Beware the snakeoil salesmen in the era of cryptocurrency

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Sadly, there are also people who have been scammed out of millions. For example, BTC Global promised investors guaranteed returns of 14% per week. More than 27,000 people lost money due to this scam that hit South Africa and Australia. And they did so by willingly sending their Bitcoin to BTC's cryptocurrency wallet.

It is imperative for investors to understand where their money is going. “There is immense hype around cryptocurrencies and blockchain. Several instant weekend-warrior financial advisers are urging people to invest. However, the fundamentals of investing stand true, regardless of whether you are investing unit trusts or cryptocurrencies. In the absence of due diligence and a comprehensive financial plan, investing can quickly become gambling. Are you prepared to gamble with your future?” Floris Slabbert, director at Ecsponent Financial Services.

Cryptocurrency and it's underlying blockchain technology has been touted as transparent and virtually tamperproof. But those are a bit like that the Titanic was unsinkable, and we all know what happened there.

Research ICOs

Besides unscrupulous groups who are out to defraud people, like in the BTC example, the technology is fraught with new developments that have the potential to be harmful if not treated correctly. For example, technology companies are building their platforms on a cryptocurrency, such as Ethereum. They then list Initial Coin Offerings (ICOs) with the aim of bringing investors and tech fans together.

An ICO is an unregulated way for a new cryptocurrency-based venture to raise funds. Tech start-ups use ICOs to bypass the regulated capital raising process required by banks or venture capitalists. Business Insider UK explains that, “ICOs are where start-ups issue their own digital currencies, structured like Bitcoin. These tokens, which can be traded online despite the company being private, are sold for real money that start-ups then use to fund their projects.”

“To give you an idea of how different this world is, let’s look at how much money has been raised, and how fast,” said Slabbert. “Bancor raised $152m in three hours. Brave raised $35m in 30 seconds. Aragon raised a million a minute to hit $25m in 25 minutes. With these kinds of numbers, is it surprising that there are fraudsters waiting to help you part with your hard-earned money?” says Slabbert.

“While there are legitimate investment opportunities, there are a few red flags to be on the look for,” he said.

Red flags

Whenever you want to spot a scam, research the team. Many times, it has emerged that supposed tech gurus or CEOs don’t even exist. Their photos on the websites are stock images with fake names,” says Slabbert. “This has been done so successfully that world famous DJ Khaled, in a now-deleted Instagram post, endorsed a company with a fake CEO.”

Look for the white paper. ICOs should provide a comprehensive breakdown of the start-up, its niche, vision and how it intends operating. There should be SWOT analyses, and a roadmap that it will follow methodically with the proposed funds. “The lack of a white paper is a red flag for sure. But it goes deeper. A poorly designed website and a sloppy white paper could be a sign that the creators are thinking about short-term money raising and not the long game,” says Slabbert.

Always look out for plagiarism, warns Slabbert. Whether it is the white paper, roadmap or any other element of the business you are researching, as past scams have been known to lift content from other companies.

Stick to investment fundamentals

Then there are the technical elements. Does the ICO have a hard cap or soft cap? If there is an unlimited cap how does this affect the percentage gains of more money being spent? Are there legitimate use cases for the use of blockchain in the industry being discussed?

“The more open and transparent a project is, the more likely it is not a scam, but this is not full proof,” says Slabbert. “This is why we always advise our clients to stick with investment fundamentals. Rather than rush off to the next big thing, work closely with a reputable financial adviser and build a plan and portfolio that grows consistently over the long-term.

Are all cryptocurrencies bad, not at all. There are some that will in the long run prove to be the right choice. The problem currently faced is how will it be regulated and taxed. We know that as soon as an asset or gain is achieved the South African Revenue Services would like their share. This makes planning difficult but not undoable. The risk should be evaluated and form part of your strategic and long-term planning.

“A lot of blockchain enthusiasts argue that financial services companies and banks are hitting back at the technology because it is disrupting the industry at the expense of the traditional players. This couldn’t be further from the truth. Believe me, every financial adviser worth his salt wants to find the best investment vehicles. However, what we cannot do, ethically and professionally, is invest clients’ money in unproven and volatile environments,” says Slabbert.

Embrace the digital world, invest with the times and understand the future, but do not forget common sense and always remember, if it sounds too good to be true, it probably is.