Bitcoin has grown to become one of the most widely recognised and used cryptocurrencies globally, offering numerous opportunities for investment, trading, and financial freedom. However, like any emerging asset class, Bitcoin carries its own set of risks. While the technology behind Bitcoin is innovative and secure, there are many areas where users can be vulnerable, particularly when it comes to scams and the safety of their funds.

Unfortunately in crypto it has become best practice to assume everyone is a bad actor until the industry emergences from its infancy.

In this article, we will explore the risks of holding Bitcoin on exchanges, common scams to watch out for, and essential strategies for safeguarding your assets. We’ll also dive into notable incidents like FTX, Celsius, and Mt. Gox to provide real-world examples of the risks involved.

The Risk of Leaving Your Bitcoin and Funds on an Exchange

One of the biggest risks Bitcoin holders face is storing their funds on an exchange. While exchanges offer convenience and liquidity, they are not as secure as self-custody options like hardware wallets or cold storage. The risks associated with keeping Bitcoin on exchanges can be illustrated by some of the most infamous failures in the cryptocurrency space.

1. FTX Collapse: A Cautionary Tale

FTX was once one of the largest cryptocurrency exchanges globally, offering a wide range of services including spot trading, derivatives, and lending. However, in November 2022, FTX filed for bankruptcy after revelations surfaced about mismanagement of customer funds and a lack of liquidity.

The collapse of FTX sent shockwaves through the cryptocurrency market, causing billions of dollars in losses for users. Those who had funds stored on the platform were left with little recourse to recover their assets. The failure of FTX highlights the risk of keeping large amounts of Bitcoin on exchanges, where users have no control over their funds once deposited.

2. Celsius Network and the Risks of Centralised Lending

Celsius Network, a popular cryptocurrency lending platform, also fell into financial trouble in 2022. Users who had deposited Bitcoin and other cryptocurrencies on the platform were promised attractive yields in exchange for lending out their assets. However, Celsius filed for bankruptcy after failing to meet its obligations and liquidating its assets to cover its debts.

The Celsius debacle emphasises the risk of relying on centralised platforms for lending and interest-bearing products. Many investors unknowingly exposed their Bitcoin to the risks of insolvency and mismanagement by third-party operators.

Yield or Staking was a popular trend that came crashing down in 2022 due to the inherent nature of risk when providing a facility that in some cases fabricates returns. The difference between on and off chain staking became a hot topic but has all been forgotten at the time of writing this article. Unfortunately several lessons that should have been learnt and this products are making a comeback in the crypto market.

3. Mt. Gox Hack: A Historic Example of Exchange Failure

Mt. Gox was once the world’s largest Bitcoin exchange, handling over 70% of global Bitcoin transactions. In 2014, the exchange was hacked, resulting in the loss of approximately 850,000 BTC. Although Mt. Gox was later able to recover some of the stolen funds, the hack marked a turning point for the cryptocurrency industry in terms of security awareness.

The Mt. Gox hack serves as a stark reminder of the dangers of centralised exchanges that do not implement robust security measures to protect user funds. Even with insurance coverage, users still suffered massive losses due to the exchange’s failure to safeguard its assets.

The Risk: No Control Over Your Funds

When you store Bitcoin on an exchange, you are essentially trusting the exchange to manage and protect your funds. While many exchanges implement industry-standard security protocols, there is always a risk of hacking, insolvency, or mismanagement. If the exchange is compromised or faces financial difficulties, your funds could be lost, and you may not have a clear path to recovery.

Key Takeaways:

• Store Bitcoin in self-custody solutions like hardware wallets or cold storage for better security.
• Avoid leaving large amounts of Bitcoin on exchanges unless necessary for trading.
• Always use two-factor authentication (2FA) and consider using additional security measures like a cold wallet for long-term storage.

Common Bitcoin Scams to Be Aware Of

Scammers and fraudsters have targeted Bitcoin users from the very beginning, exploiting vulnerabilities in the system and user behaviour. Understanding common scams is crucial to protecting yourself and your assets.

