Avoiding Cryptocurrency Scams

Everyone is always focused on the potential upside of buying cryptocurrency, but they forget there are always going to be hidden downsides as well. The downside risk of investing in cryptocurrencies is huge. Not only do you need to worry about the high volatility of these assets, but you also need to bear in mind that theft is always a possibility, and the assets are poorly regulated.

Lack of Regulation Creates Opportunity for Thieves

In the equity and debt markets, there are stringent controls on the way capital is invested and the rules that govern investors. The goal is to protect investors from any fraud or wrongdoing, and even though there are times where it takes regulators longer than normal to catch on (see: Bernie Madoff), the general effect is a safer investment marketplace.

Fraud can occur in a variety of ways. It can be the result of false claims by the company regarding the state of their finances, the returns they have yielded, or how their funds are being managed. Any one of these routes causes a potential investor to get the wrong idea of the expected outcome of an investment in that company, and the result is a case of fraud.

Many have been espousing how great it is that there are no regulations on investments in ICOs or cryptocurrencies, with most of them being “self-regulated”. This is only a good thing as long as it is executed correctly.

Examples of Fraud in the Industry

One recent example is with the cryptocurrency “One Coin”. By employing marketing tactics similar to a multi-level marketing scheme, and not having a proper product to show for all the money invested in the project, executives were able to take advantage of numerous investors.

Ponzi schemes are business practices where the reported investment results are fuelled by the funds from new entrants to the investment vehicle rather than legitimate profits. The financing practices depends on passing on money from recent investors to older investors. The business practices of One Coin very much fit this model.

The two top things investors should be looking at that will help them avoid being defrauded in this unregulated market are the team running the project, and the product they have created. In the case of One Coin, you have a team that could be considered risky, at the very best. The CEO, Ruja Ignatova, seems to have a past filled with lies (or at least unverified claims). Sebastian Greenwood is another executive involved who has also ran several multi-level marketing schemes in the past.

In terms of product, there are cases where developers have been able to get funding after writing a short white paper explaining their business plan. In Silicon Valley, everyone knows that ideas are cheap, and execution is everything, but the crypto-world is forgetting this and putting money into anything that moves. In the end, One Coin was branded a Ponzi scheme and got shut down, but not before many investors lost their money.

Another example is with BitConnect, where users were promised massive returns if they lend their funds out through the protocol. This also turned out to be a Ponzi scheme, and was eventually shut down by American regulators filing a cease and desist order.

Investors Beware

A common thread here is the centralized management of funds. When this is combined with the sort of “investors beware” market we are in right now, there are all too many opportunities for fraud to occur.

The key is determining the differences between risky investment and fraudulent investment. Regulators are slowly coming to terms with the fact that ICOs are here to stay, and are moving to define whether they are a security or not, as well as how they will be regulated in the future.

There are going to be many more One Coins in the cryptocurrency community, and as always, the best thing you can do to prevent yourself from being victimized is do your own research and only invest as much as you can afford to lose.

Featured image courtesy of Shutterstock. 


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