually and uses cryptography to secure transactions.” The word “crypto” means concealed or secret. “Cryptography” is secret writing. Cryptocurrencies rely on cryptographic methods to code and decode data. This cryptographic technology is used to secure transactions, to control the generation of new currency units, and to verify the transfer of digital assets and tokens.

The concept of cryptocurrency has been around since 1982 when David Chaum presented a dissertation that proposed the technical roots of cryptocurrency. Chaum, now known as the godfather of cryptocurrency, later founded Digicash, an electronic cash company. He pioneered the first electronic payment in 1994. In 2010, cryptocurrency was first used to purchase a physical product: two pizzas.

The cryptocurrency most people are familiar with today is Bitcoin, introduced in 2008 by Satoshi Nakamoto. “The best-known crypto, Bitcoin, is a secure, decentralized currency that has become a store of value like gold,” says David Zeiler, who works at Money Morning, a financial news site. “Some people even refer to it as ‘digital gold.’” There are 19,000 different cryptocurrencies, including Ripple, Litecoin, Tether, and others. They hold the same value everywhere in the world and their value is primarily determined by how much people invest in them.

Cryptocurrency can be used to buy goods and services. Many people invest in cryptocurrencies. Cryptocurrencies are purchased through websites, apps, cryptocurrency ATMs, and crypto exchanges, such as Coinbase, Kraken or Gemini. “It was once fairly difficult but now it’s relatively easy, even for crypto novices,” Zeiler says. “An exchange like Coinbase caters to nontechnical folks. It’s very easy to set up an account there and link it to a bank account.” Some people earn cryptocurrency through “mining,” which requires advanced computer equipment to solve complicated math puzzles. Cryptocurrency is then stored in a digital wallet—online, on your computer, or on an external hard drive. As with anything digital, there can be risks. A man in Wales accidently threw out his hard drive containing 7,500 Bitcoin (now worth millions). He has appealed to his local government to excavate the local landfill to retrieve his hard drive.

Cryptocurrency accounts aren’t insured or backed by the government and the value changes constantly. According to the FTC, cryptocurrency payments don’t have legal protections and payments are usually not reversible. Cryptocurrency seems to be here to stay, but many countries have strict regulations on exchanges.

Cryptocurrency scammers are constantly finding creative new ways to steal money. Often, the scams “guarantee” big payouts and free money. The scam typically starts with the intended victim receiving an unexpected email, text, or phone call. The scammer may impersonate a person or company that seems trustworthy: a well-known company, celebrity, government agency, utility company, or job recruiter.

According to the FTC’s website about cryptocurrency, these tips can help you avoid falling victim to a cryptocurrency scam:

  • “Only scammers demand payment in cryptocurrency. No legitimate business or government will email, text, or message you on social media to ask for money and demand that you buy or pay with cryptocurrency.
  • Don’t trust people who promise you can quickly and easily make money in the crypto markets.
  • Never mix online dating and investment advice. If you meet someone on a dating site or app, and they want to show you how to invest in crypto, or ask you to send them crypto, that’s a scam.
  • Don’t click on a link from an unexpected text, email, or social media message, even if it seems to come from a company you know.
  • Never pay a fee to get a job. If someone asks you to pay upfront for a job or says to buy cryptocurrency as part of your job, it’s a scam.
  • Scammers might send emails or U.S. mail to your home saying they have embarrassing or compromising photos, videos, or personal information about you. Then, they threaten to make it public unless you pay them in cryptocurrency. Don’t do it. This is blackmail and a criminal extortion attempt. Report it to the FBI immediately.”

If you, or someone you know, fall prey to a crypto con, you can report the scam to:

  • The FTC at ftc.gov
  • The Commodity Futures Trading Commission (CFTC) at gov/complaint
  • The U.S. Securities and Exchange Commission (SEC) at gov/tcr
  • The Internet Crime Complaint Center (IC3) at gov/Home/FileComplaint
  • The cryptocurrency exchange company you used to send the money

The safety tips involving cryptocurrency apply to any online activity—even if it’s just sifting through your email inbox. Education is key, along with some common sense and caution. If it sounds too good to be true, it usually is.

 

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Federal Trade Commission Consumer Advice. May 2022. “What To Know About Cryptocurrency and Scams.” https://consumer.ftc.gov/articles/what-know-about-cryptocurrency-and-scams. Last accessed October 4, 2022.

Seth, Shobhit. “Explaining the Crypto in Cryptocurrency.” Investopedia, May 15, 2022. https://www.investopedia.com/tech/explaining-crypto-cryptocurrency/. Last accessed October 4, 2022.

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