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With Bitcoin recently hitting an all-time high, the broader cryptocurrency sector received the credibility that it had desperately sought over the past several years. But since Bitcoin appears on its way toward a six-figure price tag, alternative cryptocurrencies or altcoins for short have attracted substantial attention. Thanks to the law of small numbers, it’s easier for altcoins to ride Bitcoin euphoria while delivering superior returns.
Unfortunately, whenever money is involved, nefarious actors are never far behind. This has led to the rise of fraudulent actions. In particular, you should watch out for these top 5 altcoin scams.
Popularized by films such as Boiler Room and The Wolf of Wall Street, the classic pump-and-dump scheme consistently lures in unsuspecting investors with the promises of quick riches. As is always the case, the scheme ends up enriching the fraudsters, leaving victims with nothing but heartache and a very expensive lesson.
These days, securities regulators wised up to many pumps and dumps. Further, the imposed penalties are enough to discourage would-be con artists from attempting such a ruse. But with altcoins, it’s far easier for fraudsters to get away with their crimes.
Here’s how this could work. An individual from a jurisdiction with lax securities laws engineers a frenzy toward an altcoin that they own. Once the price reaches a bubble top, the con artist sells, leaving others holding the bag. The relative anonymity of crypto dealings along with jurisdictional issues make prosecution extremely unlikely.
One of the hottest segments within the broader crypto narrative is the rise of non-fungible tokens or NFTs. On face value, the NFT represents a natural evolution of the underlying blockchain innovation.
First, Bitcoin popularized the idea of peer-to-peer transactions that occur without a centralized authority or intermediary. Later, Ethereum broadened the concept to apply to intermediary-less contracts, such as legal services and real estate deals. With NFTs, the idea is to cement a unique signature to digital works of art through the blockchain.
It’s a fascinating concept that offers fundamentally useful applications, such as content and product authenticity verification. But you want to be extremely careful putting your money into NFTs without due diligence. For instance, a common scam involves con artists minting or tokenizing artists’ work without their permission.
To some people, all cryptocurrencies might appear as Ponzi schemes. As legendary investor Warren Buffett once said, cryptos have no value since they don’t produce anything. Therefore, crypto investors are speculators, hoping that someone else will pay a higher price for their holdings.
As American Institute for Economic Research contributor Joakim Book counters, that doesn’t separate cryptos from any other asset class. But a Ponzi scheme is an entirely different matter.
According to the Securities and Exchange Commission, a Ponzi scheme “is an investment scam that involves the payment of purported returns to existing investors from funds contributed by new investors.” A classic tell of this fraud is the promise of extremely high returns, such as the disgraced Bitconnect’s promise of 1% daily compounded interest.
In other words, if it seems too good to be true, run!
What separates cryptocurrencies from pure speculation on nonsense assets is the underlying blockchain technology. Through this innovation, it’s possible to catalyze multiple groundbreaking applications, with decentralized finance or DeFi being one of the most popular.
DeFi generally describes applications that disrupt traditional financial functionalities, specifically involving centralized intermediaries. Under the DeFi umbrella, a burgeoning subsegment is yield farming, a process where a crypto owner stakes their holdings in an enterprise’s blockchain application in return for higher yields than what is possible from traditional banking institutions.
DeFi is a tricky arena because many good uses come from it. For instance, the innovation allows anybody to be a market maker (i.e. liquidity provider) for a startup crypto exchange. But nefarious actors can also abuse DeFi protocols for the purpose of pure swindling.
One of the earlier and most pernicious scams specifically involving altcoins is the initial coin offering or ICO. Paralleling the initial public offering (IPO), an ICO works under the same principle: an upstart enterprise seeks capital to expand its business. In return, investors receive some stake in the enterprise. In this case, rather than equity, they get cryptocurrencies.
On the surface, an ICO is not inherently good nor bad. It’s just another way of accruing capital for a startup, similar to how a special purpose acquisition company (SPAC) is alternative method to an IPO. Where things go wrong, though, is that the ICO is vulnerable to abuse.
Primarily, it’s easy for anyone to promote an ICO as it occupies an ambiguous zone within the regulatory structure. Therefore, it’s very important for anybody considering an ICO to perform due diligence. Even then, that may not spare you from a clever scheme.
The best lies have an element of truth to them. Yes, you can make substantial profits through cryptocurrencies, far more than many traditional asset classes. But it’s also true that if you’re not careful, you can fall victim to myriad scams in the crypto space. Below are signs that may hint to a possible scam.
Statements of extreme profitability are nothing new in the annals of investment fraud. But they’re insidious in the virtual currency sector because in many ways, it’s true — people have made lifechanging profits through crypto wagers.
But no financial platform with any integrity makes any promise of profitability, especially extraordinary ones. If you’re seeing too many pictures of Lamborghinis and seductive models, you need to watch out.
Though cryptocurrencies have legitimately made some investors wildly rich, this is the exception, not the rule. Because of their decentralized nature and lack of extensive oversight, many crypto coins are fly-by-night ventures.
Even the most established virtual currencies carry incredible risk. For any entity to suggest otherwise reeks of delusion or fraud. Either way, it’s not a great sign.
Through innovations such as the aforementioned DeFi architecture, it’s possible for crypto enterprises to not only replicate passive income platforms but also offer much higher-than-normal yields. Thus, not every platform offering a 10% annualized yield is a scam.
But at some point, you’ve got to do the math. When you’re dealing with 1% daily returns as was the case with Bitconnect, you should question where the money is coming from. If you don’t like the answer or don’t get one at all, it’s time to put on your running shoes.
If you ever find yourself in a fraudulent situation, the first thing you must do is damage mitigation. Sadly, the fraud may not end at the initial violation but may translate to further crimes of opportunity. The best thing you can do before you initiate any investment venture is to keep your personal information to yourself.
This is crucial when it comes to your crypto private keys and passwords. Never give up such valuable information as you will not find recourse if you become victim to a scam.
Despite the many pitfalls involved with altcoin scams, reputable exchanges exist. As virtual currency adoption becomes mainstream, you will likely see more examples of legitimate platforms. Further, greater scrutiny and standardization should spark greater protections for individual investors.
That said, the altcoin world is still the wild west. Therefore, you should always approach any platform with extreme skepticism. Investigate the target platform inside and out. Also, check out social media posts to see what other users experienced. Though you should take anything on such forums with a grain of salt, they can provide unfiltered commentary that can inspire pointed research.
As groundbreaking and unprecedented asset class, it’s no surprise that international laws vary regarding Bitcoin and altcoins. Generally speaking, governing bodies do not consider cryptocurrencies as legal tender and some countries are much more favourable to cryptos than other nations.
International investors will want to pay close attention to taxation laws. How regulatory agencies treat crypto-related transactions can make a huge difference in your total profitability.
Undoubtedly, cryptocurrencies represent one of the most transformative investment classes and their underlying blockchain innovation may permanently change finance. At the same time, the extraordinary opportunities in the virtual currency space naturally attract con artists. By watching out for the top 5 altcoin scams and keeping your wits about you, you can enjoy the crypto space while being able to sleep at night.
At time of writing, the author held a position in Bitcoin and Ethereum.
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