By Judith Herron, CPA, and Alyzabeth R. Smith, CPA

The California Gold Rush of 1848 brought people from around the world in search of personal fortune. With the modern gold flecks of cryptocurrency, it seems history is repeating itself in many ways. There have been stories of great wealth, but fortune hunters from both eras have experienced their share of problems, including fraud, cheats, and violence.

Some analysts have warned investors that cryptocurrency’s minimal association to anything tangible makes it an organic Ponzi scheme. The argument is that early adopters profit from the spikes in price resulting from a surge of new investors. While cryptocurrency nebulously straddles the line between investment and currency, it is a well-defined medium for investment scams. The Securities and Exchange Commission (SEC) has come out with a publication listing Ponzi schemes involving bitcoin, and details enforcement actions taken against facilitators of these schemes.

Cryptocurrency proponents maintain that assertions of bitcoin as a Ponzi scheme are specious arguments. They contend that there is no active solicitation of outsiders to serve as the foundation of the pyramid, so that makes it difficult to classify it as a pyramid scheme. For those confident in the logistics of cryptocurrency, there are still other precautions to take. The current financial ecosystem is seeing a rise in extortion. Electronic and postal mail correspondence have been making the rounds alleging to have caught the recipient in a compromising and adulterous position. Only a massive bitcoin payment, say the threats, will keep the secret safe. Many of these blackmail proposals get key details wrong (such as the spouse’s gender), but for criminals these points are immaterial. It’s a numbers game: catching even one unfaithful spouse is a bountiful return on the investment of five minutes and a few postage stamps.

Blackmail letters aren’t the only concern at hand. Phishing scams have adapted to the cryptocurrency market. Even the popular cryptocurrency exchange Coinbase was not immune. After spoofing Coinbase’s name, an eastern European firm posed as Coinbase to distribute its own promotional material. Smaller exchanges have been even less fortunate. These entities might only have a handful of personnel and struggle to manage supply, demand, and security. Splintered focus makes them prime targets for thieves looking to steal data from distracted staff. Also, since the inception of bitcoin in 2009, there have been a number of smaller exchanges that have been here one day and gone the next, taking millions of dollars in investor funds with them.

Criminals have expanded upon their methods and targets to include theft of cryptocurrency mining technology. Iceland has been a hub of bitcoin mining infrastructure. Thieves are aware of the value of this mining equipment, and have taken to targeting owners of this technology. Globally, rings of criminal enterprises have centralized operations around this lucrative undertaking.

For the majority of cryptocurrency investors, the biggest concern is keeping the asset safe. About six months into 2018, nearly a billion dollars in bitcoin had been pilfered from unsuspecting victims. Just as password-cracking software is available for villainous use, the darknet is fraught with mechanisms to assist thieves in criminal cryptoendeavors. Cybercurrencies are not guaranteed by any authoritative governing entity, and they are not insured by any agency such as the FDIC.

An unexpected segue in the analysis of cryptocurrency safety is the safety of the currency owners. In countries with high rates of kidnapping, criminals have demanded bitcoin in exchange for the release of hostages, and conspicuous investors have been targeted and even killed. Reported instances are rare when compared to the number of global bitcoin investors as a whole, but even a minimal number of occurrences serve as a reminder of the vulnerabilities that accompany bitcoin dealings.

For all of the cautionary tales, it’s important to note that the cryptocurrency market we see now won’t be the market of the future. There are many visionaries determined to integrate virtual currencies into everyday transactions. Undisturbed by critics and market volatility, Fidelity has entered the virtual currency space, launching Fidelity Digital Assets with the intent of expanding bitcoin availability to investors. Coinbase has received funding to expand exposure and create new platforms for cryptocurrency use.

Like any burgeoning enterprise, the virtual currency ecosystem is one that can be used or abused. Protecting users is a priority for cryptocurrency visionaries. However, market participants should be mindful of the inherent risks while simultaneously being eager to see what the future holds.

Judith Herron, CPA, works at Markovitz Dugan & Associates in Pittsburgh. Her areas of expertise include business consulting, corporate income tax preparation and planning, financial statement reporting, personal income tax preparation and planning, and tax compliance. She is a PICPA member and serves on PICPA Council.

Alyzabeth R. Smith, CPA, is a senior associate with the Siegfried Group, providing year-round business advisory services and business and personal tax planning. She is chair of the PICPA CPA Image Enhancement Committee and serves on PICPA Council.