We’ll start with the bad news: cryptocurrency scams have successfully scammed people out of millions of Rand and billions of Dollars. However, if you know what to look for and are careful, it should be easy to spot the red flags that signify a potential scam.
In this article you’ll learn how to identify potential scams as well as learn about some examples of scams that played a part in scamming individuals out of billions of Rand. By the end of this article you’ll be armed with simple tips that will help keep you safe when interacting with people in the cryptocurrency world.
Fear and greed
Fear and greed are the two core emotions that drive most decision-making when it comes to trading and investing.
The hype around bitcoin, especially in South Africa, has given people the impression that cryptocurrency can lead to quick and large gains: greed is unlocked.
Scammers are aware of this and take advantage of this by using various techniques and approaches to give potential investors false hopes of these types of returns.
Identifying potential scams
It is easier than one may think to identify a scam. A simple rule of thumb, if it is too good to be true then it probably is most of the time.
An example would be a cryptocurrency trading platform that guarantees a crazy return on investment monthly. Although the volatility in cryptocurrency prices allows for the opportunity to achieve this, it’s very seldom achieved and can never be guaranteed.
Other things to look out for are pyramid schemes or multi-level marketing schemes. These usually offer incentives based on how many people you invite to the project, with additional bonuses if the people you introduced to a project also invite people. With most MLM schemes, it’s only the organisers of the scheme who make money. Everyone else is left paying expensive access fees with little return.
Phishing scams involve people posing as representatives for cryptocurrencies online and informing you to download software required to use bitcoin or other cryptocurrencies. Almost all of the time this software grants access for hackers to your wallets and funds. A simple thing to remember is that nobody represents bitcoin or other cryptocurrencies: they are all community based projects.
Some general advice to stay safe from phishing scams is to never click a link in an email to log-in to any platform. Always navigate directly to your service provider’s website and log-in, whether that’s a crypto exchange, your bank or the post office.
Bait and switch on services
Lastly, as global regulation is still trying to catch up to cryptocurrency, it has left a lot of opportunities for funds to potentially be stolen. A common way to do this is to accept cryptocurrency as a payment for services, without ever delivering the service. As cryptocurrency cannot be traced, once it is sent it is very hard to track it and retrieve it. This is not to say that everyone who accepts cryptocurrency for payment has bad intentions – some people really do want to accept cryptocurrency to make your life easier.
To stay safe in this case, make sure that you are transacting with a trusted individual or company. Once again, if ever in doubt, rather do not do it.
Instead of purchasing and exchanging cryptocurrency, there is another way for users to grow their cryptocurrency balances – mining.
However, mining is a resource intensive activity, as it requires a lot of electricity, money and technical understanding to run the mining “rigs”. For this reason, companies have been started which make access to mining easier for individuals by offering cloud mining services. This allows you to buy a percentage of a rig and the service provider maintains the machines and pays you a return.
While some of these cloud mining services may be legit, mining scams offer “lifetime contracts” that keep costs of equipment constant while promising great returns.
Guaranteed returns for a fixed cost cannot be achieved since the difficulty to mine cryptocurrencies increases through time. Therefore, the longer you use the service the less cryptocurrency your equipment will be able to mine unless you upgrade the equipment. This costs money as the upgraded equipment comes at a higher cost.
Mining scam example: Bitclub Network
An example of a cryptocurrency mining scam is Bitclub Network which launched in April 2014. It allowed users to buy percentages of mining equipment for a return.
However, the company did not have any mining equipment to start with as it had planned to buy the equipment after the capital from clients was invested. Bitclub falsified returns to their clients while they raised the necessary capital to purchase the amount of equipment they had sold to investors. They then continued to falsify the returns and increased them to 60% daily. No machines were bought during Bitclub Network’s operation. Members of Bitclub Network had also sold shares in violation of securities law. Still, no mining equipment was purchased. $722 million were stolen and never returned.
MLM scam example: OneCoin
Founded by Dr. Ruja Ignatova on the 16th of September 2014, OneCoin promised that it would be the “bitcoin killer” that would end up replacing bitcoin. Organizers sold expensive educational materials on cryptocurrencies, trading and asset management with the promise that members of the scheme would be able to make significant returns from OneCoin. Commissions were also offered to individuals who got other individuals to sign up.
This turned out to be a multilevel marketing scheme and stole approximately R4 billion. Further investigation had uncovered that there was no real blockchain or cryptocurrency behind the project. In October 2016, Dr Ruja Ignatova fled with all the money and has not been heard from since.
South Africa-specific crypto scams
Mirror Trading International
Mirror Trading International (MTI) is a South African based multilevel marketing scheme. Started in April 2019, Mirror Trading International promised people returns of 10% per month. This high and consistent return was made possible by an apparent artificial intelligence program or robot that they had created and were using for their trading. Furthermore, clients of the platform were awarded a 10% commission fee for recommending people to sign up to the platform.
It was recently uncovered that Mirror Trading International did not possess this robot that they claimed to have and that the returns that clients were getting was from deposits made from new users. The Financial Sector Conduct Authority (FSCA) uncovered that negligible trading took place at MTI and that 99% of the funds were never even invested. The scheme scammed approximately 60,000 South Africans at a total of R5 billion being invested in the scheme.
Founded by CEO, Willie Breedt, the company promised weekly returns on customer deposits through crypto mining and trading, and accepted deposits starting from $50.
When it was uncovered that this was a ponzi scheme, the CEO fled to Mozambique in December 2019, declaring bankruptcy in January 2020. Approximately R227 million was stolen and this is still an ongoing investigation at the time of writing. The South African Reserve Bank has also hired PricewaterhouseCoopers (PwC) to investigate the company.
Operating in the rural lands of KwaZulu-Natal, Bitcoin Wallet promises investors a 100% return on investment every 15 business days through the buying and selling of cryptocurrency.
It is estimated that this scheme draws in R2 million daily. It has grown in popularity so much that there are large queues outside of their offices. Due to the increase in popularity, the minimum deposit has increased from R100 to R5 000.
While this is still an ongoing situation, it’s a good example of an organisations offering impossible returns and preying on peoples’ vulnerability, lack of financial literacy and greed.
Be careful, stay safe
As global regulation slowly catches up to cryptocurrency, scams will unfortunately be inevitable as scammers exploit the fear and greed that governs investment decisions.
However, if you look out for some of the simple red flags detailed in this article, you should be able to avoid cryptocurrency scams. Remember, if it seems too good to be true, it probably is.