The Blockchain UX Design Agency
Is Bitcoin a Scam?
If you’re wondering ‘is Bitcoin a scam?’ you’re not alone. Bitcoin has been widely dismissed in the media as a big pump and dump scheme; but what really is Bitcoin?
Why Do People think Bitcoin is a Scam/Fraud?
With having a reputation of being cross-border and anonymous, there is also a popular view that cryptocurrencies like Bitcoin only attracts suspicious activity.
Many leading figures, including ex Paypal CEO Bill Harris, have expressed their concern that Bitcoin only had a use for criminal activity in our society. Even Theresa May was quoted in 2018 in an interview with Bloomberg that:
We should be looking at these [cryptocurrencies] very seriously, precisely because of the way they can be used, particularly by criminals.
It is understandable with its reputation that Bitcoin could be seen to help criminals around the world, but the goal of money laundering, for example, is to create a chain of transactions that cannot be traced to one entity.
Since the Bitcoin blockchain is on a transparent ledger, it is designed to have a public record of all transactions. This makes the likes of laundering, much more difficult and offers a lot more transparency. It is estimated that only 1.1% of cryptocurrency transactions are actually criminal in nature.
For this reason, government agencies like the FBI have recently started contracting crypto-analytics firms like Chainalysis to easily track down criminals. This is a stark contrast to our current system, the UN has estimated that up to $2 trillion is laundered through our global financial system each year.
Despite its reputation in mainstream media, Bitcoin and the technology behind it is being used by more and more people. In fact, increasing numbers of big companies, like Microsoft, Tesla and Square Inc are embracing Bitcoin.
Why? Because Bitcoin isn’t a scam: it’s a legitimate currency which offers many advantages over traditional money. Much of the negativity surrounding Bitcoin can be put down to fear of a new system that’s set to replace established financial institutions.
While any investment carries some risk, if you understand how Bitcoin works it can be a secure and lucrative store of value. In this guide we’ll give you the low-down on what Bitcoin’s really all about, so you can buy or invest with confidence.
First up, what is Bitcoin, exactly?
What is Bitcoin and why is it needed?
Bitcoin is the original digital currency; a system that uses electronic coins instead of physical money. Bitcoin was introduced in 2009 by an unknown person (or group) under the alias Satoshi Nakamoto. You can explore more about who Satoshi might be in our Hunt for Satoshi content piece.
Unlike traditional currency, Bitcoin is decentralised. This means there’s no need for a bank; instead, transactions are verified by a network of users on an innovative digital ledger called the blockchain.
That means users have more say about what happens with their money, it gives everyone autonomy. The bitcoin payment system is peer-to-peer, meaning users are able to send and receive payments from anyone in the network without requiring approval from these traditional authorities or banks.
In the past year the US government has been reported to have printed trillions of dollars in response to the financial crisis the COVID-19 pandemic has imposed. It is estimated that in 2020 alone the US has created 22% of all USD in circulation since the birth of the nation.
This is an increasingly alarming statistic, and it is no wonder there are concerns of hyperinflation and the devaluation of American citizens’ hard earned money. We have seen from past financial crises that traditional banks take risks with our money that don’t always have a positive impact on the population’s financial well-being. It is no wonder that many people have lost trust in these archaic, authoritative systems.
Bitcoin however, was built to challenge this. It has been coded with built-in scarcity with a supply cap of 21 million Bitcoins. This limited supply is why many people suggest it is a safe bet against currencies that are vulnerable to devaluation during periods of economic crisis.
This is just one example of the benefits we see in Bitcoin but essentially Bitcoin is all about giving the power back to the people.
How many holders of Bitcoin currently are there?
Bitcoin is by far the most popular digital currency. At the time of writing, there are over 66 million Bitcoin wallet users worldwide.
Furthermore, take a look at the huge growth of Bitcoin Wallets over time, since 2013 the number of Bitcoin holders has grown exponentially.
What are the benefits of Bitcoin?
As a digital decentralised currency, Bitcoin has advantages over traditional money:
Fast transactions and low fees
Bitcoin isn’t subject to bank charges and government regulations. That means all transactions – including international ones – are fast and have minimal fees. Crucially, Bitcoin offers a solution for people in poor countries who don’t have access to a bank.
While central banks create or reduce the supply of cash at will, Bitcoin’s supply will continue to decrease until a maximum of 21 million coins have been created. This means its value will increase over time.
A secure system which protects anonymity of the users
Although blockchain is a public ledger where you can see all the transactions, it doesn’t record users’ identities, so your personal details can’t be shared with a third party. Transactions are very secure because the blockchain is virtually impossible to hack.
To find out why the blockchain’s so secure, let’s look at how it works:
What’s the blockchain?
The blockchain is a digital ledger on which all Bitcoins are created and distributed. The ledger is made up of chronological groups of transactions or ‘blocks.’
Each block of transactions is linked to the previous one by a hash – a special code that’s unique to the block. For a hacker to tamper with a block, they would have to change the other blocks as well.
The entire ledger is shared by everyone on the decentralised network – that is, everyone who uses Bitcoin. The whole network is responsible for validating every new transaction. And because transactions are validated by lots of different people there’s no central point of failure.
How do Bitcoin transactions work?
To use Bitcoin you have a public and private key. Your public key is a string of numbers available to the network (like a bank account number). Your private key is a secret string of numbers that confirms you’ve authorised a transaction (like a PIN).
When someone sends you Bitcoin, the network checks that the sender’s public key has enough funds to make the payment, and that the private key was used to authorise it.