Ponzi Schemes and Fake Investment Opportunities

Ponzi schemes are common in the cryptocurrency space, where fraudsters promise high returns in exchange for investing Bitcoin or other cryptocurrencies. They use the funds from new investors to pay returns to earlier investors, giving the illusion of a profitable business. However, these schemes eventually collapse when new investors stop coming in, leaving those who invested their Bitcoin with significant losses.

Example: Bitconnect

Bitconnect was one of the most famous Ponzi schemes in the crypto space. It promised high returns by investing in its native token, BCC, and lending Bitcoin on the platform. However, in 2018, Bitconnect shut down, and investors lost millions of dollars in Bitcoin.

Phishing Scams

Phishing scams involve tricking users into revealing their private keys, wallet passwords, or other sensitive information. Phishing can take many forms, including fake emails or websites that appear to be from legitimate exchanges or wallets. Scammers may also use social engineering tactics to persuade users to hand over their credentials or Bitcoin.

Example: Fake Coinbase Email Scam

Scammers often impersonate Coinbase or other popular exchanges through email, notifying users of account issues or security breaches. This can happen with all and any exchanges unfortunately with scammers creating elaborate hoax email addresses. The email will include a link to a fake website that asks users to enter their login details, giving the scammers access to their accounts.

Fake Initial Coin Offerings (ICOs) and Tokens

Scammers often create fake ICOs or tokens, promising high returns in exchange for investments in their project. After raising funds, the scammers disappear, and the token’s value plummets to zero. Investors are left with worthless coins and no way to recover their funds.

Example: OneCoin

OneCoin is a notorious scam that marketed itself as a cryptocurrency but was actually a Ponzi scheme. The project raised billions of dollars from investors who were promised high returns. In the end, it was revealed to be a fraud, with the founders facing criminal charges.

Rug Pulls and DeFi Scams

Rug pulls are common in the decentralised finance (DeFi) space. This scam occurs when the developers of a DeFi project create a seemingly legitimate platform, attract investments, and then pull all of the liquidity or funds, leaving investors with worthless assets. DeFi platforms often lack oversight and regulatory scrutiny, making them prime targets for scammers.

Example: Commonly found on DEFI protocols and New Projects

Many scams have occurred on platforms like Pumpfun, SushiSwap and Uniswap, where fraudsters have released tokens with little to no value. Users who purchased these tokens were left holding worthless assets after the scammers disappeared with the funds. These are commonly found on defi protocols and new projects that have little history. This area is extremely high risk.

How to Protect Yourself from Bitcoin Scams and Risks

To protect yourself from scams and risks in the cryptocurrency space, follow these guidelines:

1. Use Trusted Exchanges

Only use reputable and AUSTRAC-regulated exchanges who have strict public security measures in place. These platforms offer better security measures and are subject to Australian regulations. We do not recommend or

2. Enable Two-Factor Authentication (2FA)

Always enable 2FA on your exchange accounts and wallet services. This adds an extra layer of protection against unauthorized access.

3. Be Cautious of Unsolicited Messages

Be wary of unsolicited messages or emails offering investment opportunities or requesting your private information. Always verify the source before taking any action.

4. Use Cold Storage for Long-Term Holding

For long-term holding, store your Bitcoin in hardware wallets or cold storage solutions that are not connected to the internet, making them less susceptible to hacks.

5. Research Before Investing

Before investing in any cryptocurrency or project, do your own research (DYOR). Be cautious of projects that promise unrealistic returns or sound too good to be true.

FAQ

While Bitcoin offers exciting opportunities, it is essential to be aware of the risks and scams that can accompany it. By understanding the dangers of leaving funds on exchanges, recognising common scams, and following best practices for security, you can protect your Bitcoin investments and enjoy the benefits of the cryptocurrency world safely. Always remember: Not your keys, not your coins.