Why are cryptocurrencies popular?
As detailed in a 2017 Forbes article, “... the driving force behind the adoption of Bitcoin and other cryptocurrencies is, simply, money.” The potential for earning money from digital cryptocurrency investments makes the tech a perfect fit for the average investor.
When you have a plan in place for investing in cryptocurrency, you can establish a better “return on investment,” or ROI, than you would with traditional stocks or bonds. For instance, imagine an investor with $10,000 to invest. After a 20% return, he could expect to be worth $20,000 a year from now. The downside? That investor would be gambling that a cryptocurrency such as Bitcoin will keep increasing in value, and he might lose his initial investment if the currency suddenly crashes.
How do you spot a scam when investing in bitcoin?
Although bitcoin has grown in popularity over the years, many cryptocurrency startups are fraudulent, one reason is because of their prices. Even with the current value of cryptocurrencies ranging between around $9,000 to over $10,000, it’s still risky for people to invest in such a volatile investment. But it's even worse when you compare the digital currency market with gold, for example.
"When it comes to the risk of losing money with bitcoin, the ratio with gold is not even close," says Alex Konrad, founder of a newsletter dedicated to cryptocurrencies like bitcoin and ethereum. "The very high volatility of bitcoin versus the long-term stability of gold show that the risk for an investor of bitcoin is much higher.
What are the warning signs of a scam?
Since bitcoin isn’t widely known or understood by the public yet, scammers will often claim they’re offering something else: Bitcoin investments or start-up investments. They’ll also claim they’re offering investments in a new cryptocurrency.
Bitcoin exchanges are risky
There’s a reason you can’t just walk into a bank and buy Bitcoin. Bitcoin is still very new, and as a result there's a large amount of hype about the currency. This means that, to some degree, there are more bad actors on the exchanges than good. That means that cryptocurrency exchanges are often scammed.
Coinbase, a popular cryptocurrency exchange, announced a hack on February 25, 2018, which resulted in thousands of dollars’ worth of crypto being stolen from users.
“If you can't get your money out of an ICO, then it probably isn’t an ICO,” said Ndoro. “It's just some guy who’s running an ICO and promising you a company. You need to be in it for the long haul.”
One way to tell if a new ICO is legitimate is to look at the project’s team. The platform itself is also one way to evaluate the legitimacy of the project. Before giving your money to an ICO, check out if the team is comprised of the right experts and real people with relevant connections to the industry.
The general consensus is that ICOs are very risky and in many ways, they should only be approached with great caution. If an ICO sounds too good to be true, it probably is. If you are intrigued by an ICO, read all of the terms carefully and proceed with caution.