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The use of blockchain and the popularity of cryptocurrency has progressively increased over the last several years. What began as skepticism has gradually evolved into a certainty that cryptocurrency will stick around. But that doesn’t mean that this new form of digital currency doesn’t have its problems. Questions regarding the sustainability of mining cryptocurrency has made recent headlines. (Read up on why mining cryptocurrency is very bad for the environment in this Bold story.) And even more concerning is the rapid increase in cryptocurrency scams that seem to be taking place. This begs to ask the question, “Is cryptocurrency really safe?”

The frequency of cryptocurrency fraud is certainly noteworthy. Not only are cryptocurrency scams affecting small investors but more seasoned ones as well. This has triggered federal agencies to warn investors that cryptocurrency fraud is indeed common. However, given the state of digital currency, investor caution isn’t enough to avoid these types of scams. Without question, the general consensus in the finance industry is that digital coin is here to stay. But before everyone jumps on the bandwagon, additional safeguards will be needed to help protect investors.

“Bad guys are always going to follow the money. As the industry matures and surveillance tools get better, hopefully the cops will catch up.” – J. Christopher Giancarlo, Former Chairman of the Commodity Futures Trading Commission

A Sharp Rise in Cryptocurrency Scams

In the last six months, the number of cryptocurrency scams have increased substantially. In the U.S. alone, cryptocurrency fraud has exceeded $82 million over the last 2 quarters. This reflects a sharp increase over the preceding months to years of digital coin activity. The impact of cryptocurrency fraud is also quite broad and not very selective. While the average amount lost in cryptocurrency scams is roughly $1900, both small and large investors are affected. This includes those who simply dabble in cryptocurrency through social media. It also includes savvy Wall Street investors involved in much larger transactions.

In comparing the last six months to the preceding year, cryptocurrency fraud has increased tenfold. Investors who are most vulnerable to cryptocurrency scams are generally between the ages of 20 and 49 years. Compared to older groups, they are five times more likely to be affected. These scams have occurred concurrently with a rapid rise in value of various digital currencies. Between October of last year and this past March, Bitcoin alone increased 450% in value. Ether and Dogecoin realized similar gains. Naturally, this hasn’t attracted more investors, and at the same time, opportunities for cryptocurrency fraud have increased as well.

“Compared to a year ago, we’re seeing 12 times the number of reports and nearly a thousand percent increase in reported losses on cryptocurrency investment scams.” – Emma Fletcher, Consumer Education Specialist, FTC

An Environment Ripe for Cryptocurrency Fraud

Because digital currency is relatively new, it has many characteristics that invite a higher number of cryptocurrency scams. One of the most notable features is its lack of regulation in most countries. Likewise, many operators of digital coin investment sites are anonymous and often lack transparency. This makes for ripe environments for cryptocurrency fraud since investors lack traditional fraud protections. Even some of the most cautious and experienced investors have been subjects of these schemes. Unfortunately, this simply seems to be some of the growing pains associated with this new asset class.

Someone keeping their BitCoin locked in a safe
A world of investment opportunities has opened up, and with it comes cryptocurrency scams and fraud.

To highlight this point, one of the largest cryptocurrency scams involved Virgil Sigma Fund LP. A 24-year-old Australian fund manager named Stefan Qin conned investors out of $90 million in cryptocurrency. Running a type of Ponzi scheme, individual investors contributed between $100,000 up to $5.7 million. Even large investment firms got involved despite the lack of audited returns. Qin attributed the absence of the audits to the newness of the cryptocurrency market and the lack of regulatory guidance. He has since pled guilty to cryptocurrency fraud charges and now faces up to 20 years in federal prison.

“Sites use fake testimonials and cryptocurrency jargon to appear credible, but promises of enormous, guaranteed returns are simply lies. These websites may even make it look like your investment is growing.” – Juliana Gruenwald Henderson, Office of Public Affairs, FTC

Common Strategies in Cryptocurrency Scams

The most common strategy involving cryptocurrency scams seeks to convince investors that an opportunity is both professional and valid. This is often achieved through high-quality investing sites as well as false data that suggest growth. Because digital coin investments often attract higher yields even among legitimate opportunities, exaggerated yields are not necessarily a red flag. Therefore, it can sometimes be tough distinguishing a cryptocurrency fraud effort from a qualified investment. Many of these scams occur through social media and basic messaging apps. Likewise, because these investments are made via blockchain, a cryptocurrency purchase cannot be reversed. This is different from other types of investments that use bank account transfers and credit cards.

One of the more recent cryptocurrency scams that used this type of approach involved a company called LUB Token. The anonymous owners of this site promoted a cryptocurrency exchange that used a Telegram messaging app. They promised daily returns of 10% for investors, and hundreds of individuals fell prey to their cryptocurrency fraud. Once deposits were made, the company vanished, taking hundreds of thousands of dollars with them. Those affected by this cryptocurrency fraud not only included those in the US. It also involved hundreds of investors throughout all of Europe. While authorities are investigating these types of cryptocurrency scams, the success rate is often poor. As a result, investors are often left holding the bag and dealing with the aftereffects.

Reasons For Optimism

At the current time, it is evident that cryptocurrency scams are on the rise and that investors must be extremely cautious. The very nature of digital coin investments invites opportunities for cryptocurrency fraud. However, that does not mean that the long-term future of cryptocurrency is necessarily in jeopardy. Adoption of regulations for cryptocurrencies as well as improvements in fraud investigations will occur in time. As these advance, investors will enjoy greater protections. But until then, cryptocurrency investors must examine every opportunity with the highest level of discernment.

 

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