Last week, we shared the first part of our series: 4 cryptocurrency risks and scams and how to navigate them. In part two, we discuss two more common traps to be wary of when investing in digital currency.
3. Pyramid/Ponzi Schemes that Will Trade For You
Because dealing with cryptocurrency can be a complex affair, online scammers have developed complicated cons similar to traditional pyramid and ponzi schemes. People have lost a lot of money in such scams, and unless you’re well-versed in the technology, they can be difficult to spot.
One giant red flag to watch for is giving your money to others who invest/trade for you, or if you only get paid when you recruit new members.
Also avoid buying upfront “packages” (The Gold Package) promising varying returns. And if you see the words “This isn’t a pyramid scheme” in the marketing materials, you may want to look a little more closely!
Unless you get to hold the keys to your private wallet containing your crypto directly or trade via a reputable exchange like Coinbase, you very well could be dealing with a scammer. And while plenty of people will make money in cryptocurrency pyramid/ponzi schemes, many will lose. That could include you or people you care about, if you get involved in crypto this way.
4. Fake ICO (Initial Coin Offerings)
While new cryptocurrency can be created without any public investment or offering, many use an Initial Coin Offering (ICO) to fund their startup initiative. ICOs are basically IPOs (Initial Public Offerings) for cryptocurrency and a highly effective way to crowdfund vast sums of money extremely quickly. In fact, recent ICOs have raised millions of dollars in mere minutes.
This speed comes from the fact that ICOs are barely regulated—a good thing if you’re looking to raise money quickly and avoid the rigorous and time-consuming regulations involved with traditional capital raising. But it can bad, too, as the lack of regulation is a big neon welcome sign to scammers.
The lack of legal oversight has resulted in numerous fake ICOs being created by crypto con men, who go to great lengths to convince potential investors of their fake coin’s legitimacy. If you’re just getting started with cryptocurrency, it’s probably best to avoid ICOs until you really understand what you are investing in. In fact, that’s a good rule of thumb with any crypto investment, if you don’t understand the technology beneath it, start by learning that—and understand “what this crypto actually does”—before you invest. Contact us if you’d like help with that.
Of course, not all ICOs are fake, and if you’re tech-savvy, they can be quite lucrative. In fact, many tout ICOs as the future of venture capitalism and fundraising.
But no venture capitalist would ever fund a startup without proper vetting, and the same applies to altcoins. Check the background of the people directly involved with the project and those serving as advisors. Use Google and social media like LinkedIn to verify these are real people with stellar reputations, and their advertised skills and knowledge match those found on online resumes and CVs. And make sure you understand what the cryptocurrency proposes to do and that you believe the team behind it can accomplish that goal, as with any business investment you would make.
And as with any investment, beware of deals that promise unrealistically high returns and/or just sound way too good to be true—that’s sign they likely are.
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