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How to Prevent Frauds in Crypto Investing

Image by Sergei Tokmakov, Esq. Terms.Law from Pixabay

Since crypto prices are at an all-time low, buyers may be enticed to put money in these uncertain investments. What should their consultants tell them about the threats?

One of the most important things consultants should do when clients want to try something new is to help them from being robbed. Fraudsters can detect new “clients” from a long distance.

According to the U.S. Federal Trade Commission’s Consumer Protection Data Spotlight report, published in June, over 46,000 individuals from the United States alone have become victims of crypto scammers as of 2021, with losses racked up well over US$1 billion. This is a significant rise from US$130 million in 2020.

According to Greg Taylor, chief investment officer at Purpose Investments Inc. in Toronto, which offers crypto exchange-traded funds (ETFs), the industry’s crazy development enticed several gullible buyers who were concerned they would miss out.

“There was a greed factor involved,” he says. The excitement masked the distinction between investment and gambling, luring several unpleasant characters.

 “If there is uncertain overabundance, you must be extra careful of fraud.  This occurs throughout each rising market.”

Such deceptions are numerous and diverse. In some cases, cryptos are to blame. The Ontario Securities Commission labeled Vancouver-based exchange QuadrigaCX a Ponzi scheme in 2020 after it failed to pay users $169 million.

The various forms of fraud

According to Dragan Boscovic, research professor at Arizona State University and founder and director of its Blockchain Research Lab, some fraudsters target unconventional crypto (altcoins) with low sales valuations. These are the traditional focus for pump-and-dump fraudsters who use social media to boost the fame of the currency.

“There is a lot of activity,” he says, “and the price of those assets with very low market caps and high volumes rises relatively quickly.” Gullible buyers jump in, presumably influenced by bitcoin’s meteoric rise.

“When those bad guys are content, they sell all of their capital, and the price goes down dramatically.”

An alteration to the concept is initial coin offerings (ICOs). These token sales, which are typically linked to decentralized online services, keep promising large profits. Numerous cases have involved exit frauds in which the creators embezzled finances and ceased to deliver the promised services. Authorities in Canada and the United States have come down hard on these sales, classifying them as securities.

Other frauds actively rob funds from victims’ online accounts.

Michael Zagari, associate portfolio manager at Mandeville Private Client Inc. in Montreal, recalls a phishing e-mail that targeted holders on the Ethereum blockchain. The culprits took advantage of an impending change in the manner the Ethereum crypto blockchain produces ether coins. It informed holders that they needed to allow access to their cryptocurrency wallets in order to be ready for the adjustment. Everyone who did so had their funds taken from them.

According to Mr. Zagari, Ethereum holders did not need to do anything to prepare for the adjustment, however, these e-mails have been persuasive enough to fool people new to the tech.

Consultants should always be informed.

Mr. Zagari claims that it is his responsibility as a consultant to keep clients up to date on these developments and that many of his colleagues are still unprepared to inform clients of the threats of crypto investing.

“They don’t get it and are avoiding the discussion,” he says. “Neither have dealership compliance departments invested in understanding it.”

The first step in assisting clients in understanding crypto is for consultants to educate themselves. The rest is up to a combination of rational thinking and technical expertise.

Mr. Zagari believes that consultants should encourage investors to understand what they’re buying rather than viewing crypto as an entirely speculative investment.

“Look for a strong use case.” “What is it attempting to solve?” He continues.

Putting money into better investments

Mr. Boscovic recommends that buyers purchase capital with a strong share value, referring buyers to well-established tokens with high liquidity.

Bitcoin and Ethereum are the two go-to investments, according to Mr. Zagari. He typically puts great emphasis to restrict significant crypto reserves to no more than 5% of their portfolio.

Many people tend to invest in a cryptocurrency ETF from businesses like Purpose Investments or Evolve Funds Group Inc. rather than ensuring the safety of those investments in their own wallets. These ETFs own cryptos and store them with the New York-based Gemini Trust Co. LLC, a trustee that keeps them in “cold storage,” which means the electronic passwords used to unlock the wallet are not accessible via the web.

Mr. Zagari would also advise people to spend a greater portion of their funds – up to 10% – on assets that expose them to the crypto market indirectly. These are usually crypto service providers.

Mr. Zagari observes that the appeal of crypto is similar to that of various other emerging technologies. It has the potential for significant returns.

“That means you don’t have to have a lot of money to make a lot of money,” he explains.

Nevertheless, it is the responsibility of consultants to clarify the potential risks, based on a thorough understanding of the fundamental economic trends and innovation. And after that, they must apply that information to the customer’s specific situations in order to incorporate crypto investment opportunities into a wider asset allocation.


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