A research paper explores different kinds of bitcoin frauds and ways to fight them.

During the last four years, bitcoin users have lost over $11 million to bitcoin scammers. More than 13,000 users have fallen victim to various fraudulent schemes. Still, much can be done to counter these tendencies. This is the conclusion of a research paper  submitted by Marie Vasek and Tyler Moore at the 19th International Financial Cryptography and Data Security Conference, which is taking place in Puerto Rico right now.

Scams present a threat to the whole bitcoin ecosystem. Ponzi schemes like the one Coinfox has recently written about damage the reputation of bitcoin and everyone connected with it.  Vasek and Moore share this opinion. They believe that the monitoring of all bitcoin scams is very important for the bitcoin community itself.

To complete their research, the authors analyzed all the scam accusations they could find on Bitcointalk, Reddit, and other bitcoin forums, and then analyzed them one by one, leaving only indubitable cases and excluding such cases as Mt. Gox for which no criminal intent can be proven.

The name of the paper, “There's No Free Lunch, Even Using Bitcoin”, suggests that most victims were just hoping to get something for nothing. Indeed, out of $11 million total, $7.3 m was lost to HYIPs – high-yield investment programs or Ponzi schemes. Mining scams (raising money ostensibly to share future mining profits) brought the fraudsters $2.9 millions more. According to the authors of the research,

“HYIPs exploit people’s greed, or more precisely, their susceptibility to the narrative that it is easy to get rich quick just by using Bitcoin. Mining scams exploit this same desire, but wrap it in more measured promises of future riches”.

Two other types of scams, however, present a different case. $455,000 and $360,000 respectively have been lost to fraudulent services that masquerade as bitcoin wallets and bitcoin exchanges. In this case, the money has been lost because of how difficult it is “to distinguish between good services and bad ones”.

The scams quickly grow in popularity and profitability so the bitcoin community should try to root them out early on, while it is still possible, say the authors. Most scams can be quite easily tracked thanks to the blockchain, the researchers note. Continued investigations could help law enforcement to act more effectively. It is also very important to give more information to users to protect them from wallet and exchange scams because a negative experience for new bitcoin users can lead to more problems in the future.