How to detect and avoid frauds: when bitcoin “investors” hit up your DMs

It’s important to emphasize that investment in cryptocurrency involves significant risks and it is possible that you may lose a substantial proportion or all of your investment in cryptocurrency. Before you invest, we suggest you read more about the risks here.

Since bitcoin started trading ten years ago, its value has risen from being nearly worthless to over $170,000 pesos per coin (at the time of writing). Soon other cryptocurrencies began appearing on the scene, creating a multi-billion dollar market and huge opportunities for individuals to make money from trading. Unfortunately, given the complexity of cryptocurrencies, it also set a basis for scams to take place.

Frauds are not new nor exclusive to cryptocurrencies. Since time immemorial, people have tried to take advantage of another’s lack of understanding, tricking them into buying into something that isn’t real. Scams happen at all levels and recently, we saw some very complex and large-scale frauds like Bernie Madoff and even from large corporations like Enron.

At Bitso, we want to foster a safe environment for our users to learn about and use cryptocurrencies. We have seen many scams with cryptocurrencies around the world. Some even try to use our Bitso wallet to receive funds. Obviously WITHOUT our approval, and we continually fight against this. It goes against everything that cryptocurrency values: financial equality and transparency. Scams oppress people and their decision making power. Cryptocurrencies are here to provide you with an alternative and empower you. This blog is here to educate you so you can avoid being a victim of scams.

If it’s “too good to be true,” It probably is

Investing is hard and risky, even for professionals. There is no way to ensure that anyone will make profits, let alone high profits. Most professional investment firms struggle to deliver 10% annual gains above the market, and some even lose money. If someone promises gains larger than that — don’t trust them. Be careful and take the time to understand the business model and how the company operates.

It is possible to make big gains, but it always comes with higher risks. Be cautious and do your research.

Avoid Pyramid Schemes

You should be extra careful if the person or company in which you plan to invest promotes and rewards inviting or signing up other people to join. This is how Ponzi Schemes work. They often deliver fake profits to existing members by taking money from recent investors. The business model works until people stop joining and the pyramid scheme collapses. A successful investment must generate profits by delivering a product or service, not by taking money from their associates.

Do Your Own Research

Don’t believe everything you see, especially on social media. Before investing in something, do your research. Take your time to learn about the company and the product or service they are offering. One way to quickly check if a company is a scam is to search for the company name combined with the words Reviews or Scam.

Some quick research can show you if the company has a website, white paper, board of directors and a viable product or service. Once you’ve done some research, you can form an educated opinion on whether the product or service offers value and if this is something you’d like to put your money behind. Don’t just trust the website either, but do a quick search on the name of the board members or a reverse image search on their pictures.

Something else to watch out for on social media platforms is pump and dump schemes.

Sometimes on platforms like Telegram, desperate traders try to coordinate massive buys and sells of a specific crypto asset. If successful, this can help them make a quick return on a failing asset. They use emotional triggers like “fear of missing out” to increase the price by tricking naive investors into buying quickly. A fast influx of cash creates liquidity on the market and lets traders “cash-out” at higher prices–leaving you with losses.

Understand the Risks

Every investment comes with a level of risk–understand the risks in advance, not after you’ve made the investment.

Questions to help you measure risk:

1. What are the conditions that will cause the investment to fail?
2. How likely are those conditions to happen?
3. How can you withdraw your investment?
4. Does the withdrawal involve any penalizations?
5. Are the expected returns worth the risk?
6. Can I afford to lose my investment?
7. Can I find some other less-risky investments that offer similar returns?

Don’t Get Pressured

If you feel like someone is placing pressure on you to invest immediately, it’s a sign of fraud. It is safer to let the opportunity go than to rush into deciding. Legitimate businesses need time to plan and execute–investing does not need to be rushed.

Use Regulated Exchanges and Financial Services

Bitso is a cryptocurrency platform established and regulated in Gibraltar. By law, it follows robust regulatory requirements focused on protecting our users. In addition, it follows international compliance initiatives for cryptocurrency exchanges.

This is not the case for all exchanges. There are some exchanges and other financial platforms established in countries with weaker laws and enforcement. This increases risks for users. Don’t create an account on a financial platform only because it offers lots of leverage, no-fees or other goodies– your money could be at risk.

Don’t Invest What You Can’t Lose

The golden rule for all investments: never invest more than you can afford to lose. This is more of a general investing rule, but no less true for crypto investments.

As bitcoin is considered by traditional economists as a high-risk investment it isn’t prudent if you invest money you need for daily expenses. No one expects to lose money, but investments can sometimes go sideways, so it’s best to be prepared.

Take care of your needs and only invest with your disposable income.

If you think we missed an important point on how to avoid being a victim of scams, please comment below. If you have been a victim of a scam and would like to share your story with us and the Bitso community, we’d love to hear it. We believe these stories help to alert potential victims and educate them. Together we can create a better and safer financial world.

Special thanks to Bitso user Luis Andrés Hernández González for your valuable contribution to this post.