In recent years, the cryptocurrency space has undoubtedly drawn considerable attention, with media reports generally focusing on the monetary aspect of digital assets, as opposed to its underlying blockchain technology. However, investors looking to make a quick buck have been targeted by hackers and scammers, either with the lure of a fraudulent digital currency or with a pyramid scheme disguised as a virtual currency.
Watchdog Watching Out for Retail Investors
On May 18, 2018, China’s financial cyber-theft division, the National Internet Financial Risk Analysis Technology Platform (IFCERT), released an official document to educate investors and enthusiasts about the rampant scams in the space, alongside obvious fraud giveaways. As part of its function, the watchdog continuously monitors cryptocurrency platforms.
As per the document, the IFCERT’s findings indicated that a total of 421 cryptocurrencies displayed all characteristics of a pyramid scheme. The agency also claims that the majority of fraudulent cryptos have their servers in overseas jurisdictions, making it difficult to trace their exact location.
As part of its findings, the agency distinguished between popular fraudulent schemes.
First: Pyramid Scheme Cryptocurrencies
The IFCERT notes that the adoption of a pyramid-based, multi-level marketing (MLM) model marks the main feature of this type of platform, which relies on a false promise of investing in a digital currency to ensure high returns at a later date.
Most of these platforms attract investors by offering “high rebates” and commissions to members who persuade others to invest in the platform.
As shown below, the top tier, in terms of hierarchy, is highly rewarded, in addition to offering investors both a “dynamic [more rewarded with more investment amount]” and “static [returned on a fixed basis]” income.
A pyramid development membership platform.
Second: Fraudulent “Coin Splits”
For this type of cryptocurrency scam, the underlying technology has been observed by IFCERT to have no “real code,” in addition to an inability to run a blockchain. Hence, promoters of this type of platform promise returns on the pretext of a “hard fork” to pump the coin’s price, which can “only rise without falling.”
Third: Institution-Controlled OTC Digital Currencies
The cryptocurrencies issued by these platforms are inherently fake, and not tradable on crypto-exchanges, leaving only Over-The-Counter (OTC) trading as the option. However, IFCERT notes that these particular coins are controlled by institutions or wealthy investors, who “pump” the price by rapidly purchasing huge amounts, causing an illusion of real percentage gains. However, investors later find out that they can’t withdraw their money easily, or conduct transactions with the coins they receive. IFCERT notes:
“The fake virtual currency issued by this platform can only be traded on its website. The trading system is rough and its security is extremely poor.”
In conclusion, BTCManager reminds its readers to carefully consider all aspects of a cryptocurrency before investing any money. In particular, reviewing the platform, searching online for information on credible websites, and not investing more than what you can afford to lose.