Cryptocurrency is a digital payment system that does not rely on the banks to verify transactions. It is a peer-to-peer system that can enable anyone anywhere to send and receive payments. Instead of being physical money carried around and exchanged in the real world, cryptocurrency payments exist purely as digital entries to an online database describing specific transactions. When you transfer cryptocurrency funds, the transactions are recorded in a public ledger. Cryptocurrency is stored in digital wallets.
Cryptocurrency received its name because it uses encryption to verify transactions. This means advanced coding is involved in storing and transmitting cryptocurrency data between wallets and to public ledgers. The aim of encryption is to provide security and safety.
Bitcoin: Introduced in 2009, Bitcoin was the first cryptocurrency and is still the most commonly traded. The currency was developed by Satoshi Nakamoto – widely believed to be a pseudonym for an individual or group of people whose precise identity remains unknown.
Ethereum: Developed in 2015, Ethereum is a blockchain platform with its own cryptocurrency, called Ether (ETH) or Ethereum. It is the most popular cryptocurrency after Bitcoin.
Litecoin: This currency is most similar to bitcoin but has moved more quickly to develop new innovations, including faster payments and processes to allow more transactions.
Ripple: Ripple is a distributed ledger system that was founded in 2012. Ripple can be used to track different kinds of transactions, not just cryptocurrency.
Non-Bitcoin cryptocurrencies are collectively known as “altcoins” to distinguish them from the original.
How does Cryptocurrency work
Cryptocurrencies run on a distributed public ledger called blockchain, which keeps a record of all transactions updated and held by the currency holders. Blockchain describes the way transactions are recorded into “blocks” and time stamped. It’s a fairly complex, technical process, but the result is a digital ledger of cryptocurrency transactions that is hard for hackers to tamper with.
Units of cryptocurrency are created through a process called mining, which involves using computer power to solve complicated mathematical problems that generate coins. Users can also buy the currencies from brokers, then store and spend those using cryptographic wallets.
Anyone holding or owning cryptocurrency, actually do not own anything tangible. What they get is a key that allows movement or transfer of a record or a unit of measure from one person to another without a trusted third party.
In addition, such transactions require a two-factor authentication process. For instance, the user might be asked to enter a username and password to start a transaction. Then, they might have to enter an authentication code sent via text to their personal cell phone.
Unlike government-backed money, the value of virtual currencies is driven entirely by supply and demand. It is pertinent to mention that much of the interest in cryptocurrencies is to trade for profit, with speculators at times driving prices skyward. This create wild swings that produce significant gains for investors or big losses. And cryptocurrency investments are subject to far less regulatory protection than traditional financial products like stocks, bonds, and mutual funds.
While securities are in place, that does not mean cryptocurrencies are “un-hackable”. Several high-dollar hacks have cost cryptocurrency start-ups heavily. In 2018, the hackers hit Coincheck to the tune of $534 million and BitGrail for $195 million, making them two of the biggest cryptocurrency hacks of the recent times.
How to buy cryptocurrency
There are typically three steps involved:
Step 1: Choosing a platform
The first step is deciding which platform to use. Generally, you can choose between a traditional broker or a dedicated cryptocurrency exchange:
- Traditional brokers. These are online brokers who offer ways to buy and sell cryptocurrency, as well as other financial assets like stocks, bonds, and ETFs. These platforms tend to offer lower trading costs but fewer crypto features.
- Cryptocurrency exchanges. There are many cryptocurrency exchanges to choose from, each offering different cryptocurrencies, wallet storage, interest-bearing account options, and more. Many exchanges charge asset-based fees.
When comparing different platforms, the buyer may consider which crypto currencies are on offer, what fees they charge, their security features, storage and withdrawal options, and any educational resources.
Step 2: Funding your account
Most crypto exchanges allow users to purchase crypto using fiat currencies (i.e., government-issued) such as the US Dollar, the British Pound, or the Euro using their debit or credit cards. Crypto purchases with credit cards are considered risky, and some exchanges don’t support them. Some credit card companies do not allow crypto transactions either. This is because cryptocurrencies are highly volatile, and it is not advisable to risk going into debt — or potentially paying high credit card transaction fees — for certain assets.
Some platforms will also accept ACH transfers and wire transfers. The accepted payment methods and time taken for deposits or withdrawals differ per platform.
Step 3: Placing an order
A buyer may also place an order via the broker’s or exchange’s web or mobile platform. They may buy cryptocurrencies, by selecting “buy” option and choosing the order type, entering the amount of cryptocurrencies to be purchased, and confirming the order. The same process applies to “sell” orders.
The other mode to invest in crypto include payment services like PayPal, Cash App and Venmo, besides the following investment vehicles:
- Bitcoin trusts: One can buy shares of Bitcoin trusts with a regular brokerage account. These vehicles give retail investors exposure to crypto through the stock market.
- Bitcoin mutual funds: There are Bitcoin ETFs and Bitcoin mutual funds to choose from.
- Blockchain stocks or ETFs: One can also indirectly invest in crypto through blockchain companies that specialize in the technology behind crypto and crypto transactions. Alternatively, you can buy stocks or ETFs of companies that use blockchain technology.
How to store cryptocurrency
Usually, cryptocurrency is stored in crypto wallets, which are physical devices or online software used to store the private keys to your cryptocurrencies securely. Some exchanges provide wallet services, making it easy to store directly through the platform. However, not all exchanges or brokers automatically provide wallet services for the users.
