When Bitcoin first came along, one of its biggest draws was the use of blockchains to make the currency secure in our digital world. Unfortunately, digital wallets are still open to hacking, and people are still open to scamming — so, so much scamming.
To get an idea of how bad it can get, let’s take a look at the biggest Bitcoin scams in history, and the often-ridiculous reasons that they happened.
The massive Mt. Gox disaster
You may have already heard about Mt. Gox — it’s easily one of the most infamous crashes in Bitcoin history, a tangled knot of mistakes, corruption, and fraud. Back in the early 2010s, Mt. Gox was a Bitcoin exchange based in Tokyo that handled the majority of Bitcoin transactions around the world because people thought it was safe. There were not very many options to buy or sell Bitcoins at the time, and as such, Mt. Gox oversaw more than 70% of all global Bitcoin trades by early 2014.
Unfortunately, Mt. Gox proved to be anything but secure. Within a few short years, it faced several massive successful hacking attacks, payment processing issues, governmental investigations, and a massive bank run as people tried to withdraw their funds (and found it might not even be possible). It even turned out that a hacker had been leisurely siphoning Bitcoins from the exchange all along.
Ultimately, Mt. Gox gave up. In a devastating blow to the Bitcoin market, the company filed for bankruptcy and announced that it had lost around 850,000 Bitcoins, worth about $450 million dollars at the time, nearly $8 billion at today’s usual market value. While 200,000 Bitcoins were later rediscovered on the exchange, the price had crashed from $800 to $400 and caused the first-ever Bitcoin market crash.
Of course, hackers didn’t make away with all of it — in fact, it’s hard to tell just how much money was hacked because of security issues and how much was simply stolen by Mt. Gox representatives. Millions and millions of dollars were lost to fraud, embezzlement, and other illegal acts made by company agents and partners. It will probably be years before we know just how deep the scamming went.
The Optioment ploy
One of the worst types of cryptocurrency scams involves a fake ICO (initial coin offering). The equivalent of a company going public, an ICO occurs when a business first starts selling its cryptocurrency.
Most ICO scams use basic investment fraud, aka, “We promise we’re a super-real and very successful company!” when the company doesn’t actually exist and has no plan to make a profit. More advanced ICO scams may even pretend to be other real cryptocurrency organizations to confuse buyers who are searching online.
Bitcoin Savings and Trust was even more blatant: It started out as an ICO scam based around a simple Ponzi scheme and then kept on chugging. Unwitting investors were promised amazing returns like 7% per week, and ultimately more than 265,000 Bitcoins were stolen via fraud. The whole Savings and Trust scheme finally collapsed in 2012, and organizer Trendon Shavers was caught up in court battles for years. This eventually led to his imprisonment and a $40 million fine. Too bad the Bitcoins that he stole were worth around $100,000,000 at the time of his sentencing.
Silk Road’s ridiculous email trap
“Wait, Silk Road wasn’t exactly a scam, was it?” you may be wondering, and you would be correct. Silk Road was an infamous black market for trading drugs and other various illegal things on the dark web. Most importantly, it was taken down by the FBI and other law enforcement organizations, which actually helped to cement Bitcoin as a legitimate currency that governments cared about.
Then things went a bit wrong. Specifically, the government agreed to auction the Bitcoins seized from Silk Road (something that commonly happens to harmless seized goods), so it contacted potential participants to let them know about the auction and ask if they were interested in signing up. Unfortunately, due to a classic “bcc” email mistake, all potential bidders could see everyone the email was sent to. That list was quickly copied, sold, and stolen.
The result was a wave of scam emails sent to all these people who were already interested in buying Bitcoins. Phishing schemes like this one pretended to be from the government or related agencies, seeking out sensitive financial information that allowed the scammers to steal Bitcoins from those participating. It wasn’t the greatest way to end the Silk Road case.
Canadian Bitcoins and the simplest scam
The worst scams are those that no one should fall for but somehow work anyway. This happened to Canadian Bitcoins, an exchange that was used to, as you might guess, manage Bitcoins for Canadian investors. Back in 2014, the exchange was expertly hacked, and at least $100,000 dollars worth of Bitcoins were stolen.
So, where does the scam come in? Well, CB had leased out some space at a Rogers Data Centre for important server hardware, the sort of hardware you could use to hack into the exchange. The data center fell for what might be the oldest scam in the book, right behind, “Hey, what’s that over there!?”
A hacker sent a message to Rogers Data Centre that (basically) said, “Hello, I am the CEO of Canadian Bitcoins. My name is James Grant. I need all your security codes.” Rogers verified that the CEO of Canadian Bitcoins was indeed named James Grant, then sent the hacker all the security codes they needed. No one ever checked to see if the message had really been from Grant or asked for any kind of confirmation, or, you know, tried to contact Grant through professional channels. You can imagine how displeased investors were when they found out.
Bitcoin gold and false promises
Bitcoin gold was a project designed to create a new form of cryptocurrency that also tapped into the Bitcoin name. That branding trick was a little shady, but nothing was particularly illegal.
Then, expert scammers built a website called mybtgwallet.co, which offered users a once-in-a-lifetime opportunity to generate Bitcoin gold wallets. All they had to do was submit their private keys used to protect their cryptocurrency wallets!
Needless to say, people shouldn’t have fallen for such an obvious scam, but apparently, the website looked convincing to a lot of buyers. More than $3 million in Bitcoins were stolen by the scammers, along with a number of other cryptocurrencies. Even the creators of Bitcoin gold were roped into the scam and actually endorsed the website on its Twitter account before realizing it was all one big con. Remember, it’s really easy to lie online.
Celebrity-endorsed cryptocurrency card backfires
While the realm of influencers and the validity of the products they are paid to endorse are often controversial, the fallout from the Centra scam was particularly damaging to the overall reputation of cryptocurrency. You might recall that a couple of years ago, DJ Khalid and Floyd Mayweather made several paid endorsements of Centra ICO, which was promoted as a secure method of storing cryptocurrency like Etherium, Ripple, and Bitcoin. Said endorsements allowed Centra to raise $30,000,000 in a matter of weeks and greatly raised the company’s public profile.
Unfortunately, neither Khalid nor Mayweather declared that these were paid endorsements for an ICO, as required by law. As such, they were forced to pay over $700,000 between them in fines, penalties, and interest to the SEC (neither admitted guilt).
As if this wasn’t bad enough, the Southern District of New York filed a civil action against Centra’s founders for making false statements about their corporate sponsorship and running a fraudulent ICO. Centra went from boom to bust in a matter of weeks, tarnishing the reputation of cryptocurrency and making the public even more skeptical.
A murder mystery
For any fans of mystery novels and police procedurals, the following may sound like a plot straight out of fiction. The CEO of investment firm QuadrigaCX died in February of 2019 suddenly and without explanation, leaving no one else capable of accessing client funds valued at around $190,000,000. Following the death of the CEO, it was uncovered that the financial records for 2018 showed no evidence of any such fund existing and that QuadrigaCX itself was in dire financial straits.
In addition, one of the co-founders of QuadrigaCX may have been a convicted con artist going under a false identity. Allegations of money laundering have subsequently emerged, and it turns out the whole exchange was being run by just one developer. While the whole bizarre tale could easily fill an entire article itself, several class action lawsuits have been combined into a single committee comprised of several law firms, and monitors Ernst and Young have been court-appointed to manage any remaining assets.