Just like any other businesses have risks, the cryptocurrency investment is not an exception. There is a big number of fraudulent projects that take advantage of the cons of the cryptocurrency industry. These vulnerabilities make it easier to attract people, and then leave them without their funds.
Due to the increased losses consumers have made, any regulator or government must protect its people. Since these products are still new in the market, some countries have taken serious measures to safeguard users of these digital commodities.
Some cryptocurrency companies offer investments in digital currencies or even lending or schemes associated with coins which promise to give abnormal or high profits in return. Companies that make such ventures involve taking high risks with user’s funds. Users should first understand properly before participating in such high-risk and speculative investment activities.
The United Kingdom’s Financial Conduct Authority ( FCA) came out to warn venture capitalists that they should be ready to make heavy losses if they wish to invest in digital currency products promising abnormal returns. Despite the report concerns general risks that are faced by investors when dealing with digital assets, some of them are actual vulnerabilities that make the industry attractive for scammers.
Some of the products and services offered by a certain coin are very complex to understand. This makes it harder for users to discover the risks that come with using such coins. Besides, the complexity of the technology and lack of awareness about it results in the lack of trust, which stalls its adoption. Let alone the fact that there is indeed a large number of scams.
As CoinIdol, a world blockchain news outlet, reported, the number of cryptocurrency frauds surged in 2020. This only adds to the confusion, making the beginner investors easy victims for scammers.
In the process of attracting more customers to invest in their products, companies tend to make a fuss about the returns of their goods and services and also understate the associated risks. They lie to clients. Once customers make investments, then they are given fewer returns than agreed hence making losses.
Cryptocurrency investments can indeed bring high returns due to the ability of coins to gain value in a matter of hours. However, it might very well lose a great deal of it in the same way. For this reason, it is very difficult to set any exact return rate. If a company promises high and stable returns for cryptocurrency investments, it is most likely a scam project.
Lack of regulations
Cryptocurrency guidelines are still disorganized, random and complex to understand especially when it comes to tax treatment. The lack of a proper regulatory framework leaves venture capitalists scared to invest. No serious investor will make big investments if one doesn’t understand the benefits of a product he is to invest in. Financial regulators globally are trying to draft regulations that will properly govern the cryptocurrency industry.
On the other hand, the lack of a regulatory framework sometimes makes it easier for fraudsters to get into the industry. Despite most regulators require startups to comply with the KYC and AML requirements, the lack of framework makes it possible to skip them, or the provided data is not checked thoroughly.
The regulators and law enforcers do their best to protect consumer rights. However, it might be difficult, considering the online nature of such companies. Legitimate companies usually disclose all information about themselves, including the names of the management and the registration data. Some scammers also try to look as unclosed as possible.
However, in case they vanish with the investors’ money, it might be difficult to track and hunt down people behind the scheme. For this reason, the cryptocurrency industry is attractive for illegal players.
It is a very risky business to store cryptocurrencies. Numerous exchanges and wallets were hacked and coins stolen by thieves. This has remained a serious threat to the community. It is still very hard to trace or reverse the stolen coins.
The industry has seen a great number of hacks that affected millions of people. One of the most famous hacks in the history of the industry is the hack of Mt.Gox exchange. Among other big hacks is the hack of Cryptopia, a New Zealand cryptocurrency exchange, which took place in 2019.
On the other hand, scammers also take advantage of the existing security issues. First, they pose as reputable exchanges and then act as if they were hacked to get away with the customers’ funds.
Cryptocurrency market offers a great number of both legitimate and fraudulent companies, and sometimes it is indeed difficult to tell who is who. However, a great deal of research will help to tell a company that is worth dealing with.
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