The dark side of cryptocurrencies
The history of Bitcoin and other cryptocurrencies, despite its young age, is very rich in events and incidents – like any other associated with big money, which can very easily change owners. This new technology, which is gaining more and more popularity every day, attracts not only respectable and law-abiding citizens.
It is possible that the “dark side” of the cryptocurrency economy is actually the underwater part of the iceberg, which is several times more visible activity on exchanges, exchangers and numerous stores that accept Bitcoin for payment.
As you know, one of the main distinguishing features of cryptocurrencies in relation to fiat is maximum anonymity. And it attracts not only hackers, but also “ordinary” scammers and scammers who prefer to remain in the shadow when making questionably legitimate transactions.
It was the emergence of Bitcoin that made possible the emergence of black markets selling illegal goods online, 24 hours a day, around the world. But, as it turned out, law enforcement agencies were well prepared for the new challenge. After several high-profile arrests of the owners and customers of these resources, most of the most famous black markets were closed.
Another reason for the high criminal activity around cryptocurrencies is the poorly developed security infrastructure and the carelessness of most users. It’s psychologically difficult for people to get used to the fact that money can be stored not in a bank account (even with online access), but in ordinary files on the disk of a home computer.
In the four years that have passed since Bitcoin became known to the general public, the amount of funds lost in the world of cryptocurrencies due to various kinds of illegal actions has long exceeded one billion dollars. Tens of thousands of people said goodbye to their savings, “rewarding” scammers and crackers who attacked various exchanges, online wallets and other resources that use cryptocurrencies.
Others bought non-existent equipment or cloud mining contracts or were unable to get mined coins from closed pools. Still others invested in exchanges and funds, which turned out to be financial pyramids. Many lost their bitcoins in online casinos banned in their country.
There are probably a ton of unreported cases of fraud, as well as scam information, which is extremely difficult to prove or verify. Therefore, all these figures are most likely only a lower limit. In reality, the loss in the cryptocurrency community can be much higher.
Cryptocurrencies, mainly Bitcoin, are very popular on various services of the ‘dark network’ – DarkNet – and are the main way to make payments there. This is due to the fact that users of such sites first of all need anonymity and non-control. It is quite obvious that one of the first who began to seriously use bitcoins was the sellers of weapons, drugs and other ‘charms’ of the black market.
A distinctive feature of such sites is that they cannot be accessed in the usual way – using a traditional browser. To be able to plunge into the depths of the darknet, it is necessary to install special software – for example, Tor. With the development of cryptocurrencies, black markets have gained a new breath. The method of anonymous money transfer, and the very idea of a decentralized currency, have greatly reduced the control capabilities of governments and special services.
The Silk Road Darknet
The most revealing story was the Silk Road online market, which everyone who deals with cryptocurrencies knows about. The main feature of the site was the use of Bitcoin, which for most people was then a ‘dark horse’, and the ability to pay for purchases through the anonymous Tor network.
Silk Road gained real popularity precisely thanks to the opportunity to buy various ‘substances’, and besides them, pirated software, stolen things and a huge amount of other illegal goods were sold.
But the U.S. intelligence also proved to be unharmed – after almost two years of investigation, in October 2013, the owner and administrator of Silk Road, William Ross Ulbricht, was arrested, and later several of his employees and dealers.
The creator of the Silk Road complied with a certain code of ethics – in particular, forbade the sale of weapons and services of killers. But this did not help him mitigate the sentence – he received two life sentences and several tens of years in the appendage.
Followers of Silk Road
Such a tidbit, such as illegal trade, could not remain untouched. The baton was first accepted by Silk Road 2.0, and then several more similar sites. However, the reincarnation of Silk Road turned out to be a snare trap. One of the trustees of the creator of the site, Blake Bentall, who worked from the very beginning, turned out to be an FBI agent. So they wanted to catch the main dealers, and they did it.
Another follower of Ulbricht’s idea was the Evolution black market. But he did not live long. In March 2015, the administrator of this resource suddenly disappeared, taking with him about $ 12 million. He argued this with some “technical problems”, and a few days later the site simply went offline along with the money of sellers and buyers. This event caused a panic in the black market, but information that the security services had a hand in the closure did not receive confirmation.
An interesting point is that among many illegal markets on the DarkNet network, it was Evolution that enjoyed a reputation as the most reliable. A three-sided signature was used here for each payment – the transaction had to be confirmed by the buyer, the dealer, and the administration of the forum. Another “trick” of this market is that it essentially lacked a moral framework if it came to the type of product. At Evolution, you could purchase a much wider range of goods and services, including dirt.
The next was the Sheep Marketplace. They say that this happened due to a hack, which is very doubtful, since a week before it the withdrawal of funds from the resource was stopped. The amount stolen is also impressive – more than 150,000 BTC for a total of about $ 40 million.
In addition to the above resources, you can highlight the online market Agora. This is now DarkNet’s largest drug distribution market, the popularity of which is growing rapidly.
