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How to avoid losing your money through Bitcoin scams


Image by Geranimo on Unsplash

 Introduction

There are currently around 1500 dollar millionaires that are created by Bitcoin on a daily basis. This is according to Bloomberg research. This indicates newly developed opportunities to create wealth within the crypto ecosystem. On the other end of the coin, more people lose their money in this crypto ecosystem because, with every opportunity, many threats present themselves. The ones that survive within this ecosystem are the ones that are able to exploit the opportunities whilst navigating through the threats. Thus, this article aims to equip the reader with the tools necessary to thrive within this space.

 

Crypto Scammers

The thing is that Bitcoin is part of a crypto ecosystem, and this ecosystem is filled with bad actors that look to prey upon the laziness and lack of information that consumers have, especially those looking to score a quick buck. One of the biggest predators in this ecosystem is Sam Bankman Fried (SBF), who took $8,9 billion dollars (R177,71 billion) of customer deposits. The news of such predation in the crypto space caused a frenzy within the market that had investors panic selling their digital assets. The price of Bitcoin fell to an 87% low from its peak in 2021 due to this crypto contagion, amongst other factors. Fortunately, Bitcoin is anti-fragile and has bounced back to all-time highs since the SBF debacle, with a 286% rise compared to the South African Rand since the 25th of  November, 2023.

 

How to protect yourself at all times within the crypto ecosystem

The simple answer would be to buy Bitcoin and self-custody it through a cold wallet. However, this is a complicated process that requires an individual to have longer-term thinking, but most people want an easy way to get rich quickly. This mindset towards "investing" is a breeding ground for scammers to prey upon the avarice and the sloth of such "investors". Thus, understanding how FTX (owned by SBF) stole customers' money can help build a framework to protect oneself from scammers.


FTX was the third largest cryptocurrency exchange, with $10 billion traded daily across its 1 million users. Customers on FTX would have wallets allowing them to buy and sell cryptocurrencies amongst other financial instruments on the exchange. FTX would send customer deposits to its sister company, Alameda Research (also founded by SBF). Then Alameda Research, which was run by SBF's girlfriend at the time, Caroline Ellison, would gamble away customer deposits on the market. To keep the charade going, FTX created money out of nothing in the form of an FTT token. It would sell the token to its customers for added benefits such as lower fees, staking, and supposed governance benefits for the FTX ecosystem. FTX would gift its sister company, Alameda Research, the FTT to make it look good by propping up the asset side on its balance sheet. Put differently, Alameda Research would use money from customers' wallets and store manipulated and artificial money from FTX to make everything look above board. The scam looked like a viable business model in 2021 when the FTT went from $5.82 to $77.69.

 

However, the House of Cards would start falling when the Federal Reserve Bank raised interest rates. Thus, the price of cryptocurrencies started falling as there was less money in the economy, also known as a credit crunch. Former CEO of Binance Changpeng Zhao (CZ) sent a tweet that would send the FTX empire down to its foundations when he said Binance is selling all of its FTT tokens. SBF was trying to show a brave face, but at this point, he was in trouble as FTX faced liquidity issues with customers demanding their deposits back, whilst, at the same time, FTT  had fallen to $2.28. Eventually, SBF swallowed his pride and went to his former friend CZ for help. A non-binding agreement was formed for Binance to save FTX by buying the crypto exchange. However, Binance scrapped this agreement after a due diligence report. This move took the remaining 1% in market share that FTX had and raised the market share Binance had by 1%, from 21.3% to 22.3%. Months later, CZ was charged with violating the Bank Secrecy Act by failing to implement an effective anti-money-laundering program and wilfully violating U.S. economic sanctions. This is evidence that if you purchase any other cryptocurrency outside of Bitcoin or if your money on an exchange, you will be posed with three types of risk mentioned below:

 

Counterparty risk

This is the risk associated with the threat that the party you are involved with breaks a promise they have made to you. In this context, the counterparty risk that materialised was the loss of customer funds when FTX became insolvent. Customers were under the impression that their wallets were safe in the exchange, only to discover that they were empty. This kind of risk is endemic to cryptocurrencies and exists in the entire financial ecosystem.


Third-Party risk

This vulnerability occurs when the quality of the relationship between two parties depends on a third element. If you were a customer within the cautionary tale above, then Alameda Research gambling away your deposits on the market would be your third-party risk. Or Binance abruptly pulling out of FTX would be another third-party risk factor. Despite being the largest cryptocurrency exchange, Binance is not immune to ambush. The security breach of 2019 is evidence that hackers stole over 7,000 bitcoins, worth around $40 million at the time ($485 million today). The hackers were able to compromise user API keys, 2FA codes, and other security measures. While Binance reimbursed affected users through its Secure Asset Fund for Users (SAFU), the incident underscored the vulnerabilities associated with centralised exchanges (Coindesk, 2019).


Altcoin risk

To put it simply, Bitcoin (BTC) is the best. The numbers speak for themselves, as it has the longest track record amongst other cryptocurrencies that come and go, it has one of the highest rates of return (166% over the past year), and it occupies the lion's share in the crypto market $1.4 trillion of the total $2.8 trillion. Having any other cryptocurrency outside of Bitcoin exposes oneself to altcoin risk. The three most noteworthy risk factors that may materialise from altcoin risk are:

·        Liquidity risk: This is the risk that when you try to sell the altcoin in your wallet, nobody wants to buy it from you.

·        Regulatory risk: This is the risk that the overseers of the altcoin fail to adhere to the law. An altcoin called Ripple (XRP) is a good example because the U.S Security Exchange Commission (SEC) has fined the organisation $1.95 billion for illegal sales made to institutional investors.

·        Market Manipulation: Artificially inflated prices and manipulated trading volumes in altcoin markets are recurring themes. This is done to maximise the return held by individuals who can control the altcoin, and this manipulation is often done at the customer's expense.


Conclusion

Risk cannot be eliminated; it can only be mitigated by good judgment. Buying Bitcoin and storing it in a cold wallet is the best judgement an investor can make within the crypto ecosystem. The storage of cryptocurrencies on an exchange presents challenges beyond the customer's control. Buying any other cryptocurrency outside of Bitcoin is to settle for less, far less.

 

 

 

 

 

 

 

 

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