There are different wallet providers to choose from : “hot wallet” and “cold wallet”.
- Hot wallet storage: “hot wallets” refer to crypto storage that uses online software to protect the private keys to your assets.
- Cold wallet storage: Unlike hot wallets, cold wallets (also known as hardware wallets) rely on offline electronic devices to securely store your private keys.
Cryptocurrency investment scams
Some of the most common crypto scams include:
Scammers sometimes create fake cryptocurrency trading platforms or fake versions of official crypto wallets to trick unsuspecting victims. These fake websites usually have similar but slightly different domain names from the sites they attempt to mimic. They look very similar to legitimate sites, making it difficult to tell the difference. Fake crypto sites often operate in one of two ways:
- As phishing pages: All the details you enter, such as your crypto wallet’s password and recovery phrase and other financial information, end up in the scammers’ hands.
- As straightforward theft: Initially, the site may allow you to withdraw a small amount of money. As your investments seem to perform well, you might invest more money in the site. However, when you subsequently want to withdraw your money, the site either shuts down or declines the request.
Crypto phishing scams often target information relating to online wallets. Scammers target crypto wallet private keys, which are required to access funds within the wallet. Their method of working is similar to other phishing attempts and related to the fake websites described above. They send an email to lure recipients to a specially created website asking them to enter private key information. Once the hackers have acquired this information, they steal the cryptocurrency in those wallets.
Pump and dump schemes
This involves a particular coin or token being hyped by fraudsters through an email blast or social media such as Twitter, Facebook, or Telegram. Crypto traders rush to buy the coins, which drive up the price. Having succeeded in inflating the price, the scammers then sell their holdings – which causes a crash as the asset’s value sharply declines. This can happen quickly, within a few minutes.
Another common way scammers trick cryptocurrency investors is through fake apps available for download through Google Play and the Apple App Store. Although these fake apps are quickly found and removed, that doesn’t mean the apps aren’t impacting many bottom lines. Thousands of people have downloaded fake cryptocurrency apps.
Fake celebrity endorsements
Crypto scammers sometimes pose as or claim endorsements from celebrities, businesspeople, or influencers to capture the attention of potential targets. Sometimes, this involves selling phantom cryptocurrencies that do not exist to novice investors. These scams can be sophisticated, involving glossy websites and brochures that appear to show celebrity endorsements from household names, such as Elon Musk.
This is where scammers promise to match or multiply the cryptocurrency sent to them in what is known as a giveaway scam. Clever messaging from what often looks like a valid social media account can create a sense of legitimacy and spark a sense of urgency. This supposed ‘once-in-a-lifetime’ opportunity can lead people to transfer funds quickly in the hope of an instant return.
Blackmail and extortion scams
Another method scammers use is blackmail. They send emails that claim to have a record of adult websites visited by the user and threaten to expose them unless they share private keys or send cryptocurrency to the scammer.
Cloud mining scams
Cloud mining refers to companies that allow you to rent mining hardware they operate in exchange for a fixed fee and a share of the revenue you will supposedly make. In theory, this allows people to mine remotely without buying expensive mining hardware. However, many cloud mining companies are scams or, at best, ineffective – in that you end up losing money or earning less than was implied.
How to protect yourself from cryptocurrency scams
- Protect your wallet: To invest in cryptocurrency, the user needs a wallet with private keys. If a firm asks to share your keys to participate in an investment opportunity, it is highly likely to be a scam. Keep your wallet keys private.
- Keep an eye on your wallet app: The first time you transfer money, send only a small amount to confirm the legitimacy of a crypto wallet app. If you’re updating your wallet app and you notice suspicious behavior, terminate the update, and uninstall the app.
- Only invest in things you understand: If it is not clear as to how a particular cryptocurrency works, then it is best to pause and do further research before you decide whether to invest.
- Take your time: Scammers often use high-pressure tactics to get you to invest your money quickly – for example, by promising bonuses or discounts if you participate straightaway. Take your time and carry out your own research before investing any money.
- Be wary of social media adverts: Crypto scammers often use social media to promote their fraudulent schemes. They may use unauthorized images of celebrities or high-profile businesspeople to create a sense of legitimacy, or they may promise giveaways or free cash. Maintain a healthy skepticism when you see crypto opportunities promoted on social media and must do your due diligence.
- Ignore cold calls: If someone contacts you out of the blue to sell a crypto investment opportunity, it’s probably a scam. Never disclose personal information or transfer money to someone who contacts you in this way.
- Only download apps from official platforms: Although fake apps can end up in the Google Play Store or Apple App Store, it is safer to download apps from these platforms than elsewhere.
- Do your research: The most popular cryptocurrencies are not scams. But if you haven’t heard of a particular cryptocurrency, research it – see if there is a whitepaper you can read, find out who runs it and how it operates, and look for genuine reviews and testimonials. Look for an up-to-date and credible fake cryptocurrency list to check for scams.
- Is it too good to be true: Companies that promise guaranteed returns or promise to make rich overnight are likely to be scams. If something seems too good to be true, tread carefully.
What to do if you fall victim to a crypto scam
Falling victim to a cryptocurrency scam can be devastating, and it is essential to act quickly if you have made a payment or disclosed personal information.
Contact your Bank immediately if you have:
- Made a payment using a debit or credit card.
- Made a payment via bank transfer.
- Shared personal details about yourself.