Cryptocurrency is one of the hottest topics in today’s business sector. The first and most well-known cryptocurrency was Bitcoin. Launched in 2009, Bitcoin went from something only computer geeks and hackers talked about to a global phenomenon that’s transformed how the entire world views money.
As of November 2017, a single Bitcoin was worth more than $10,000, with the currency’s total market capitalization at roughly $158 billion. Bitcoin’s explosive success spawned a legion of other coins, known as “altcoins,” such as Ethereum, Litecoin, and Ripple, and the global market value for all cryptocurrency is currently more than $300 billion.
With such huge amounts of money transitioning into the world of cryptocurrency, it’s no wonder entrepreneurs are flocking to it, whether they’re using it to conduct business transactions, raise funds for their startup, or as an investment vehicle. However, because it’s largely unregulated, involves extremely complex technology, and offers significant anonymity, the cryptocurrency market has also become a haven for cyber criminals.
The brief history of cryptocurrency is littered with stories of people losing major money through hacking, along with a variety of other traps and scams. As with any new technology, the key to safety when dealing with cryptocurrency is education. While business owners should do their own research before dipping their toes into the “crypto” waters, here are four of the most common scams to look out for and how to know whether investing in or using cryptocurrency is right for you and your business.
1. Shady Exchanges
A cryptocurrency exchange is an online platform for trading one cryptocurrency for another or for fiat currency, like the U.S. dollar. These platforms are where you buy in and cash out your cryptocurrency, so they’re essential to the crypto market. Exchanges typically charge a fee for each transaction and are based on current market rates or rates set by sellers/brokers.
Bitcoin’s popularity has caused the number of exchanges to explode, but not all exchanges are trustworthy. In the past, popular exchanges have disappeared overnight and taken all of the digital currency with them, while others offer horrible customer service, and/or make getting your money out extremely difficult.
Your best bet is to stick with the largest, most popular exchanges like Coinbase, Kraken, and Bittrex. That said, legitimate smaller exchanges are out there and can be used safely, provided you’ve done your research. Indeed, there are numerous websites that rank and review exchanges for quality, security, and customer service. If the reviews are largely negative, note that it’s difficult to cash out your altcoins, or mention the customer service is exceptionally poor and/or slow, steer clear.
2. Picking Your Wallet
In order to store cryptocurrency, you’ll want a digital wallet, as that’s the safest way to hold your cryptocurrency. Exchanges are for buying and selling, but not the safest for storing.
Your cryptocurrency wallet doesn’t actually “store” money like a traditional wallet; rather, it stores passcodes, known as keys, that allow you to send and receive digital currency to and from the wallet. There are many different wallets available, but not all of them are totally secure.
Wallets come in two forms: hot and cold. A “hot” wallet stores your cryptocurrency in a location that’s connected to the internet—exchange-based wallets, desktop wallets, and mobile wallets. Because they’re connected to the internet, hot wallets are the most convenient, but that also makes them vulnerable to hacking. A “cold” wallet, conversely, stores your cryptocurrency in a location that’s completely offline. Ironically, the most secure type of wallet for storing digital currency is a cold “paper” wallet.
Paper wallets involve printing out your keys and storing them in a secure location. While paper wallets are the most secure option, if you lose the codes, it’s the same as losing paper currency—the money is completely gone. And there is no way to recover your investment. Paper wallets are also inconvenient—you have to send your money back to an exchange to use it—which can be a pain if you’re using cryptocurrency on a daily basis.
If you primarily use cryptocurrency as a long-term investment, you should store all of your crypto in a paper wallet. If you’re receiving, spending, or trading frequently, however, you should use both a hot/online and paper/offline wallet. Like real-world wallets, store the money you need for the day in your hot/online wallet, but keep the majority of your funds in a paper/offline wallet for safekeeping.
