Since the bitcoin boom, cryptocurrencies have taken the world by storm. Soaring valuations, increasing trading volumes and widespread news has caused an unprecedented level of investment and speculation alike in the crypto space.
However, despite the numerous potential attributes of the blockchain protocol, many cryptocurrencies and blockchain based companies have become synonymous with fraud in the recent past. This is primarily due to the fact that the investing public is eager to jump into this rapidly burgeoning space and since there is a complete absence of regulatory oversight, fraudulent parties can leverage this to dupe potential investors.
In fact, a study conducted by Statis Group, an ICO advisory company, recently disclosed that more than 80 percent of ICOs in 2017 amounted to scams. Furthermore, cybersecurity company Carbon Black revealed that approximately $1.1 billion worth of digital currency was stolen in the first half of 2018 alone.
For example, one of the major Crypto exchanges, BitKRX presented itself as a cryptocurrency exchange operating as a branch of the KRX, a creation of KOSDAQ, the South Korean Futures Exchange, and South Korean Stock Exchange. In 2017, this was ultimately proven to be fraudulent after investors were duped of millions of dollars worth of cryptocurrency.
This is just one of the many incidents of fraudulent companies. Below we list a few of the major incidents that shook up the crypto industry:
After recent events, it has come to light that a large number of once established firms have leveraged the blockchain hype to inspire false confidence and artificially inflate share prices. This has often been followed by market manipulation and insider trading which subsequently leads to SEC investigations. Such firms have often carried out business in completely unrelated fields but adopted the word ‘Blockchain’ in their name to gain traction.
An excellent example of this is Long Blockchain Corp, which was formerly known as Long Island Iced Tea Corp. The company saw its stock skyrocket after it changed its name, and declared that it would provide globally scalable blockchain technology solutions. Another example is Riot Blockchain, which was formerly Bioptix, a company operating in the biotech space. Both these companies were investigated by the SEC on allegations of ‘Pump and dump’ schemes.
Additionally, it is important to note that Eastman Kodak, once a dominant force in the photography and digital printing industry, introduced the Kodak KashMiner and the KodakCoin, a cryptocurrency for payments generated by licensing photographs. This was panned by critics as nothing more than a stunt to create a short-term boost in stock prices. This was ultimately proved to be true when BBC reported that no licensing deal had materialized and the project had never taken off.
There are a number of potential ways fraudulent parties attempt to dupe investors. These include:
Unlike IPOs which are highly regulated, require transparency and large amounts of financial and accounting disclosures, ICOs are free to run unchecked. This shortcoming has been used as an opportunity for scammers to create fake or useless coins with the intention of defrauding investors. Hence, it is important to thoroughly study the coin, the underlying protocol, the company, and the digital wallet before reaching any decisions.
Fake lending agencies
A number of platforms had been involved in practices wherein they promise loans collateralized by cryptocurrency and simply disappeared once the assets had been transferred to them. Hence, it is important for borrowers to avail of loans from only credible and trustworthy lenders to avoid the potential of getting scammed.
Pump and Dump Scams
Due to the lack of regulatory oversight, the cryptocurrency space has become ripe for market manipulation, especially by large participants. These groups target a coin with a small market cap, buy that coin en masse to drive its price up, create hype over the coin and further artificially inflate its price, and then sell it. This often causes inexperienced investors who have fallen for the scam to lose large amounts of money.
While this practice is illegal in regulated securities markets, these scams are known to commonly occur in the cryptocurrency space, with several groups and forums documented to have repeatedly been involved in this practice.
Blockchain Ponzi Schemes
The words ‘Ponzi Scheme’ is enough to strike fear in the hearts of any investor. Combine the term with blockchain and it could prove to have even more disastrous repercussions. Ponzi schemes promise high returns to investors and operate on the pretext that such returns will carry on consistently if the investors bring in more clients. Following this, the schemes pay out money invested from later investors to the initial investors and continue to do so until the fraudulent parties decide to disappear with the money. This scam has grown to be quite common in the blockchain company space.
How can you stay away from these scams?
As an intelligent investor, there are several ways to identify and avoid potential scams.
For example, it is important to get to know the business model and the management of the company before opting to invest in it. It is also important to carry out thorough due diligence, SWOT analysis, and pour over the fundamentals as well as the feasibility of the projects undertaken.
Furthermore, look out to see if there is too much jargon in the White paper. The white paper is designed specifically to simplify complex issues and inform readers concisely about the organization’s philosophy, ideology, vision and roadmap for implementation. Hence, an unnecessarily complex White paper could be a red flag and hint that the company is attempting to defraud investors.
Additionally, it is important for investors to look at the token sale and the response from industry experts concerning the company. It is always imperative to note that investors must exercise caution while investing as even legitimate companies with solid business models might fail if market conditions are wrong or if they are poorly designed.
Always remember that if it sounds too good to be true, then it probably is.