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The virtual currency Bitcoin has been getting quite a bit of publicity lately, not just from the skyrocketing value but from the multimillion investment by the notorious Winklevoss twins, famed for their role in the founding of Facebook, and the guy who accidentally threw away $9 million in bitcoins.

But much of the news has been for the wrong reason.

The real story is fraud.

And lots of it.

Why is Bitcoin so ripe for fraud?

Lack of Regulation

Silk Road, the largest online black market, was recently busted by the FBI. Silk Road thrived in part because of a complete lack of regulation. Bitcoins are traded virtually and are not regulated by any of the world’s banks, so anyone looking to buy and sell illegal goods can almost completely evade authorities with the transfer of bitcoins.

Get-Rich-Quick Schemes

A chart of the value of Bitcoin looks more like a crazy roller coaster ride than a currency chart. Much as the dot-com era produced thousands of paper millionaires who amassed fortunes by simply breathing, people who have invested in Bitcoin have seen the value of their bitcoins go up a hundredfold in just a few years. The frenzy attracts fraudsters who prey on people’s incessant search to get rich quick.

Frenzy

The get-rich-quick schemes have created an absolute frenzy. Everyone is joining the party at such a rapid pace that people completely lose sight of any sense of normalcy (like tulipomania). Take Charles Shrem, who two years ago was a senior in college when he rose to the top of the Bitcoin community and amassed a net worth of $6 million.

Shrem, a vocal advocate of the regulation of currency, was charged with money laundering. Kind of ironic since he was, among other things, responsible for preventing money laundering at his firm BitInstant. If anyone had taken a moment to notice, Shrem was involved in a massive conflict of interest in his dual role as BitInstant’s president and compliance officer, which is akin to a fox guarding the henhouse.

Theft

Skyrocketing values have also produced high-tech thieves. Because there is no physical currency for bitcoins, everything is stored virtually — in many cases, they are stored right on your computer. (We all know how safe your computer is.)

But imagine you had millions of dollars sitting on your laptop. According to the New York Times, there have been numerous cases of high-tech hackers who have stolen more than $10 million. In one case, more than $100 million was stolen.

A Shadowy World

The world of bitcoins is a shadowy one. Bitcoins are created by a process called “mining,” which is carried out by computers solving complex calculations. No, this is not the Matrix. There is also something called Mt. Gox, which is the largest trading exchange for bitcoins and sounds like something from the world of Harry Potter, if you ask me.

This dark and misunderstood world has created a field day for fraudsters.

A Wisconsin man lost $150,000 in an international bitcoin scam. An invitation-only hedge fund turned out to be a $5 million scam. And some prominent players in the Bitcoin industry have been previously charged with fraud.

The world of Bitcoin is a misunderstood and unregulated one, where people are becoming instant millionaires in a complete frenzy.

Sounds like the perfect storm for fraud if you ask me.

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