There are also “specialized” black markets entirely dedicated to one type of illegal trade. For example, the Darkleaks website uses its own blockchain to transfer various private and confidential information. It was the Darkleaks black market that was one of the first to put into practice a blockchain similar to the Bitcoin blockchain for other needs not related to financial transactions.
Exchange scams and robberies
Back in 2011, the first victims of hackers fell at the time, the largest Bitcoinica and Tradehill exchanges at that time, but almost no details were preserved – Bitcoin was little known at that time and these incidents were hardly covered in the media. In 2012, a successful attack on BTC-e was carried out, which paid losses from its own pocket.
The first Bitcoin price crash was due to the MtGox hack in June 2011. But in comparison with the final crash of this exchange, it seems like a minor episode. The bankruptcy of MtGox in early 2014 can rightfully be called the “crime of the century”, and not only in the narrow world of cryptocurrencies. 650,000 BTC – about $ 480 million in February 2014, and now $ 130 million – disappeared without a trace, and after a year and a half no success was achieved in solving the case. Who should answer to tens of thousands of customers? Mark Karpeles, hiding in his name as darknet sharks or an unusually dexterous group of hackers? So far this is the same rhetorical question, for example, ‘who killed Kennedy?’
But there were many more “minor” hacks – at the beginning of this year, as a result of a hacker attack on the largest Bitstamp exchange, theft of nearly 20,000 BTC was committed, which was then more than $ 5 million, after which the exchange temporarily suspended operations for auditing the security system.
Already this year, a major exchange of altcoins Bter twice fell into disrepute. At first, about 50 million NXT was stolen, which was equivalent to about $ 1.65 million. However, soon the exchange administration managed to “negotiate” with a hacker, and almost the entire amount, except for 8 million NXT, was returned.
The second blow was fatal – more than 7,000 BTC was stolen from an insufficiently cold wallet. As a result, the exchange was forced to close, distributing to customers the remaining assets. Until that time, the Chinese Bter had a reputation as one of the most reliable altcoin exchanges, and storing funds in ‘cold wallets’ was considered quite secure and reliable.
Information about thefts from cryptocurrency exchanges is often received, but in fact it is very difficult to verify whether this is really the result of hacker attacks. Perhaps the unscrupulous creators of the exchanges themselves conceived a scam and brought it to life, ‘comforting’ the depositors by the fact that a hack was committed. Or maybe some of the hacking news is just an attempt to denigrate competitors and a way to attract attention? However, the fact remains that money from cryptocurrency exchanges disappears from time to time, and their customers need to be careful.
Not only exchanges, but also pools can be hacked. Once, one of the five largest pools, 50BTC.com was considered reliable, but on October 18, 2013, it stopped paying remuneration to miners. For some time, the administration talked about technical problems, and then announced a hack that resulted in about 1,500 BTC being stolen. The pool lost almost all the miners and after a while it closed. Whether there was really a hack – no one knows.
In June 2013, at the large Litecoin mining pool – ltcmine.ru – as a result of the owner’s negligence, after incorrect wallet updating, amounts exceeding the real ones hundreds of times were credited to customer balances. The first lucky ones, seeing the money ‘fell from the sky’, immediately withdrew them, leaving everyone else with nothing. In total, up to 13,000 LTC were lost. However, this case has other versions.
Pyramid builders and air sellers
Around the cryptocurrencies, like any other complex and obscure technology, a whole host of the most excellent myths walks around. Poorly informed people often call Bitcoin a financial pyramid.
Although these opinions are not well-founded, cryptocurrencies are actually very convenient for building pyramids. The first to understand this was the American Trendon Shivers, who created the Bitcoin Savings and Trust fund. Of the bitcoins received from depositors, he paid part in the form of interest, and for the rest he began to live as he pleased, putting forward the argument that they were not money, so he did not commit any crimes. However, the judge did not agree with him, and Shavers went to prison.
Another giant pyramid, the losses from which are comparable in scale to the disaster MtGox, appeared at the end of 2014 in Hong Kong. It was the MyCoin pseudo-exchange, which raised money, promising a payback of several months, and then fabulous profits. All the signs of the pyramid were evident – promises of extra-profit, gifts to those who would give money “right now”, a bonus for the drive of other customers. However, there were many people who invested hundreds of thousands of dollars in this enterprise. The total amount amounted to almost 390 million HKD.
And in February 2015, when the police became interested in MyCoin, its owners took the money and disappeared, putting under the hammer of justice hired employees who knew nothing about fraud. The criminals have not yet been found.
Miners also became victims of scammers. So, in 2013-2014, there were many virtual manufacturers of pre-orders for ASIC miners who created a beautiful site, posted pictures of non-existent devices drawn in the editor and raised money for pre-orders.
Gullible people during the take-off of Bitcoin and the hype around mining, without thinking twice, placed orders, making irrevocable payments to scammers’ wallets. Of course, they received neither equipment nor money. Smaller scammers sold fictitious hardware through ads or took money to deliver real-life miners from China, and then disappeared in the same way.
