A couple weeks back I received a rather interesting and eventful phone call. An older gentleman named Alex told me how disrespected and inconvenienced and insulted he was banking with TD Bank for sending wires to a cryptocurrency firm based out of London, England. The bank accused him of money laundering, possibly committing fraud, and maybe being scammed. He called me, working as a financial advisor at a credit union, because he wanted to hear my pitch and he was interested in our community approach to banking and investing and was prepared to move all his money to me (his Registered Income Fund, Tax Free Savings Account, and cash margin account). I'm pretty excited about the prospect and further excited to shoot the shit talking about bitcoin - which is typically my favourite topic to discuss these days. Before letting my excitement get ahead of me though, I needed to uncover his situation first. Was he being scammed? It's a fair question to ask because, let's be honest, with cryptocurrencies still in their infancy, there are a huge swath of scams and older people are typically the easiest targets.
I must give this man credit though, he did his homework, the company he was working with seemed legitimate, and he was excited to be making money with each jump in bitcoin volatility. He was disciplined, didn't risk more money than he could afford to lose and was patient - all important qualities in investing in general but certainly moreseo in an investment as volatile as bitcoin.
Bitcoin and other cryptocurrencies are difficult to grasp, the industry is in its infancy (and people are unsure in general which companies to trust and what characteristics to expect) and there is a lot of excitement and a ton of new, interest users and this creates the conditions for scams to run wild, several I have personally experienced. If it's too good to be true or it smells a little fishy, it's probably a little unsavoury.
Ponzi Schemes
Ponzi Schemes are named after Charles Ponzi, an Italian swindler and conman in the United States and Canada. His basic scheme was to promise investors 50% profit after 45 days or 100% after 90 days by buying postal stamps discounted in other countries and redeeming them at face value in the United States - seemingly a simple arbitrage opportunity. In reality, he used new investors money to pay out the older investors. This scheme ran for a year before collapsing, taking $20million in investor money with him (inflation adjusted to $250million today).
Bernie Maddoff unimpressed figured he could do one better by claiming that he had developed a split-strike options strategy (a long put and short call, called a collar) that allowed his consistent, great risk-adjusted returns. He kept this up for a while by generating fake trade reports and even occasionally adding the wrong trading date (like weekends) showing that he had been able to pick the best performing stocks, at the best times, and selling quite perfectly. And why wouldn't you believe him? He was smart, charismatic, and ran in the right crowds. He was a one-time non-executive chairman of the NASDAQ and his company was the sixth largest market market on the S&P500. His smarts and his prowess led him to leading a ponzi scheme worth a staggering $65 billion and lasting 17 years. Take that Charles!
They've been around a long time though and new investors must take notice, bitcoin has also seen their fare share.
The Bitcoin Savings and Trust - This was a ponzi scheme ran by Trendon Shavers in 2011 and claimed to offer "7% returns per week" by selling bitcoin to local close-knit buyers and buying them at the present market rate. It's elusive enough that it's almost believable, right? That's the key. It's possible and you want to roll the dices long enough that, even if it is a ponzi scheme, hopefully you can get in and out without losing your money. I'm sure there were a lot of people that thought.
Mr. Shaver's undoing was a product of his own success. After accumulating an ever amount of bitcoin, transactions became difficult and expensive. He decided to reduce the interest rate payout to reduce this strain and this resulted in a mass exodus and his company declared default on August 28, 2012. At one point he held 700,000 bitcoin and the US District Court for the Northern District of Texas requires Shavers to disgorge more than $40million in ill-gotten gains.
More recently, I used a website called Wow Doge which has conveniently been down since just prior to "Doge Day" On April 20th. The concept seemed simple - you load your Doge into this website and buy "miners" which are cute little doge puppies that mine cryptocurrency for you and the rates of returns were as much as 100% in a month. The skeptic in me was fairly confident this was a ponzi scheme. The optimist in me considered "I don't know much about cloud mining, is that what they are doing? maybe the rates of returns are that great" and also there was a little gambling rig on their website and I also thought "this gambling operation seems to have a good house advantage, maybe the profits from this are more than enough to subsidize the rates of returns they are providing".. also I did a test withdrawal and they let me withdraw my funds so I figured I was safe. This was all wishful thinking. While I did withdraw some before it was all over, this did turn out to be a scam - and it's being replicated elsewhere so please be careful! If it is too good to be true, it likely is.
Not Your Keys, Not your Coins.
It's happened a couple times throughout the history of this cryptocurrency movement so I will warn you - keeping your crypto on an exchange may not be the most prudent way to hold your crypto unless you plan on doing active trading. If you are going to HODL for months of years, move it into a private and STORE YOUR SEED PHRASE. I made this mistake as well - don't be like me!
The best example of the risks here is the classic story of Mt. Gox. Launched in July 2010, at one point they held as much as 70% of all bitcoin volume. Three years later and they suspended operations all withdrawals in US Dollars. In February 2014, the website went blank and they filed for bankruptcy protection with liabilities of 6.5 billion yen and assets of 3.84 billion yen. Apparently they had lost 750,000 of their customer's bitcoins.. equivalent to 7% of the entire supply! (bitcoin will top out at 21 million coins) How did this happen? it turns out that the exchange had suffered hacks. One of the founders was arrested for embezzlement and fraud in Japan though later found not guilty, only being found guilty in 2019 of falsifying bookkeeping data.
Another example - Robinhood. When you own bitcoin or litecoin or dogecoin on Robinhood, you physically don't own it. Instead, Robinhood owns all the crypto itself and gives you a representative ownership in their large wallet. This means you can't actually move your money onto another exchange or private wallet and instead would need to literally sell your bitcoin and re-puchase it on a different exchange if you wanted to physically own it in a private wallet. Robinhood has had a pretty unsavoury year when they stopped trading in Gamestop under the guise of "protecting naive investors" but really because Citadel (a large short seller of GME stock) pays over $100million to Robinhood for order flow Is this a company you want to trust holding your bitcoin?
Careful Work at Home Scams
I was also looking for a side hustle recently and was able to get some work through a company called "Yellow Star Investment Group" and their business model is essentially you deposit money with them and they provide you good investment advice, provide you access to 'top crypto traders' so you can mimic their strategies and so on. The work started off legitimate enough and I helped craft a marketing brochure. Next, they ask me to buy bitcoin at an ATM. Big Red Flag! Always avoid any work that asks you to move money around or purchase things for them right off the bat - that's not the face of a legimiate company.
I can think of a hundred other examples but by real takeaways are to be wary of people especially those claiming to help you, be wary of schemes when the returns sound too good to be true, NEVER share your seed phrase and ALWAYS write it down, and be careful about the exchanges you decide to use (and the funds you decide to keep there). Be like Alex and be patient, disciplined, and never risk more than you are willing to lose.
