What Can We Learn from the Biggest Bitcoin Related Scams

The cryptocurrency industry has been the talk of the town with all the millionaires (and billionaires) it has made, but very few people are talking about the losses that have occurred here. With any fledgling industry, there is a tendency for some shadier players to enter and cater to people’s hopes of making a quick buck. The result is that if someone is not careful and wary of investments that seem “too good to be true”, they get ripped off.


One Coin – Shady Marketers? Avoid at All Costs

The most recent example that everyone is still talking about is One Coin. This is a cryptocurrency that is currently under attack for sketchy marketing schemes and recently some arrests have been made related to the practices this cryptocurrency follows. The cryptocurrency turned out not to be an actual cryptocurrency. There was no true “use case” for the coin like Ethereum, Filecoin, and other utility coins have. It depended upon forming a multi-level marketing scheme that used referrals and education materials about blockchain technology to lure in more customers.

When you look at many of the business methods and the people who work at One Coin, it becomes clear why people are decrying the company for wrongdoing. The CEO, Ruja Ignatova, is a Bulgarian woman whose past seems to be filled with numerous lies (or claims she hasn’t been able to verify yet). Additionally, Sebastian Greenwood is known to have been involved in numerous multi-level marketing (MLM) schemes.

For those who can’t remember, Ponzi schemes are based upon a business plan where results are fueled by new entrants to the program rather than profits. The financing is designed to basically pass on money from recent investors to older investors. Investors see what they think are high returns, but the increase in funds is really just the result of new investors putting money into the venture, and that same money being paid out to existing investors. There is no creation of value.

When one examines the business practices of One Coin, this seems to be the case. The biggest lesson here is to not fall for aggressive marketing and salespeople with big reputations. It seems like One Coin ran similar to a Ponzi scheme. The entire business model is around selling plagiarized cryptocurrency education resources to the next buyer, and then having that buyer sell even more of those resources.


Pump N’ Dump Schemes Are Alive and Well

Many of the problems in cryptocurrency markets have occurred in equity markets before. Pump n’ dump scams and multi-level marketing schemes are a reality everywhere, but there are measures in place to prevent them.

As mentioned before, there are none of the same regulations that equity markets depend upon to keep investors safe, and this has led to numerous schemes that draw in unsuspecting investors.

A pump n’ dump scheme is when a group of people comes together to pump a coin by purchasing as much as possible to drive price up. This will trigger additional buying from outsiders, which will ultimately drive the price even higher. The original investors market the coin to other investors and sell out at the peak.

The key lesson here is that price action isn’t indicative of fundamental strength. Just because a coin is spiking in price, doesn’t mean it has inherent value. It will always be necessary to do your own research, and it will definitely help you avoid pump n’ dump schemes.

The real problem is that human nature will naturally look at any of these situations as “greater fool” scenarios. Greater fool markets require you to make a profit selling your good to another investor. Profit is based on timing rather than the fundamentals of the investments, and all you need is someone else who wants in on the investment. This works until there is a turn in the market and nobody wants to buy any more.

The point is not that cryptocurrency markets are inferior or superior to equities markets, but that many of the same problems plague all markets. The regulation is much more undefined in cryptocurrency markets, and that has created an investor-beware situation in the cryptocurrency markets.


The Wild West of Investing

Another issue that is making all these schemes possible is the lack of regulation in cryptocurrency markets. Equity markets are heavily regulated, but the same sort of oversight does not exist in cryptocurrency markets. Recently, we have seen the SEC and other investor resources indicate that they would not be aggressively regulating the cryptocurrency market. At the same time, they have also demonstrated a willingness to go after companies who execute ICOs in bad faith. This has left many companies unsure of the best way to proceed in managing their business.

Knowing all of this, it is very much a market where investors should beware any instances where something seems overhyped or have no visible downsides. Many of the cryptocurrency protocols are, by definition, unproven businesses, and there are lots of things to watch out for.

For example, with One Coin it is pretty clear they aren’t operating a cryptocurrency. The business model the company follows is much more like a digital currency, which means that it has all the governance issues of regular currencies, but is online. This doesn’t make it a scam but does change the investment thesis and risk profile a significant amount.


Perfect Storm of Schemes and Fraud

A cryptocurrency is both decentralized and transparent, but many scams are neither of these things. Once you know this, it is easy to see that you are being taken for a ride and move on. But the bigger issue is the people who fall for buzzwords like “decentralized”, “blockchain”, or “cryptocurrency”. Currently, there are laws that prohibit anyone but accredited investors from investing their money into risky assets. These laws were put in place to avoid unsophisticated investors from losing their money due to being deceived.

There are plenty of other scams that have popped up in the last few months, and they all seek to capitalize on the same thing: the overexuberance of investors. For example, there is BitConnect, a company promoting themselves as a P2P lending protocol. Unfortunately, facts are starting to emerge which paint a picture much more like a Ponzi scheme. The company seems to be delivering returns on the BitConnect coins that have been lent, but the returns always trail Bitcoin’s. It has recently unfolded that no value is being created and the returns are purely dependent upon more referrals entering the scheme, which makes BitConnect a confirmed scam.


What We Have Learned

The issue that is most likely to draw the attention of regulators are ICOs of companies that are still in the early seed stages of their fundraising process, and therefore have more risk. Some developers have been able to get funding by simply writing a short white paper explaining their business plan, and going to meet with investors. It is generally accepted that ideas are a dime a dozen, but execution is everything, yet the inexperience of investors in the ICO space has left many people short their investment.

With Ponzi schemes, poorly run cryptocurrencies, and other fraudulent players entering the market, lots of people are going to get ripped off. Here’s a short guide on how to avoid common bitcoin-related scams. The number one thing people can do to prevent themselves from losing money unfairly is to do research on the business plan of the company. There are also knowledgeable investors who may be able to provide insight into the potential of a cryptocurrency. Hopefully, the cryptocurrency industry will begin to regulate itself, but if not, it is up to investors to perform deep research in order to avoid any big losses.