Recently, the creators of the pyramids have found another scheme of fraud – the sale of fictitious contracts for cloud mining. In fact, what could be easier? A site is being created where the allegedly existing data center is advertised and favorable (but not too) mining conditions are promised, and contracts begin to be sold.
Since the average payback time of real mining is 4-6 months, there is no place for hiccups to rush. They simply pay part of their own money to the victims, continuing the advertising campaign and luring new customers, or old ones, to “reinvest profits”.
Such pyramids can exist for many months and gain a reputation for reliable services. And only when the flow of payments begins to dry up, they turn off activities and disappear with money. Moreover, the first customers who invested at the very beginning can even make a profit, since it is more profitable for fraudsters to pay a “small share” than to deserve suspicion ahead of time. Examples of such services are HashProfit and cointellect.com.
One of the largest ‘cloud’ pyramids was BitcoinCloudServices, which lasted about a year and stopped payments in May 2015. The number of victims and lost amounts are still unknown.
High risk investments
Among other pyramids, it is impossible not to mention their form such as HYIP (High Yield Investment Project), which are currently gaining more and more popularity. There are a whole host of hyips that accept cryptocurrencies, from Bitcoin to little-known altcoins.
The HYIP scheme is quite simple – the user puts real money into his account and gradually receives interest from his own deposit. Moreover, the creators of hype often pre-announce that the scheme is a pyramid, but the first investing can get a big (in percentage) profit.
HYIPs are distinguished by very attractive ‘promises’, up to several hundred percent daily (the so-called ‘doublers’). In fact, the conditions in different hypes can radically differ, but the main feature is that the creators lure users to invest as much money as possible in their brainchild, motivating them with a huge percentage of payments from the amount deposited.
Thanks to high-profile advertising slogans and company promises, the creators lure the right amount of investors, make them several payments and, with a clear conscience, “wind down” their project, leaving the clients’ money in their wallet.
You need to understand that money for payments is not taken from the pocket of the creators, but from the pocket of investors, that is, in essence, the hype exists and pays exactly until the influx of new users, and as soon as it slows down or stops, the hype simply disappears from All accumulated deposits.
Investors can also get a good profit, provided that they manage to give money right after the opening of the hype. But if you give a little free rein to greed and “pull the time”, then there is a very great chance of losing all your investments and accumulations.
Anyone who has a wallet with popular cryptocurrencies can try to invest in such services at any time, literally with one click. A particular attraction is that the payment is anonymous and is often credited to your balance in a matter of minutes. But you need to understand that the chance to predict the behavior and likelihood of ‘winning’ in a particular hype is approximately equal to the reliability of fortune telling on coffee grounds and does not depend at all on the type of coffee.
Ransomware viruses and miners
Bitcoin and virus writers have discovered. Especially beneficial is the anonymity of cryptocurrencies for the so-called ransomware – that is, ransomware viruses. These viruses, penetrating the victim’s computer, quietly encrypt files and documents, and then display a warning, demanding a ransom in Bitcoin for providing the decryption key – otherwise, all the user’s files become useless garbage. According to the name of the first of these trojans, a new class of threats is called CryptoLocker, but now there are many such viruses. Even policemen became victims of crypto lockers. Different means are offered against them, but the main struggle is yet to come.
There is also a “less harmful” virus-miner, which is a trojan that launches a mining program on the victim’s computer, thereby exploiting its computing power for its own purposes. Some of the companies that produce games and various software have become famous for such ‘sins’ by integrating such trojans into their clients. Caught on this and fairly well-known companies.
Two or three years ago, online casinos and various sites began to appear on the network offering to play gambling not with fiat money, but with cryptocurrencies gaining popularity. One of the first online casinos to gain popularity was SatoshiDice. A whole host of stories are connected with him about attempts to deceive the system, as well as large bets – both winning and losing.
You should immediately divide the casinos that work with popular cryptocurrencies into two groups: the first is ordinary online casinos that simply accept cryptocurrencies as one of the ways to replenish your account and withdraw funds; The second group is casinos that were originally created for playing on cryptocurrencies.
If the first group is more or less clear, the second group is much more interesting. Such sites usually support Provably Fair technology to enable checking bets and the game itself for honesty. Players are given the opportunity to use unique hash signatures, thanks to which you can check your bets at any time and make sure the site is honest and there are no tricks that traditional online casinos often sin.
We can confidently say about the world of cryptocurrencies that this is a completely new and very dynamically developing market with its own characteristics specific to it. There is wide scope for various scams. Many of them end successfully, since the criminals retain the advantage of anonymity. It will not work to return the money if you make a mistake. It is practically useless to complain if you are deceived. You are completely in control of your money, but the concern for their safety also lies only with you.
It should be borne in mind that even an elementary neglect of general safety rules can lead to very unpredictable consequences, because if an attacker could gain access to your funds, then with a high probability you will say goodbye to them forever. Remember the most important thing – you should take all actions deliberately. Take care of your wallets!