Some scammers focus on altcoins with small market capitalizations, says an expert.DADO RUVIC/Reuters
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With cryptocurrency prices at a low ebb, investors might be tempted to put some money into these speculative assets. What should advisors tell them about the risks?
When clients want to test the water, one of the first things advisors should do is help them avoid becoming shark bait. Scammers can smell fresh chum from miles away.
The U.S. Federal Trade Commission’s Consumer Protection Data Spotlight report published in June found more than 46,000 people in the U.S. alone had suffered from cryptocurrency scams since 2021, with losses totalling more than US$1-billion. That’s up from US$130-million in 2020.
The market’s wild growth lured many naive investors afraid of missing out, says Greg Taylor, chief investment officer at Purpose Investments Inc. in Toronto, which offers cryptocurrency exchange-traded funds (ETFs).
“There was a greed factor that got in,” he says. The hype blurred the line between investment and gambling and attracted some unsavoury characters.
“When you get speculative excess, you must be wary of fraud. It happens in every bull market.”
Those frauds are many and varied. In some cases, cryptocurrency exchanges themselves are guilty. In 2020, the Ontario Securities Commission described Vancouver-based exchange QuadrigaCX as a Ponzi scheme after it left users with a $169-million shortfall.
The different types of scams
Some scammers focus on alternative coins (altcoins) with small market capitalizations, says Dragan Boscovic, research professor at Arizona State University and founder and director of its Blockchain Research Lab. These are classic targets for pump-and-dump scammers who stoke the coins’ reputation with social media posts.
“There’s a lot of activity and the price of those assets with very low market caps and high volumes rises relatively fast,” he says. Naive investors, perhaps remembering bitcoin’s huge growth, pile in.
“Once those bad actors are satisfied, they sell all their assets and then the price goes down very quickly.”
Initial coin offerings (ICOs) are a variation on the theme. These token sales are typically tied to decentralized online services and promise big returns. Many have been exit scams in which the founders misused the funds and didn’t deliver the promised services. Canadian and U.S. regulators have cracked down on these sales, deeming them securities.
Other scams steal assets from victims’ cryptocurrency wallets directly.
Michael Zagari, associate portfolio manager at Mandeville Private Client Inc. in Montreal, recalls a phishing e-mail that targeted owners of the …….