Next, certain users called ‘miners’ take the latest group of transactions and race to solve a complex mathematical puzzle called the ‘proof of work consensus algorithm.’ The purpose of the puzzle is to assign a hash to the group. The winning miner is rewarded with newly created Bitcoin.
The miner who solves the puzzle then broadcasts the group to the network together with its hash, and the group is added as the latest block in the chain. This block of transactions – including your payment – is now immutable and your public key balance has been updated.
The proof of work algorithm is another layer of security; because puzzles take so much energy to solve, it’s counterproductive for hackers to tamper with the mining process.
Where do I buy Bitcoin?
The easiest way to buy Bitcoin is via a Bitcoin exchange website. These exchanges allow you to purchase Bitcoin with traditional currency. Here are some popular ones:
Coinbase – founded in 2011, Coinbase is one of the biggest exchanges out there. It is probably one of easiest places to buy cryptocurrency due to the simple User Experience and acceptance of most currencies. However, one thing to look out for is the high transaction fees that come with every transaction.
Binance – this exchange accepts bank transfer, debit or credit card payments. Binance has very low transaction fees, and has a wide range of resources that teach users about how to purchase Bitcoin in their Binance Academy.
Coinjar – Coinjar’s user-friendly interface makes this exchange ideal for beginners; here you can buy Bitcoin via bank transfer. Coinjar has good customer support and a handy mobile app.
Coinbase Pro – founded in 2012, Coinbase Pro is a more technical version of the original Coinbase for slightly more experienced crypto users. Coinbase Pro has much lower transaction fees than the Coinbase website and app.
Like anything in the digital world it is good practice to have excellent privacy and security measures in place. We suggest when you start your journey into the world of crypto to create a separate email address. This will mean that if your personal email address is compromised then your information regarding your crypto activities will still be safe.
Where do I store my Bitcoin?
While the blockchain is extremely difficult to hack, keys can be stolen if you don’t take care of them, so it’s a good idea to choose your storage carefully. You can store your Bitcoin on the exchange you bought it from, or on a digital wallet.
Keeping your Bitcoin on the exchange is convenient, but there’s a downside: you don’t own the keys for your coin – they’re controlled by the exchange. If the exchange has a lapse in security your coin could be vulnerable to theft.
Most people opt for a digital wallet – software that contains your public and private key and interacts with the blockchain, keeping a record of your balance. A wallet lets you have full control over your keys.
Wallets can be online (called ‘hot wallets’) or offline (‘cold wallets). Each version has unique benefits:
Hot wallets are a good choice if you want to make regular transactions with your Bitcoin. They’re typically free, easy to set up and access.
A hot wallet could potentially be a target for hacks because your keys are connected to the internet. For this reason, it’s best not to store high amounts of Bitcoin on it. Some popular hot wallet choices include Mycelium and Trust.
Cold wallets are the safest way to store your Bitcoin because your keys are kept offline. They’re a good choice if you have a lot of Bitcoin and you don’t need to access it too often.
Again, as with everything online, security and privacy is always important. Ledger has recently been subject to a cyber attack and data that was compromised included personal customer information. While their database was breached, their device security is still excellent, remember no one is immune from database hacking.
We suggest adding an extra layer of protection by sending your cold wallet to a place of work rather than a home address, using a non traceable email and name will also provide additional protection.
Wallets can only do so much in terms of security so whichever type of wallet you use, it’s essential to keep your private key safe and secret. Your private key is needed to access your wallet. Lose it, and you lose your Bitcoin.
Bitcoin scams to look out for
Bitcoin itself isn’t a scam, but every financial system has its share of scam attempts. For this reason it’s important to do your own research before you buy from an exchange or invest in a Bitcoin project.
Here are some common bitcoin scams to keep an eye out for:
Fake exchange websites will entice you with very low fees or bonuses for high deposits. They take your payment but won’t give you Bitcoin in return. Scam exchange websites can look very convincing, so it’s best to choose only long-established exchanges, and check independent reviews to confirm they’re reputable.
Fake investment projects
Bitcoin has generated a lot of new blockchain projects, and not all of them are legit. Scam projects entice people to invest their Bitcoin with promises of a high return. Many use fake celebrity endorsements and leverage our instinctive fear of missing out.
Be very suspicious of anyone asking you to invest in a venture that seems too good to be true, and never get pressured into investing before researching a project.
Cloud mining projects allow users to rent server space and mine Bitcoin, cutting out the need to buy expensive hardware capable of solving the hash puzzles. But if you’re new to Bitcoin, it can be very difficult to discern real cloud mining projects from the many fake projects set up to steal your cash.
The reality is, hash puzzles are extremely complex (and getting more complex over time). Cloud mining projects rarely deliver a profit, even if they’re legit.
You’ve probably heard of phishing scams that impersonate your bank? Well, phishing attacks target Bitcoin holders in the same way. The scam email will look as if it’s from your exchange or wallet provider, asking you to click a link. This takes you to a fake website that’s been set up to steal your details.
To avoid phishing it’s a good idea to access Bitcoin websites via your bookmarks rather than email links. Phishing links can also appear at the top of Google as paid ads.
We hope this guide has helped dispel the myth that Bitcoin is a scam, and given you the basics of how Bitcoin works – and the benefits it offers. Pay with Bitcoin for lower fees; invest in Bitcoin for a safe-haven asset like gold.
As Bitcoin becomes more mainstream it will revolutionise money, offering a fair and secure alternative to traditional currencies. But because Bitcoin is decentralised, the onus is on you to research reputable markets and protect your keys.
This article was published on: February 18, 2021
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