It’s not hard to see why there have been so many cryptocurrency scams and why they’re so successful. It only needs a combination of folk who want to get rich in life but are, for some reason, too trusting and likely to fall for a scam, and thieves — and there’s no shortage of either.
Then, when we have a new development in which some people have genuinely made millions, like Bitcoin, the opportunities for the two groups of people to come together escalate. Add a charming leader, and a fraudulent scheme can seem irresistible.
Disappeared
The BBC is currently running a podcast series on what’s looking like the biggest cryptocurrency scam of all time. Titled The Missing Cryptoqueen, it tells the tale of the OneCoin fraud and its charismatic public face, Ruja Ignatova.
OneCoin is considered by law agencies as a Ponzi scheme, and by the time of its collapse in January 2017 it was estimated to have raked in around $4bn worldwide. The coins were only ever exchangeable at a single exchange, xcoinx, and with the expiry of that it became clear that it was all worthless.
A number of the scheme’s architects have been arrested, but the cryptoqueen herself has, as the BBC podcast title suggests, disappeared.
Big losses
There are multiple smaller rip-offs happening almost every day too. A recent report from CipherTrace puts the level of fraud at $4bn in 2019 alone. It’s mostly individual crimes that are much smaller than OneCoin, typically involving a few million to tens of millions of dollars. May’s theft of $40m from Binance, one of the world’s biggest cryptocurrency exchanges, was one of the more notable events. In that case, the exchange covered the losses, but smaller operators often can’t.
It’s easy to find recommendations for ways to avoid falling for cryptocurrency scams, but my favourite approach is the obvious one — don’t touch cryptocurrencies with a bargepole, not even the established ones like Bitcoin and Ethereum.
While major cryptocurrencies are not fraudulent, they do share one key feature with Ponzi schemes. For today’s holders of the coins to make a profit, there need to be new punters tomorrow to sell to for a higher price. And that highlights a key difference from investing in stocks and shares (or as I like to think of it, real investing).
Honest business
All that’s needed for shareholders to benefit is for a company to keep on making annual profits and paying dividends, and no ‘greater fool’ is required. Companies generate actual new, real, wealth, which is something that cryptocurrencies (and things like gold) never can.
Another concern is that cryptocurrencies rely on scarcity for their valuation — if anyone could mine coins quickly and easily, nobody would ever need to actually buy any. The supply is limited by the computer capacity available for mining, and by the energy costs of the activity. And, of course, computer power doesn’t just keep on increasing and getting cheaper year by year… oh, hang on.
I’ll leave you with one of my favourite investing facts — according to a study by Barclays, £100 invested in the UK stock market in 1945 would be worth £180,000 today, even after inflation