Why is bitcoin so susceptible to fraud?

As more real money pours into bitcoin, it seems that the potential for and risk of fraud increase.

AccessTimeIconJul 29, 2013 at 5:48 p.m. UTC
Updated Sep 10, 2021 at 11:27 a.m. UTC
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Bitcoin is trying hard to grow up. As we have seen, when the price of bitcoin rises, there inevitably comes real money to invest in its future. There are still many skeptics out there that don’t believe in bitcoin. They don’t think that it is real money. They don’t think that it has any value. And to be sure, there just aren’t enough real ways to spend it yet.

Bitcoin Savings and Trust

All of these aspects of Bitcoin seem to bring to it a fraudulent, secretive element. It’s harder to trace bitcoins in smaller amounts, so any scammer looking to make some cash from bitcoin would do well to solicit payments for an “investment” similar to a Ponzi scheme, where the initial investors are paid proceeds that come from the successive investors.

Recently the SEC indicated a man doing just that with bitcoin. Trendon Shavers from McKinney, Texas, solicited investors from the Bitcointalk forums by promising them a 7% weekly return from something called bitcoin arbitrage. At 7% per week, this means that investors in Shavers’ “Bitcoin Savings and Trust” were expecting a 364% annual return, and that’s not even calculating compounding interest.

Shavers’ strategy, arbitrage, is a method of buying low and selling high between different exchanges. The problem is that this hardly can be profitable unless you posses a lot of buying power. And even then it is hard to make money on several different markets since the overall volume for bitcoins is still relatively low. It is for this reason that anyone who thought Shavers had some sort of method for arbitrage unavailable to anyone else would have been sadly mistaken.


The unfortunate truth is that Trendon Shavers will not be the last person to promote the supposed benefits of arbitrage. And while it is a successful strategy in high liquidity capital markets, there just is not enough volume in bitcoin trading to successfully move money that easily. In fact, companies like BitInstant have promoted this concept to their customers. It’s no wonder why they would do that: at a 4% processing fee for each transaction, arbitrage would make them solid money no matter the result for an investor.


Others have promoted the simplicity of arbitrage to bitcoin investors with a degree of enthusiasm to deflect the real truth in that it isn’t really that easy. BTC Trader is another example whereby the claim is “Bitcoin Arbitrage Made Easy”. But one look at the interface tells you that while arbitrage is possible, it doesn’t appear easy.


BTC Trader Screenshot. Source: Bitcoin Magazine

New technology and fraud

In announcing their indictment of Bitcoin Savings & Trusts’ proprietor, the SEC at that time released a summary report regarding fraudulent activity and virtual currencies. One of their most interesting statements in the report was that new and innovative technology is specifically ripe for fraudulent activity.

“As with many frauds, Ponzi scheme organizers often use the latest innovation, technology, product or growth industry to entice investors and give their scheme the promise of high returns. Potential investors are often less skeptical of an investment opportunity when assessing something novel, new or ‘cutting-edge’, the SEC report states.

This results in an interesting trajectory: as bitcoin ascends and becomes increasingly well known, it means that the potential for scams to appear increases. The more money that is involved in bitcoin, the more opportunity there is for fraudsters to rip unsuspecting bitcoiners off.

Bitcoin versus traditional banking

Many in the bitcoin community continue to expound the virtues of bitcoin as if it is some kind of currency that can somehow thwart bad guys. The recent news regarding charges being filed against five men regarding a grift on the scale of hundreds of millions of dollars on the credit card companies highlight this.

But in actuality it is bitcoin’s inability to reverse transactions that scares the credit card companies and processors like PayPal away from adopting it. And in this case where information on at least 160 million credit cards were stolen, major companies in the financial and insurance industries are going to have to pay that stolen money back.

It took web-based bitcoin wallet Instawallet 91 days to run through a reclamation process for its customers. This occurred after someone had breached the site’s infrastructure was able to access all of the unique URLs that hosted wallets and thus bitcoins.

 Claims closure announcement on Instawallet homepage
Claims closure announcement on Instawallet homepage

Instawallet is no longer around, although one of the founders, Jan Vornberger, has gone on to start Bridgewalker, which is an Android-based wallet that makes fast Bitcoin transactions possible by using something called the green address approach.

Bridgewalker is also decidedly security-focused after what happened with Instawallet, according to Vornberger. “Green addresses (Bridgewalker recognizes Bitcoin ATM, merchant recognizes Bridgewalker) would allow the whole process to be fast without compromising security - meaning no need to wait for confirmations at any point”, he says.

Protecting investors

Wallets, exchanges and mining are all bitcoin-related businesses. And they all face the threat of hacking and scamming. That’s true whether you are in the business of bitcoin or if you are just a customer. It’s no wonder, then, that the Bitcoin Foundation is trying to do its best to interface with legal and regulatory officials regarding guidelines on virtual currencies going forward.


Regulators realize that these decentralized systems for money are only going to proliferate over time. The problem, in their view, is rampant fleecing of unsuspecting investors. If there are no checks on the system, authorities will be overwhelmed with cases of fraud. The general consensus, then, is to find ways to operate while protecting the average person from having their money stolen. It’s a tough job, as technological advancement keeps moving one step ahead of law enforcement and regulatory personnel.

What do you think about scammers using bitcoin to take money from people? What is the best way to educate the public about bitcoin, to give it a better reputation? Let us know in the comments.


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