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Crypto dangers and how to stay safe..

I never thought I would start a serious blog on cryptocurrencies by mentioning Kim Kardashian.  At the beginning of October 2022, the US Securities and Exchange Commission (SECannounced charges and settlement against Kim Kardashian. The SEC Order found that Ms Kardashian failed to disclose that she was paid USD$250,000 to publish a post promoting a crypto-asset, which they allege is security. As a result, Kim Kardashian agreed to pay $1.26 million to the Securities and Exchange Commission for “unlawfully touting” a crypto asset security on her Instagram account. We’ll discuss celebrity endorsements and why you should ignore them later in this blog.

We’ve all heard the stories of the guy who lives in his mum’s spare room and has made millions trading cryptocurrencies. Then there was the guy who had Bitcoins on his computer years ago and is willing to pay millions for his Council to dig up their tip for it! So what is all the excitement about and more to the point can you and I also become multi-millionaires?

 

The important thing to know about Crypto-assets, including cryptocurrencies, is they are neither issued nor guaranteed by a central bank or a public authority. Crypto-assets are currently out of the scope of EU legislation. This means there is no consumer protection. If you buy or sell this instrument type you are on your own. You are in the ‘wild west' of the finance world. I say again, you have no protection, you are on your own.

Besides Bitcoin, one of the earliest and most popular cryptocurrencies, as of July 2022, there are 20,268 cryptocurrencies in existence. However, not all cryptocurrencies are active or valuable. Today there are an estimated 11,000 active cryptocurrencies.  To help you get your bearings, these are the top 10 cryptocurrencies based. The total market cap of the coins currently in circulation can be found in Table 1 below:   You can see that we are talking serious numbers here!

According to Forbes:

1. Bitcoin (BTC) 

Market cap: $377 billion 

2. Ethereum (ETH) 

Market cap: $165 billion 

3. Tether (USDT) 

Market cap: $67 billion 

4. U.S. Dollar Coin (USDC) 

Market cap: $47 billion 

5. Binance Coin (BNB) 

Market cap: $46 billion 

6. XRP (XRP) 

Market cap: $24 billion 

7. Binance USD (BUSD) 

Market cap: $21 billion 

8. Cardano (ADA) 

Market cap: $14 billion

9. Solana (SOL)

Market cap: $12 billion

10. Dogecoin (DOGE)

Market cap: $8 billion

 

Table 1: Top 10 Cyrpto currencies Market Cap as of July 2022 - Forbes

 

All cryptocurrencies tend to experience sudden spikes (and drops) in value. If you buy at a low point and sell at a high point you could be making huge profits. Equally, if your bet is wrong, you could lose big. For example, the price of Ethereum roughly doubled from July 2021 to December 2021— a big payday for some savvy early investors.

 

 

Our current financial system revolves around third-party intermediaries processing transactions between banks. The recession of the early 2000s made a lot of people wonder if that was a good idea as some key banks failed and had to be bailed out. Blockchain/ cryptocurrencies offer an alternative model. Once you make an entry in the blockchain, it can never be erased. It’s there forever. They can be viewed by anyone, anywhere, anytime so you can take part in the financial markets and make transactions without any intermediaries (banks etc) whatsoever.

This also means crypto markets are always open. With coins being mined and transactions being recorded around the clock, you don’t have to wait for the LSE, NYSE, NASDAQ or any other exchange to start trading for the day. Today regular stock exchanges are also looking into the option of trading stocks outside of regular banking hours as well to keep up with the cryptocurrency ecosystem

As cryptocurrencies aren’t tied to a single currency or economy, this means their price reflects global demand at any given time.

This all sounds attractive and an exciting financial utopia for traders. As with everything else, there are a few negatives about cryptocurrencies that you need to think about.   While the price of a cryptocurrency can climb quickly to highs (with associated benefits for investors!) it can also crash to terrifying lows just as quickly because crypto markets thrive on speculation.

One wouldn’t wish to bet one’s pension on cryptocurrencies because of the reasons stated above. Stock markets, in contrast, can look back on centuries of history. The London Stock Exchange, for example, was founded in 1801 and gold has been a proven custodian of value for millennia.

There are also new risks to be considered e.g. as a crypto owner, one could lose the private key and with it, all one's holdings! And then there’s hacking, phishing, and all the other attempts to gain control by malicious means. This is something that seasoned investors keep an eye out for, but newer investors are more likely to be vulnerable to these kinds of risks. 

Let’s look at some of these potential scams briefly. Unsurprisingly,  they all have a familiar pattern – criminals will try anything to get hold of your money!

Bitcoin investment – in this scam - scammers contact a potential investor claiming to be seasoned "investment managers." As part of the scam, they promise their victim that they will make money with investments, they will cite made up examples, and even introduce people who claim to have money. All they are interested in is stealing your money. Always make sure you have verified the identity of the investment manager and they do belong to a bona fide regulated firm. 

