Anyone who is even casually watching global financial issues is aware that there has been a notable uptick in cryptocurrency activity over the last few years. Buying, selling, and using cryptocurrency can generate profit. Still, unfortunately, there is a considerable amount of risk in the crypto space because there are so many scams and other types of fraud. In this article, Daniel Calugar, an experienced investor, looks at several examples of crypto fraud, how it is committed, and how to avoid it so you can invest safely.
There are more than 5,000 different cryptocurrencies in circulation today. Most people are familiar with only a few, such as Bitcoin and Ethereum. You can use cryptocurrency to purchase goods and services—use it as money—but it is more commonly leveraged as an investment vehicle. Essentially, investors buy a cryptocurrency with an expectation that the value will increase and they can make a profit when they sell—similar to investing in stocks or precious metals.
The value of a cryptocurrency is driven entirely by supply and demand. Like fiat money—the paper bills we are all familiar with—there is no intrinsic value in the currency itself. However, there is no central authority to manage and maintain the value of a cryptocurrency. Cryptocurrency investments are subject to much less regulatory protection than conventional financial commodities like stocks, bonds, and mutual funds.
The AARP website reports that “The Federal Trade Commission (FTC) received nearly 6,800 complaints of cryptocurrency investment scams from October 2020 through March 31, up from 570 in the same period a year before.”
One common cryptocurrency scam to watch out for is the fake initial coin offering (ICO). An ICO is the cryptocurrency equivalent to an initial public offering (IPO) for a startup business.
In April 2018, Investopedia reported that “nearly 80 percent of the initial coin offerings (ICO) are scams, and only a meager 8 percent of the floated ICOs manage to reach the trading stage on the various cryptocurrency exchanges.”
The best way to protect yourself from a fake ICO is to research the individual project team members before investing. The foundational document for a cryptocurrency project is their whitepaper. Be sure to read and analyze the team’s whitepaper. If none exists, do not invest in the project.
Mining scams are another popular method fraudsters have devised to separate novice investors from their money. The authenticity of a blockchain (the method by which cryptocurrencies are protected against unauthorized manipulation) is maintained by crypto miners solving complex mathematical problems with their computer processors—which takes time and costs money. Miners are then rewarded for their work with small amounts of cryptocurrency.
The typical mining scam involves convincing unsuspecting investors to trust a mining operation with their money by promising an exceptional return on their investment. The scammer dupes as many investors as possible then disappears, never to be heard from again.
Just like protecting yourself from the fake ICO scam, do your research to determine the validity of a mining operation. Profitable cryptocurrency mining is done these days by large organizations using huge specially designed server farms. If details about a potential mining investment are scant, be very suspicious.
There are also fake bounties and bogus airdrops to be wary of, along with pump and dump scams and phishing scams. In each case, the best protection comes from doing your homework and adhering to the adage that if it sounds too good to be true, it probably is.