On May 7, 2014, the U.S. Securities and Exchange Commission (SEC) released a news alert declaring Bitcoin, and all other virtual currencies insecure and unsafe. Due to a rise in Bitcoin popularity, many investors and business owners like to use it for worldwide transactions. But, how safe is it, and how likely are you to run into a Bitcoin fraud scheme?
Bitcoin is a cryptocurrency, an online currency used much like physical cash. However, the difference lies in that Bitcoin has no central authority, like a bank, and is not backed by any government. This might make it seem like a risky gamble, and it is. However, Bitcoin is a peer-to-peer currency, and can easily be sent anywhere in the world via the Internet. It can be used as its own currency, or it can be converted into other currencies such as the U.S. dollar.
Why Use Bitcoin?
Why would people decide to entrust their own personal cash to an open-source cryptocurrency? There are several benefits that one can potentially reap. Bitcoins can be sent through the Internet, and aren't delayed by bank processes or any other third party. Transactions are irreversible, meaning that your transaction is sure to be processed, and quickly - the funds are available almost immediately upon sending or receiving.
Perhaps the biggest benefit of using Bitcoin is that the currency is subject to limited inflation. This is due to the supply of Bitcoin being regulated by software, and it cannot be messed with by any government or bank. The fact that you can transfer funds anywhere in the world for a low fee is also attractive for international corporations (and criminals). Its sheer versatility is impressive, to say the least.
While the idea might sound interesting for investors, the SEC seems to think otherwise. They believe that there is a much higher risk of fraudulent behavior associated with Bitcoin investment. In the alert, the SEC states that:
Innovations and new technologies are often used by fraudsters to perpetrate fraudulent investment schemes. Fraudsters may entice investors by touting a Bitcoin investment "opportunity" as a way to get into this cutting-edge space, promising or guaranteeing high investment returns. Investors may find these investment pitches hard to resist.
Their concerns are perfectly viable, as there have been scams that have happened in the past. The Bitcoin Ponzi scheme of July 2013 is one such case, where an "investment opportunity" was advertised on the Bitcoin forums offering investors a great interest rate. Instead, the fraudster allegedly used Bitcoins to pay his own personal bills and expenses, as well as pay off their own existing investors.
Identifying Bitcoin Fraudulent Schemes
If you are being offered any of the following deals, be wary of possible investment fraud:
The SEC might not find Bitcoin secure and effective, but there are plenty of people out there who support the idea and enjoy using it. What are your thoughts on the risks involved with using Bitcoin? Let us know in the comments!