In all cases, whether you have crypto in a hot wallet, paper wallet, or directly in an exchange, make sure you’ve given the details of where it’s stored and how to access it to the people who need to know in case you’re incapacitated or when you die. Otherwise, it’s completely lost. If the people you love don’t know how to find and access it, it’s the same as it not existing at all. Your cryptocurrency holdings, if any, should be included in your estate plan.
In addition to safety, cryptocurrency raises a whole sea of other complexities for business owners to navigate in terms of finances, taxes, and legal issues.
3. Pyramid/Ponzi Schemes That Will Trade For You
Because dealing with cryptocurrency can be a complex affair, online scammers have developed complicated cons similar to traditional pyramid and ponzi schemes. People have lost a lot of money in such scams, and unless you’re well-versed in the technology, they can be difficult to spot.
One giant red flag to watch for is giving your money to others who invest/trade for you, or if you only get paid when you recruit new members.
Also avoid buying upfront “packages” (The Gold Package) promising varying returns. And if you see the words “This isn’t a pyramid scheme” in the marketing materials, you may want to look a little more closely!
Unless you get to hold the keys to your private wallet containing your crypto directly or trade via a reputable exchange, like Coinbase, you very well could be dealing with a scammer. And while plenty of people will make money in cryptocurrency pyramid/ponzi schemes, many will lose. That could include you, or people you care about, if you get involved in crypto this way.
4. Fake ICOs (Initial Coin Offerings)
While new cryptocurrency can be created without any public investment or offering, many use an Initial Coin Offering (ICO) to fund their startup initiative. ICOs are basically IPOs (Initial Public Offerings) for cryptocurrency and a highly effective way to crowdfund vast sums of money extremely quickly. In fact, recent ICOs have raised millions of dollars in mere minutes.
This speed comes from the fact that ICOs are barely regulated—a good thing if you’re looking to raise money quickly and avoid the rigorous and time-consuming regulations involved with traditional capital raising. But it can bad, too, as the lack of regulation is a big neon welcome sign to scammers.
The lack of legal oversight has resulted in numerous fake ICOs being created by crypto con men, who go to great lengths to convince potential investors of their fake coin’s legitimacy. If you’re just getting started with cryptocurrency, it’s probably best to avoid ICOs until you really understand what you are investing in. In fact, that’s a good rule of thumb with any crypto investment, if you don’t understand the technology beneath it, start by learning that—and understand “what this crypto actually does”—before you invest.
Of course, not all ICOs are fake, and if you’re tech-savvy, they can be quite lucrative. In fact, many tout ICOs as the future of venture capitalism and fundraising.
But no venture capitalist would ever fund a startup without proper vetting, and the same applies to cryptocurrency. Check the background of the people directly involved with the project and those serving as advisors. Use Google and social media like LinkedIn to verify these are real people with stellar reputations, and their advertised skills and knowledge match those found on online resumes and CVs. Like other business investments you make, be sure you understand what the cryptocurrency proposes to do and that you believe the team behind it can accomplish that goal.
And as with any type of investment, beware of deals that promise unrealistically high returns and/or just sound way too good to be true—that’s a good sign they are.
If you’re serious about making cryptocurrency a part of your business, take the next step in your education by contacting a trusted advisor.
In a future article, we’ll cover various ways to use cryptocurrency to fund and grow various aspects of your business. Look for that soon.
This article is a service of Law Office of Benjamin Diederich, centrally located in Southwest Riverside County, in the city of Menifee, and serving the surrounding cities of Murrieta, Temecula, Wildomar, Lake Elsinore, Riverside, Corona, and around the country. We offer a complete spectrum of legal services for businesses and can help you make the wisest choices on how to deal with your business throughout life and in the event of your death. We also offer a Business Protector Audit℠ for new or ongoing businesses, which includes a review of your legal, financial, insurance, tax, and intellectual property foundation to ensure your business operates in a sound manner. Call us today to schedule your Business Protector Audit and mention this article to get this $750 session at no charge.