The Celebrity: This scam involves using fake celebrity endorsements. Scammers take real photos and impose them on fake accounts, ads or articles to make it appear as though the celebrity is promoting a large financial gain from the investment.  Santander recently warned that Celebrity-Endorsed Crypto Scams Soaring in UK - case volumes jumped 61% in 1Q from the prior three months. Sir Richard Branson who’s image was used to attract investors,  also brought attention to the issue in June interview. Generally don’t believe such endorsements – it’s your money. Why would an unqualified ‘celebrity’ advise you on finance?

The Rug pull:  as the name suggest these scams involve investment scammers "pumping up" a new project, non fungible token (NFT) or coin to get funding. After the scammers get the money, they disappear with it. Investors are left with a valueless investment unable to sell it. An example of this scam was the Squid coin scam. The scammers made off with about $3 million in profit only recently.

Romance:  we’ve all heard of this one these scams involve relationships -- typically long-distance and strictly online -- where one party takes time to gain the other party's trust. Over time, one party starts to convince the other to buy or give money in some form of cryptocurrency. After getting the money, the dating scammer disappears.

Phishing These scams have been around for some time but are still popular as they are so successful. Scammers send emails with malicious links to a fake website to gather personal details, such as cryptocurrency wallet key information. To avoid phishing scams, never enter secure information from an email link. Always go directly to the site, no matter how legitimate the website or link appears. 

The Man-in-the-middle:  Always make sure your session is secure. When users log in to a cryptocurrency account in a public location, scammers can steal their private, sensitive information. A scammer can intercept any information sent over a public network, including passwords, cryptocurrency wallet keys and account information. The best way to avoid these attacks is to block the man in the middle by using a secure virtual private network (VPN). The VPN encrypts all the data being transmitted, so thieves cannot access and read your data.

The Social media cryptocurrency giveaway:  There are many fraudulent posts on social media outlets promising bitcoin giveaways. Victims are taken to a fraudulent site asking for verification in order to receive the bitcoin. The verification process includes making a payment to prove the account is legitimate. The victim can lose this payment -- or, worse yet, click on a malicious link and have their personal information and cryptocurrency stolen. Remember – there is nothing free in life – avoid ‘give a ways’ – you are the prize!

Fake cryptocurrency exchanges:    Scammers lure investors (victims) in with promises of a great cryptocurrency exchange -- maybe even some additional bitcoin. But in reality, there is no exchange.  My advice is to do lots of research and check with the FCA and use their scansmart tool and industry newsfeeds for details about the exchange's reputation and legitimacy before entering any personal information.

Employment offers and fraudulent employees:     Criminals can impersonate recruiters or job seekers to get access to cryptocurrency accounts. In this example, they will offer an interesting job but require cryptocurrency as payment for job training. They will introduce you to a site to buy your cryptocurrency and steal your payment details. It’s really that simple.

Platform Upgrade:   Scammers will try to trick crypto holders into giving up their private keys as part of an “upgrade.” Upgrade scammers can piggyback on legitimate migrations, such as the recent Ethereum merge, which had both the Ethereum Foundation and Robinhood concerned enough to issue a warning that users be on “high alert” for upgrade scams.

 

Given the heightened risks with digital assets, prudence is essential. To avoid crypto scams, follow these straightforward tips:

 

  1. 1.       Don’t respond to unsolicited contact from any financial institution. Look up the official number for the institution and initiate independent contact.
  2. 2.       Check before you click. Never open hyperlinks or attachments from unknown senders.
  3. 3.       Keep accounts separate. Never link crypto brokerage accounts and traditional bank accounts permanently.
  4. 4.       Only use reputable companies. To ensure your information and crypto security, use a wallet from a reputable company. If you don’t know who they are – find out beforehand.
  5. 5.       HTTPS is vital. HTTPS—as opposed to just HTTP—in a crypto exchange or wallet URL indicates the site has secured and encrypted traffic
  6. 6.       Remember a celebrity-endorsed investment in crypto assets or crypto asset-related products doesn’t mean it’s a genuine endorsement or a legitimate investment.
  7. 7.       Never allow anyone to set up a cryptocurrency wallet, upload ID documents or manage investments on your behalf remotely. 
  8. 8.       Avoid uninvited investment offers whether made on social media or over the phone. If you’re thinking about making an investment, thoroughly research the company first and consider getting independent advice. 
  9. 9.       Don’t fall for pressurized sales with limited timescales and promises of too-good-to-be-true returns.
  10. 10.   Always use the FCA website www.fca.org.uk to look up the company who you’re buying crypto from and check they’re a legitimate registered firm, not unregistered, or a clone or fake. Then call them using the number on the FCA website when you both set up a payment and every time you make a payment, even if you think it’s going to the same place. 
  11. 11.   The FCA also has ScamSmart www.fca.org.uk/scamsmart, an online tool to help you identify if your investment is a scam or not. Answer four questions with drop downs for multiple choice and get a clear picture on the potential investment and the potential risks.

If you have lost money through some kind of crypto fraud – the chances of getting your money back are to be blunt pretty low as skilled investigators in this area are grossly under-resourced.  However, you should still report the crime to the authorities – if you are very lucky you may get at least some of your money back. 

The best advice is to take extra precautions with these unregulated assets, be very vigilant and only invest what you can afford to lose.

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Gian Mahil

Gian Mahil

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The FinTechGuys

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