Category: common-scams

Mining Investment Scams

What is Crypto Mining?

Crypto mining involves using computers to solve advanced mathematical equations in order to “mine” and create bitcoin. Bitcoins are earned through verifying transactions on the blockchain, which, in effect is a digital type of ledger that is used to monitor and track all transactions by a particular cryptocurrency. Everytime a “hash” is solved, the person involved in the mining operation earns bitcoin.

In order to solve these complex mathematical equations however, the computers used to mine the bitcoins need to operate 24/7 which uses a huge amount of CPU power which translates to an enormous amount of electricity. Hackers are now taking advantage of the situation by infiltrating other users’ computers in order to use their resources and electricity to mine bitcoin which they will ultimately gain from.

How Does Crypto Mining Work?

When it comes to mining cryptocurrencies, an ID labeled with a hash is generated after each transaction. A hash is essentially a 256-bit encryption or password on the bitcoin blockchain. Every computer that is on the network attempts to identify and solve the 256-bit password. If one character in the chain is incorrect, the hash cannot be solved. Additional computers attempt to authenticate the validity of the solutions that the successful computer resolved. This ultimately results in a successfully mined cryptocurrency.

Users operating in certain cryptocurrency ecosystems receive voting rights in the network’s governance composition. This translates to the ability to vote on any decisions the development team makes regarding the future prospects of the cryptocurrency.

Despite it being relatively simple for a computer to solve a hash, it needs to be fast enough to perform the solution before other users’ computers. A fast computer however, is not all that is required. As the CPU works tirelessly to solve these hashes, powerful fans run constantly to keep the computers at a constant temperature. This requires an enormous amount of electricity which is why hackers are constantly trying to access these computers and add it to their hijacked bitcoin mining pools. It is common for hackers to install bitcoin mining malware on multiple computers in order to divide the processing capacity within a hijacked mining pool.

Crypto Mining Investment Scams

Mining investment scams are one of the oldest and most effective ways to steal cryptocurrencies from new investors. In this particular cryptocurrency scam, a company will approach an investor with a request to invest their cryptocurrency. The company promises in return that the investor will receive a share in the platform’s cumulative hash power. One would expect that the hash power would be utilized to mine bitcoin and the profits gained to be split between all investors in the pool.

In classic Ponzi scheme style, the funds are just used to pay out early investors in the scheme. By using this technique, the platform then seems legitimate, but only for a certain amount of time. Promises of extraordinary returns and bonus payout are then offered to create more participation in the scheme. Once the platform has yielded a certain amount of profit, the website suddenly shuts down, all accounts are closed and access to the site or any support ceases to exist.

In 2019, a massive online cloud mining scam was unearthed and reported on worldwide. Three men linked to an online mining platform by the name of BitClub Network were arrested for cryptocurrency fraud. Their criminal activity involved a staggering $722 million worth of investors’ money in exchange for shares in cryptocurrency mining pools. These investors were also responsible for recruiting new investors which ultimately collapsed under its own weight thus exposing the scam.

What Motivates Cloud Mining Scams?

Statistically, from 2014 to 2015, there has been a moderate move in the kind of people that involve themselves in cloud mining. In the beginning, individuals made use of these operations without much thought as they were easier and inexpensive to set up. However, in recent times, the prices have increased to such a degree that a single person would not be able to afford setting up such an operation. In addition, 80% of all bitcoin has already been mined which suggests that the cryptocurrency market is in a boom which results in it being much easier for scammers to deceive consumers by offering numerous contracts for Bitcoin, Etherium and other crypto coins.

The main reason behind this therefore is the big network of cryptocurrency worldwide and not being lured by the promises of big gains can be difficult, but it’s not impossible. Following a number of guidelines and staying alert can keep consumers away from the threat of cloud mining scams.

Identifying an Investment Mining Scam

There are a number of warning signs that investors should look out for to that could indicate that they are involved in an online investment mining scam:

Mining Address Unavailable / Users Prevented From Choosing Own PoolsM

When users partner with online cloud mining platforms, they are leasing hashing power and therefore should have the ability to choose the pool that they contribute towards. There is no valid reason for a mining pool to disclose their public mining address, unless of course there are ulterior motives.

No Hardware or ASIC Provider Endorsement

The fact that so many of these cloud mining operations are in fact Poni schemes, those in the industry require guarantees from hardware providers to keep customers at ease and reassure them that there are in fact mining operations working on their behalf. If a particular cloud mining company cannot prove to their customers that they own their own hardware, then it should raise a red flag.

Pictures or Recordings of Hardware or Datacenter Missing

It’s not uncommon for miners to keep the location of their data centres under concealed so customers should not expect to receive images or recordings with facility locations or owner profiles. Some information however should exist and besides for revealing their exact location, pictures and video evidence should not look like it is concealing any important information.

No Limits on How Much Hashing Power One Can Lease

Cloud mining companies have a limited amount of hashing power on hand at any given time. Expanding an organization’s inventory takes a considerable amount of time and can often be limited by ASIC’s market supply and other such factors. If a company is not interested in sharing its inventory supply with a customer, it should raise a few questions. Look out for operators that offer instant and limitless scalability.

Referral Payouts Schemes

Mining Ponzi schemes will invariably promote a form of multi-level marketing in order to encourage members to recruit new investment. Users are incentivized by the organization to expand their own teams where each new member onboarded, increases their rewards. Watch out for this classic ponzi scheme red flag.

Anonymous Operators

If the owners’ and managements’ names and information is not disclosed, it’s time to move on. There is absolutely no reason that this information should not be disclosed by a cloud mining service, unless of course, they are trying to hide their identities. If identification is provided, ensure you do your due diligence and cross reference this information until you are sure you know who you are dealing with. Clarify whether the owner is hidden behind a private registration and how long the domain has been registered for, less than six months is questionable. Conducting a search on a platform’s URL registration details can easily be done online with little effort. It goes to say that the more information one can find on a particular company and the people involved, the better.

No Clear Path for Divestment Provided
Of course, there should be clear and well-defined information on how users can withdraw funds and terminate lease contracts.

Guaranteed Profits
It just goes to say that any mention of guaranteed profits is a major red flag and you should walk away immediately.

If any of these red flags are present in the cloud mining business then take a moment and consider why.

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