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How to Spot Cryptocurrency Scams Using Basic Business Sense

With recent news surrounding the Ponzi scheme known as BitConnect collapsing virtually overnight, many cryptocurrency investors are nervous about uncertainty in the markets. However, an equally large number of cryptocurrency investors and users were quick to point out that BitConnect smelled like a scam from the day it opened to the public.

As cryptocurrency continues to gain traction on a global scale, more and more “investment opportunities” are appearing. BitConnect certainly wasn’t the first cryptocurrency-related scam or flop, but it is renewing discussion about what to watch out for when dealing with these markets.

Let’s take a look at some common-sense business principles and explain how they can be used to spot cryptocurrency scams before you make any investment.

Consider the Age

While an increasing amount of regulation over cryptocurrency has appeared in recent years both in the US and abroad, the broader world of cryptocurrency still remains heavily unregulated. Because of this, a plethora of shady exchanges and crypto “institutions” have appeared over the years – only to later fold, collapse or run off with individuals’ deposits.

The age of an exchange or crypto-affiliated business matters immensely. While a certain amount of trust is always required (consider the case of MtGox, once the sole Bitcoin exchange, which collapsed after the owner bled the company’s assets slowly), a popular, established institution is far more likely to remain in existence than one that has appeared in recent weeks or months.

Institutions such as Brandeis University offer financial tech classes that cover many common signs of online financial scams, with cryptocurrency scams being featured among others. One of the biggest red flags in most online financial scams is the age of the company, so always invest wisely.

Consider the Scheme

Most cryptocurrency services in existence operate under one of two models: they either serve as nominal exchanges for trading or accept payment for services and products in one or more currencies.

Where likely scams tend to propagate is in a third category, which often involves excessive trust or convoluted math. Again, consider the recent BitConnect scheme: while fancy language was used to reassure clients, it essentially amounted to a Ponzi scheme. BitConnect requires its users to purchase their proprietary cryptocurrency with Bitcoins and then promised a set percentage ROI for each six-month period following their investment. When regulators cracked down, the gravy train stopped – and BitConnect’s price collapsed.

It doesn’t take a masters in project management or economics to figure out that something fishy was going on there. If it doesn’t make sense in the world of business, then it doesn’t make sense in the world of crypto.

Consider the Market

The sheer amount of volatility in cryptocurrency makes it an inherently risky bet. That doesn’t mean that money cannot be made by trading cryptocurrencies – but it does mean (in conjunction with the lax rules that would normally concern insider trading) that a lot of speculation and hype may be flowing.

Ultimately, three factors can offer insights into whether a cryptocurrency investment is legitimate or a scam. By considering the age of the institution or proposition, the market conditions and the actual structure of the investment itself, you’ll be able to spot enough red flags (or not) to determine its overall legitimacy.

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