Disclaimer: Opinions expressed in this article do not constitute investment advice from Bitcoin Reserve.
As the bitcoin market seems to be on the cusp of a long-awaited bull run, the interest in the asset is increasing. This, in turn, will bring a wave of new investors who have little knowledge about how the industry operates. Unfortunately, due to the nature of how bitcoin works, the market quickly attracted all kinds of unsavoury characters. In this article, I would like to cover the most common tactics swindlers use to walk away with your bitcoin, fiat currency or personal information.
How Deals Are Done
Over the years, the bitcoin over-the-counter market has gained a bad reputation due to the abundance of fraudulent activity. The main driver for it is the ignorance on the part of the investor about the industry in general. If, in traditional markets, it is fairly easy to to find a reputable counterparty for a trade, bitcoin is much smaller, and the options are not always intuitive. Should you buy from an exchange? A broker? Directly from a private or corporate seller? The answer to these seemingly basic questions is not easy to find.
First, let us briefly explain the difference between these options.
- Online exchanges: exchanges are platforms that provide professional traders with all the tools they need to execute their trading strategies. They are places where price discovery happens in a live order book. Over the years, they have become more institutionalized and regulated. If you are a HNW investor and not a trader, we do not recommend using exchanges for your bitcoin needs: the onboarding process can be long and difficult; the advanced trading interface may be too complicated.
- OTC desks: these are venues whose goal is to match a buyer and a seller for a one-off deal, with the desk operating as an escrow service provider. Online exchanges often have OTC desks as an additional offer. This is a better option for investors as the process is more straightforward. You will still need to go through the regular exchange onboarding procedures, however. And a match on the other side is not always guaranteed.
- Broker-dealers: brokers are the most popular choice for bitcoin investors and sellers alike. Individuals and corporate clients choose brokerage firms because of their fairly straightforward onboarding procedures, often individual approach to clients and flat rates. As opposed to OTC desks, they do not match you with a counterparty but are themselves a counterparty. Thus, you only deal with one entity throughout the process. If you want a personal yet streamlined experience, we recommend dealing with broker-dealers.
- Private buyers or sellers: in the wild, you may be contacted by representatives of certain individuals who claim to want to buy a large sum of bitcoins or to liquidate some of their positions. These private deals are rarely standardized and have many variables when executed. They may be accompanied by multiple middlemen, a fair amount of legal work, escrow services and so on. This is the least recommended option and the reason why this article has been written. See below how you can get in trouble during private deals.
A Swindler's Paradise
The bitcoin OTC market has gained a bad reputation over the years thanks to many private deals go sour. As bitcoin acts like cash which you cannot get back once sent, it attracts a lot of individuals who want to take advantage of this fact to commit theft. News outlets report cases of outright robberies, batteries, torture and even murder attempts by criminals looking to score some bitcoins. But such things can also happen under the guise of an over-the-counter deal. Moreover, the world has seen a rise of organized gangs that focus exclusively on swindling unsuspecting bitcoin buyers or sellers.
Below are the common tactics that these groups use, some of which the author knows from direct experience.
- Unrealistically large deal amounts. Criminals often take advantage of human psychology. Greed is one of the most powerful traits that they take advantage of. If someone says that they have a client willing to sell 100,000 BTC or have $2.37 billion in their bank account ready to go, this is a huge red flag. First of all, no wealthy individual will expose such numbers to people they have just met. Secondly, from our experience, all high-volume trades always start with smaller ones. It takes time to establish trust and a long-term working relationship. A good way to do that is to start small. This is precisely what we at Bitcoin Reserve recommend to our clients, too. Trust but verify.
- Phishing. Most of the time, criminals pretend to represent a wealthy client who wishes to either purchase or sell bitcoins. They are the middlemen organizing the deal because the rich guy is, obviously, too busy for these distractions. To appear more legitimate, they have a non-disclosure agreement (NDA) or a memorandum of understanding (MOA) ready, a fake website if they claim to represent a company and their "client's" KYC package (identifying information). Often, passports, bank statements and corporate documents are quite legitimate. The way they obtain such sensitive information is by phishing it out of potential victims under the pretext of KYC/AML policies. Once the counterparty provides the documents, the criminals may disappear completely (they have what they need) or may continue to the next phase. Of course, documents bought on the dark web or totally fake ones are a common occurrence, too. Do not provide your documents to anybody without doing due diligence!
- Personal meetings. Once you have spent a few hours' worth of calls with the criminal discussing the minutiae of how the deal will go through, he may suddenly ask for a personal meeting. The pretexts differ but the most common one is to provide the KYC package in person because it is too sensitive to send over the Internet. Needless to say, this is a warning sign. Even if you decide to attend such a meeting, do not under any circumstance bring any money with you (cash or bitcoin). But we highly advise against going as there is high risk to your physical safety. Cases of assault and robbery have been reported multiple times.
- Intermediaries. It is common for private deals to have multiple intermediaries. Both the buyer and the seller may have a representative (a mandate), and there may be a party who connected the two. The more intermediaries involved, the less likely that the deal will happen. Each party has its own rules that it wants to impose on the other, and everybody wants their cut. It is also likely that one of the parties is part of a criminal enterprise. Such deals are a waste of time in 99% of the cases.
- Fake escrow. Often, the criminals will insist on using an escrow service to "secure" the deal for all the parties. This can be either a lawyer's bank account or a firm that allegedly provides escrow services professionally. In such cases, sending funds to an intermediary may be the end of the deal—with you getting nothing in return. The lawyer or escrow provider along with the brokers disappear into thin air. If you are about to use such a service, thorough due diligence is highly recommended.
Slowly but Surely
As you can see, the world of bitcoin deals is not a pleasant one. Criminals are known to be ahead of the curve when it comes to adopting the latest technologies. Bitcoin is not an exception.
To avoid any such misfortunes, we recommend going through a reputable brokerage firm that is well established on the market, whose directors are public and who you can reach any time with any questions or concerns. We believe that bitcoin is a unique opportunity of our lifetime. Do not waste this chance: take a slower path of education, due diligence and common sense.
Visit bitcoinreserve.com and reach out if you want to learn more about the best practices when it comes to buying or selling bitcoin, storage solutions, latest trends in technology or simply want to chat about the future reserve currency of the world.