So you are in the business of trading Bitcoin or other cryptocurrencies. However, you can’t help but feel wary when it comes to the media being dogged by stories of dubious fraudsters and their creative antics.
Seasoned old-school traders have long since established the associated pitfalls when it comes to trading. Sadly, this is still rife in the Bitcoin and Crypto markets currently.
One quickfire tip is trying to spot a scam. This can be done by going purely on your gut feel. Generally speaking, if something feels too good to be true – Murphy says it is. And we all know Murphy – they are not usually wrong when it comes to instincts.
Two of the most common scams
There are many articles dedicated to the various scams that manifest themselves on the net. And as time evolves, so do the tactics from scammers. It is a living, breathing item, always on the move.
Two of the most common scams are:
The infamous Ponzi Scheme
Charles Ponzi has been credited as the criminal mastermind and founding father of this concept. It operates on a very simplistic business model in that fraudsters assure potential investors of huge returns and then head for the hills. But not before getting access to your hard-earned capital.
Even though this scam has been around since the 1920s Gatsby era, it is still around this very day. Con artist Bernie Madoff managed to rob investors of cash totaling 65 billion dollars and will spend the next 150 years behind bars.
Small-time crooks are still being brought to justice currently.
If you spot a crypto scheme that can present you with a return on investment of 40% annually, steer clear of it immediately. The “sellers” who can promise a 10% return monthly are even worse and will use your emotions against you.
The Ponzi model operates on the premise of disbursing the capital they obtained from older investors to pay the new investors the so-called promised returns. This means that in order to facilitate payment, they have to recruit new investors actively all of the time.
The money does not originate from a business but directly from the capital that is invested by the new victims. Eventually, the con artist gets trapped, as they don’t have the funds to pay investors anymore, and they are close to getting caught. This sees the fall of the scam.
Pro tip: It is never a good idea to dab in crypto strategies that blow the returns out of proportion.
The Exodus Called an Exit Scam
This form of scam frequently appears in the case of smaller transactions. It is widespread in transactions involving initial coin offerings (ICO’s for short). The foundation is for a scammer to establish the scam, obtain investors’ capital, and then disappear for good.
Various exchanges have added a new level of complexity by allowing ICO trading. The coins are traded elsewhere, and investors are placed under a misconception that they are competing against the platform’s accounting system.
The investor will not see the balance reflecting in the virtual wallets. When the demand for capital reaches the prescribed limit, the exchange closes down. This implies that the wallets might either have been hacked due to a bug in the system. But the fact remains that the money and the platform are gone without a trace.
They will add insult to injury by placing a 404 error (page not found) message on their homepage when the investor tries to reach it via a URL. Some form of protection comes from the KYC (Know Your Customer) requirements that are governed by the banks and that the platforms need to adhere to in order to become and remain compliant.
The best means of protection comes in the form of trading without stops or leverage. There is no denying that the seductive allure of trading without leverage is attractive but should be best avoided.
Legitimate exchanges will not facilitate leverage and stops as they have your best interest at heart. If you need to trade with stops, do so in a mental capacity. When you decide to engage in leverage tactics, these should remain low at all times.
Patience is vital, and engaging in the retro trading methods of buying and holding is best.
Another way of protecting yourself and your crypto is to avoid holding large balances on these platforms. Ensure that your coins are removed frequently and place them in a separate cryptocurrency wallet. When a platform does not communicate sufficiently, see this as a red flag and high-tail it out of there.
These platforms are essentially just like a bank and operate on the same business model. Even reputable exchanges can fall victim to corruption by scammers. They work like banks because only a small percentage of coin trading is facilitated via a blockchain ledger.
In the instance whereby Bitcoin (BTC) is traded for Litecoin (LTC), an accounting system will inform the investor how many coins they started out with and what the current balance is. If the coins are in existence, they are stored in what is referred to as a “cold wallet”.
Surprisingly, these cold wallets have no bearing on the accounting system whatsoever. When you request a withdrawal from your Bitcoin wallet, your cryptos is not connected with the platform apart from means via the accounting system, and this is what causes the decrease in your balance.
Exchanges are also much like casinos. An individual provides the cashier with cash; they provide casino chips in return. That individual then plays with the casino chips.
When the person is done playing with the chips, they give the remains back to the cashier in return for money, and the chips are left at the casino. This is an excellent example of the disjointed connection between the coins and the amounts traded.
Keep your coins guarded at all times and protect your investments at the same time.
Disclaimer: The Content is an opinion and is for information purposes only. It is not intended to be investment or financial advice nor does it constitute an offer to buy or sell or a solicitation of an offer to buy or sell shares or any other assets. Seek a duly licensed professional for investment or financial advice.