Cryptocurrency

2009 marked the first time the global market heard about Cryptocurrency currency. During that year, Bitcoin came into the market. It was not the first time that people had thought of it, for sure. After all, wireless transfers and online businesses had been running for years before an anonymous source invented and released the Bitcoin. Since then, the digital currency industry has developed. Bitcoin is no longer the only digital currency in town. Now, there are hundreds of different currencies anyone can use for virtual transactions. Bitcoin comes first, then there are endorsed smart money brands like Ethereum and Dash.

An Overview on Cryptocurrency

How much do you know about cryptocurrency? The ‘crypto’ in cryptocurrency comes from the fact that digital money uses cryptography to keep it secure. Cryptography simply means using a series of letters and numbers to form a key that locks up whatever you want to be locked up. Currency is anything that you can use to buy information or other commodities. Combine crypto for encryption and currency for the ability to buy, and you have cryptocurrency. A virtual currency that operates using cryptography-generated keys.

If you would like to know more about the fundamentals of Cryptocurrency there is a great article by Demir Selmanovic. You can read it here.

Since its inception, Bitcoin has been the most recognizable cryptocurrency. As of 2017, the market capitalization of Bitcoin stands at $44 billion. Ethereum follows at a close second with $20.9 billion while Ripple comes in third. People love using bitcoins because one, they are an untraceable form of cash, at least where the government is concerned.  Secondly, because people find that mining bitcoins is an easy way to make cash.

If you’ve been paying attention over the years, you’ve probably noticed the latest craze surrounding bitcoins. Everywhere you look, there is always someone claiming that they can turn $300 into $5,000 within six to twelve months. Are these real down-to-earth founded claims, or are they digital currency scams? If you’re thinking of investing in bitcoins, you should be aware that whereas there are a lot of legit ways to make money from digital currencies. There are also many people out there running digital currency scams that look a lot like past pyramid schemes.

 Famous Pyramid Schemes

Many of us lose money to digital currency scams because we don’t even know what the schemes look like. Here are a few of the most well-known pyramid schemes for a little context.

Between 1919 and 1920, a man named Charles Ponzi approached his neighbors, friends, and acquaintances, and asked them to invest in an opportunity that would give them 50% returns in less than seven weeks. Numerous people handed him their money. He pretended to invest it, paying out dividends to the earlier investors from money he was actually getting from new investors. After months of shuffling money around, Ponzi made off with millions of his investors’ money.

In the 1990s, another man, this time by the name Jordan Belfort, hired brokers for his front Stratton Oakmont. The brokers told their numerous clients of great investment opportunities and promised them good returns. In a bid to make money, more and more people bought into the idea of buying stocks that were expected to rise. They did rise, but the unfortunate bit was that those that bought the issued stock didn’t get any benefits from the purchase. Belfort, on the other hand, made millions. He used the classic pump and dump to cheat people out of almost $65 billion.

Pyramid Schemes and Cryptocurrency Scams

When you first look at it, those two don’t look like they have anything in common. After all, pyramid schemes involve approaching others and getting them to invest their money- liquid, traditional cash- in a plan that would make few people rich and the rest broke. Bitcoins, on the other hand, involve virtual cash that you can’t use to invest. So where do the similarities come in?

You see, in the two examples above, a few things stand out about pyramid schemes. You could go as far as to say that they are characteristics of pyramid schemes. The first of these, following the mentioned examples, is that in pyramid schemes, there’s always the person that makes money and the ones that lose it. Usually, what happens is that the higher up you are in the pyramid (the earlier you invested), the more money you make. Digital currency scams operate the same way. When people invest in such scams, they’re not usually aware of it so they end up a few dollars short of where they start.

Example number two gives a more elaborate link between pyramid schemes and digital currency scams. The Belfort pyramid scheme was based on a type of market manipulation called the pump and dump. In this scenario, what happened is that Belfort, using the Oakmont front, bought up a large number of shares. He then hired brokers to tell investors that the shares were becoming more valuable, that is, to ‘pump’ the market. The more the excitement grew among investors, the higher the shares went for. Belfort waited for the prices to peak before selling people stock that tanked in weeks (‘dumping’ the stock). The pump and dump is one of the most common motif seen in digital currency scams.

Pump and Dump in Cyptocurrency Currency Scams

Sometimes, when people are new to the bitcoin world, they make it big. Typically, this is usually just luck. Pyramid-scheme style digital currency scams capitalize on people’s beliefs in such good fortune. Like in the original pyramid scheme, the digital currency scams begin when a person buys up a particular cryptocurrency. Then spreads the word, usually through forums, that the value of that digital currency is about to skyrocket. Suddenly you start hearing that if you buy that cryptocurrency, you’ll be making up to 1000 times as much money. The more excited bitcoin owners get, the higher the price for the cryptocurrency goes because investors determine how much a digital currency is worth. You rush to buy the cryptocurrency. The scam artist then sells all his coin at inflated rates right before the rates tank, and you lose your money. Exactly like a pyramid scheme.

Digital currency are all the rage right now, but many people don’t realize how risky just going for the latest ‘deal’ can be. So, the next time you hear about an I’ll-make-you-a-thousand-times-more money bitcoin deal, think about it. Do your research. It’s the only way you can avoid digital currency scams.

 

References:

http://money.howstuffworks.com/pyramid-scheme4.htm

http://www.investopedia.com/articles/04/042104.asp

https://www.coinpursuit.com/articles/digital-currency-fraud-101-the-pump-and-dump-scheme.145/

https://www.firmex.com/thedealroom/10-famous-investment-scams/

2 COMMENTS

  1. Very good read ! … every website is telling people to buy bitcoin like crazy. First time i have read someone give right truth advise and not just make profit advise. Bitcoin can not last being cryptic