The origins of bitcoin are shrouded in mystery and folklore, with confusion over whether its enigmatic ‘founder’ Satoshi Nakamoto even exists.
One thing we do know is that in 2009, Nakamoto (or whoever hides behind this pseudonym) created the world’s first decentralised currency, or cryptocurrency.
Bitcoin could be exchanged for traditional (fiat) currencies like Sterling, and used to purchase goods and services online – mostly on the unregulated Dark Web.
Unfortunately, bitcoin then fell into the hands of traders, and its value began to fluctuate wildly.
Initially, you could use two bitcoin to buy a pizza. In the heady days of January 2018, one bitcoin was worth almost $20,000. Today, it’s worth half as much.
This might seem like a natural decline, but in fact, bitcoin’s value is highly unstable. It was worth $11,929 on the 1st of September. By the 3rd, its value had dropped to $10,264.
Battered by scandal and plagued by theft, few businesses that accept bitcoin even provide receipts, as the anonymous nature of cryptocurrencies makes it impossible to trace their use.
All of which begs the question whether individual bitcoin scams (of which there have been many) are secondary to the bigger question of whether the entire cryptocurrency is fraudulent.
The biggest bitcoin scams
Many people would accept the suggestion that bitcoin is inherently untrustworthy, including anyone who’d invested through the Mt. Gox cryptocurrency exchange.
In 2014, Mt. Gox was handling around 70 per cent of the world’s bitcoin transactions, until it emerged endemic and ongoing theft had led to the loss of around 850,000 bitcoins.
Having lost $450 million of customer assets, the company promptly went into liquidation. Nobody knows where the bitcoin went, and only 200,000 coins have been recovered.
The challenges of recovering stolen cryptocurrencies stem from the way transactions are recorded in an anonymous (yet supposedly incorruptible) ledger known as the blockchain.
When someone hands ownership of bitcoin to someone else, the transaction is recorded but the parties involved are not identified. They’re not even identifiable.
This has made bitcoin the currency of choice for online purchases of illicit goods and services, from narcotics and extreme pornography to hitmen.
Yet many of these websites are fraudulent, defunct or police honeytraps. Paying money won’t deliver the promised goods or services, though it might bring a CID officer to your door.
Perhaps most concerningly, it was revealed last month up to a third of all bitcoin transactions are fraudulent.
Known as wash trading, this market manipulation involves buying and selling the same stock at the same time to create a greater sense of market activity and demand among buyers.
Wash trading is illegal, and this is the first time there’s been definitive evidence of this particular bitcoin scam – ironically revealed by close scrutiny of the Mt. Gox fiasco.
So is bitcoin a scam?
Because bitcoin is only worth whatever stock market speculators feel it’s worth today, it’s impossible to know what its value will be tomorrow.
After all, you are merely buying a promise that a digital token will be worth a particular sum of money. There’s nothing tangible like banknotes, and nothing moveable like gold.
If everyone stopped accepting bitcoin, its value would drop to zero. There’d be nothing people in possession of the currency could do in terms of reinvestment or compensation.
Nevertheless, people have successfully completed sales using bitcoin. At the time of writing, companies including Microsoft, BMW, Etsy and Virgin Galactic all accept it.
As such, it’s hard to claim the world’s first cryptocurrency is a scam. But it does require very careful handling and management.