How to avoid crypto scams

Background of Scams in Crypto

How does one ensure they’re not falling for a scam in crypto space?  The crypto market has been maturing over the years and is in a stage where the market capitalization is at an astonishing $600B+ valuation at the time of this writing.  While many investors are happy with their substantial profits through trading cryptocurrencies, there have been many scams lingering in the crypto space.  These scams include shady crypto-exchanges, ICO scams, and Ponzi schemes.  This article will cover these topics in more detail and give you a further insight on how to avoid these types of scams.

Mt. Gox Shutdown & Loss of 850,000 Bitcoins

The increasing interest and attraction to Bitcoin and the growing number of altcoins has inherently increased the number of exchanges that exist in the market.  These exchanges all try to attract customers to their platforms and charge transaction fees for trades made.  Some of these exchanges such as Binance, Bittrex, and Poloniex, are all reputable and well-known exchanges that exist in the market today.  While there exist many legitimate exchanges, there have also been shady exchanges ultimately leading to cheating customers of their coins.  One of these exchanges in the past was known as Mt. Gox.  Mt. Gox is a famous known example in the crypto world of a seemingly trustworthy exchange that ended up shutting down and declaring bankruptcy.  At one point, Mt. Gox was single-handedly accountable for more than 70% of Bitcoin transactions in the world.  It was in February 2014 when the Mt. Gox had suddenly suspended trading out of the blue.  Shortly after trading suspension, it was revealed that 850,000 Bitcoins were stolen.  The current value of those 850,000 Bitcoins with the price of Bitcoin at the time of this writing equates to a mind-boggling $12.4Bn!  Although some of the Bitcoins were found and returned to the victims of the hack, many users remain clean out of their money.  The Mt. Gox hack that made history as one of the largest hacks up to date resulted in the Mt. Gox exchange declaring bankruptcy.  The main point behind this is that trust should never be put in a centralized exchange where the exchange holds private keys to your cryptocurrency funds.

Confido Exit Scam

Another more recent scam trending in crypto was the Confido ICO exit scam.  

The ICO that raised nearly ~$375,000.00 left investors in the dark after they shut down their website and deleted their social media presence.  Confido identified themselves as a company allowing the building of smart contracts to take on the role of an escrow between buyer and seller.  Smart contracts remove the need for trusting a third party because once a condition is satisfied, the smart contract will automatically trigger and execute.  The Confido ICO was hosted on a platform known as TokenLot where the asset was selling for nearly ~$1.20 per token but immediately plummeted to roughly 2-3 cents after the Confido team vanished.  The Confido ICO quickly became recognized as an exit scam after the Confido team and company deleted their website and social media accounts. A video shown by CNBC discusses the elaborate exit scam performed by the Confido team here.

With ICO’s becoming a hot market in the crypto space, it’s becoming evident that more ICO’s are turning out to be scams that trap the investors with worthless tokens as team’s cash out on the raised funds.  It is very important to keep an eye on the ICO, always perform your due diligence of research on the company, and ensure that you are not investing more money than you are willing to lose in the market.

BitConnect: Ponzi Scheme or Legitimate?

The cryptocurrency world has become more wary and curious about the legitimacy of BitConnect and its suspiciously generous business model.  BitConnect has come up with their own cryptocurrency that allows its users to make transactions in the BitConnect exchange.  The investors that support BitConnect are normally the people that realize the value of Bitcoin is too high and that they’ve arrived to the crypto scene too late to make substantial gains through Bitcoin.  Instead, they follow the substantial percentage of rewards provided through the use of the BitConnect lending service.  Now you may be wondering: How does someone make a lot of money with BitConnect? Why isn’t everyone investing in this?  Well, given the business model that can be found on the Bitconnect website, it becomes visible that the accrued interest increases substantially depending how much money is lent:

BitConnect claims they use a unique trading bot that takes advantage of the Bitcoin volatility and price swings.  If the Bitcoin value goes up, the use of this volatility bot can result in making tremendous gains.  Here’s the catch: BitConnect’s trading software handles the processing of price swings by using your “lent” out Bitcoins.  For this to all happen, BitConnect tokens must be purchased directly on their exchange using Bitcoins to utilize this service.

Bitcoin’s price can swing up and down by hundreds of dollars a day, so anyone who can predict these changes can make a fortune. That’s what the trading bot reportedly does, and loaning your Bitcoins to the software allows you to enjoy these returns. To make an investment, users must first buy the Bitconnect token with Bitcoin via the exchange.  Once the BitConnect token is purchased, the trading bot can be accessed to loan out your token.  The catch here is that the investment loan that you just deposited into the trading bot remains locked up from 120-299 days depending on the amount you are lending.  The interest that is earned from the trading bot cannot be accessed/withdrawn right away, instead it can only be taken out after the grace period of the loan is complete.

Another way to earn money through the BitConnect platform is through the use of referrals.  The affiliate model of referring new users to the platform under their referral code earns the individual a commission.  This model of lending money for generous gains over a given time and through referrals is reminiscent of a ponzi scheme as it seems way too good to be true.  The ability to loan out a BitConnect token and earn high daily interest does not show how all users of the platform benefit; only the earlier users and users that operate with high affiliate numbers under their belt.  The whole business model of BitConnect sounds sketchy and big names in the crypto space such as Vitalik Buterin and Charlie Lee have made comments on the legitimacy of the BitConnect platform:

Whether the BitConnect platform is legitimate or not, the business model and insanely high compounding interest rates don’t seem likely at all.  It is important to remain vigilant about BitConnect and do your own research before making any commitment to the platform and trading bot lending service.

Protecting Yourself Against Scams

With the onset of multiple scams and schemes to steal your money that exist in the crypto market, it is best to be vigilant and on your feet.  There are many ways to protect yourself against these types of scams.

The first and most obvious tip is: If something is too good to be true, then it probably is.  This pertains a lot to services and platforms that offer high yielding commissions and daily interests such as BitConnect.  Ponzi schemes do exist and they normally work by funding your large returns by using the lent money from other investors.  If this was a real legitimate thing, wouldn’t everyone be doing it? Wouldn’t everyone become rich? Be vigilant on this.

Be very alert and attentive when you’re being marketed a referral code to earn quick money.  This is a very common technique that falls under multi-level marketing methods where people try to sell/refer a product to others to make money.

Another tip to protect yourself in the crypto space centers around the ICO craze.  ICO’s, short for initial coin offerings, are ways to gather capital and funds by providing tokens/coins for a certain amount of Ethereum (or other accepted cryptocurrencies).  The growing 

number of ICO’s has also shown us exit scams performed by the team’s running the ICO such as the popular Confido exit scam.  To protect yourself against these scams, it is very important to do your own due diligence on the company and only invest what you’re willing to lose.  Investing more capital than what you can afford to lose can lead to disastrous situations in the case of an ICO turning out to be a shady deal afterwards.  

Lastly, it is important to be aware of exchanges that are centralized and hold your private keys.  A prime example of a crypto exchange that shut down and liquidated its user base was Mt. Gox that lost hundreds of thousands of Bitcoins at the time.  To avoid situations like these, it is best to purchase your cryptocurrencies through an exchange such as Bittrex or Binance (for example), and move the coins off the exchange platform to a local wallet, known as cold storage.  Another way to securely store your coins is by purchasing a hardware wallet like the Ledger Nano S.  There are a limited number of coins that are supported by this hardware wallet, but the list continues to grow.  This is a great way to ensure your coins remain secure from any type of hacks or malicious attempts to steal them.

Always be attentive and aware of scams that linger around the crypto space because it is all digital and still somewhat considered “The Wild West”.

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