There's no denying that the digital currency market is still in its infancy.
Bitcoin has only been around for nine years, and the vast majority of digital tokens didn't even show up until 2015.
With that said, a baby market like the digital currency one often lacks the regulation that comes with larger markets. And for many investors, this lack of regulation means trouble.
Over the course of 2017, it became increasingly apparent that scamsters were more than happy to take advantage of investors who were desperate for easy profits.
Heck, some of the digital currency market's biggest scams also generated a lot of profits before leaving investors with empty wallets.
At Token Authority, we're well aware of the dangers that can crop up in this unregulated space. These dangers are one of the reasons that we're excited to see the Securities and Exchange Commission (SEC) stepping in to provide regulation for initial coin offerings (ICOs) in 2018.
And even though regulation is coming, it's coming slowly. So, in the meantime, here are a few red flags that investors should be on the lookout for...
Although they have the potential to generate incredible gains, ICOs also come with a lot of risks.
An ICO, in the most basic sense, is simply a new form of unregulated capitalism. In lieu of traditional venture capitalism or an initial public offering (IPO), companies decide to launch a digital token. Investors can then purchase this digital token with Bitcoin and Ethereum — funding the project and receiving a token in return. Sometimes, these tokens have utility. But more often than not, they're considered securities.
If you're curious about how to tell the difference between a security and utility token, you can check out our security and utility token here.
Many of the companies that launch an ICO don’t have a functioning product. And some don’t even have a target market. Because of this, it’s hard for investors to gauge whether or not the company has long-term potential.
In the venture capitalist world, these companies are regulated. You either have to be an accredited investor to participate or the company has to jump through more hoops to prove that it's not a scam.
But in the digital currency space, a lot of companies have taken advantage of the lack of regulation to launch products with no long-term value. Investors simply flock to these projects because they sound promising.
In order to make sure that you don’t get pulled into a rotten ICO, you should ask the following questions before investing:
By asking these questions, investors can stay protected against dangerous ICOs...
Digital currencies aren't immune to traditional investing schemes, including Ponzi schemes.
A Ponzi scheme is when a group of individuals, or one individual, convinces other people to give money to a fake investment.
A successful Ponzi scheme usually entails a good sales pitch, a shiny website, and the promise of extreme returns in a very short amount of time. Most Ponzi schemes don't emphasize the value of the technology for the long term.
Often, Ponzi schemes fall apart when one of the following happens:
This has already happened in the digital currency space through a token called Bitconnect. Bitconnect, a digital currency and blockchain company that was based in Houston, Texas, was lambasted with criticism during its short time on the market. People from all over the crypto world spoke out against it, calling it a crypto scam and a Ponzi scheme.
Bitconnect's platform promised investors outrageous returns for loaning their cryptos to the platform. For instance, a $10,000 investment could generate a 40% return within a matter of months.
But it wasn't long before the scheme fell apart. Bitconnect shut down its website among accusations and inquiries from government entities. The token associated with the Bitconnect platform lost over 80% of its value within a matter of hours, plummeting from over $300 to $3.
To stay safe from digital currency Ponzi schemes, you have to look at the traditional signs: the promise of outrageous returns, lack of transparent leadership, and the refusal to work with government inquiries...
And then there are the pump-and-dump schemes: one of the most common schemes in the investment world and certainly one of the most common in the world of digital currency.
Pump and dumps happen in a lot of ways in the digital currency landscape...
Some pump-and-dump schemes are so organized that they have their own mobile applications — like Russia-organized application Telegram. And then there are communities that are single-handedly dedicated to pump-and-dump schemes, like PumpKings.
And then there are the big players who hype coins. This happened to more than a few of the big digital currencies in their early days.
Pump and dumps are easy to commit in the digital currency space because the space is largely unregulated, prone to media manipulation, and can be accessed from almost anywhere in the world.
When investors fall victim to a pump and dump, meaning that when they buy at the top, they're usually investing in the hype and not a valuable project. To avoid this situation, investors need to do the groundwork and investigate tokens. They need to be sure that there's a long-term business plan, a valid technology, and a market need for the token.
Don't just hop aboard the next heavily hyped token and expect to ride the profit train.
And there you have it. Those are just a few of the red flags for investors to keep an eye out for in the digital currency space. If you're interested in learning more about the digital currency world, make sure to sign up for our free Token Authority e-letter.
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