Mind the red flags, trader! Read the signs of alleged crypto scam

Highlights the common characteristics of fraudulent crypto exchanges - discussed by me, Viktor Kochetov, CEO at Kyrrex, a digital wallet and professional cryptocurrency trading platform.

Crypto domain has a lot going on. Bitcoin’s price jumps wildly. Picture this: $19,783 in December 2017 and $3,122 in December 2018. In June 2019 bitcoin’s price oscillated around $14,000 for the first time in 17 months. The new crypto exchanges emerge, some of them, even the most significant ones, die off — for instance, the second largest Polish crypto exchange Bitmarket ceased its operations, and liquidity is to blame. Cryptocurrencies come and go. There seems to be one trend that is persistent simply because people are people and most of them chase the quick buck. It’s scams I am talking about.

The security issue prevents cryptoworld from being a welcoming place. The ratio of scam is enormous, FCA says it has actually tripled since 2018 in the UK only. On a global scale, fraud, scam and thefts cost $1.2 billion for the crypto community in Q1 2019 (VentureBeat).

Jacob Burrell Campos was imprisoned for 2 years for selling unlicensed bitcoins (The Verge) — money laundering as it is. The EU Central Bank expressed its attitude towards crypto by not seeing bitcoin as a currency at all, which is why the entity refused to add it to reserves (Cointelegraph). Quite revealing.

The audience is divided into two camps: those who consider cryptocurrency a "fun digital commodity" (probably more fun than it is) and those who think it’s nothing but a bubble.

The dwellers of the first dream big, realize the opportunities of crypto and religiously pour money into it. Non-believers remain cautious with regard to the turbulent market. Indeed, the price fluctuations do not instil a sense of stability.

Critical thinking, analysis and expertise on classical financial markets, let us stay somewhere in the middle — things are not that black and white, the hype is gone. Scam can be detected via certain traits and schemes. In the crypto exchange environment there are red flags you should be aware of; otherwise your funds will be frozen, lost and hacked.

Early clues in the platform architecture

Before you start interacting with any website, you should get acquainted with public information and reviews about the company on forums and social networks. First of all, it is necessary to search for contact and legal information on the exchange’s website that the licensed company is obliged to post to the public, such as the legal address of the company, contact details, Terms of business, Privacy Notice, Cookie Policy, licenses and legal documents on the basis of which the exchange operates.

The commitment to KYC and AML is vital. A legal exchange must use procedures for checking and storing personal data of its clients with a licensed organization. Otherwise, the exchange has no legal basis for conducting its activities. Pay attention to the presence or absence of multi-factor client authentication — 2FA system is the most common one. Company sites should use the secure HTTPS data transfer protocol. The protocol can be seen in the browser line, where the link to the site is displayed.

Huge buy and sell buttons could be an indication of the hidden push to active trading. There is often conflict of interest. It's better for a trader to take fewer trades, and some exchanges are willing to increase the number of trades to earn more fees. But, it rather points to bad faith of a platform rather than a scam.

Matching the order book and Time&Sales or chart can also provide some signs. The appearance of dramatic spikes on the chart, and the absence of such price fluctuations on all other exchanges, indicates that this platform is playing against its customers.

The nature of margin trading implies an increased risk level due to the use of leverage. This dangerous situation is added to by the huge cryptocurrencies volatility (large price spikes) and we get the perfect instrument for traders to lose all their money, sometimes even through one trade.

Deceitful Guarantees and Promises

Professional traders use both sides of their brain, because trading is an intuitive business. Gut feelings about the market are based on vast experience and knowledge. When the crypto exchange sounds too good to be true it is probably one you should run away from. This type of platform usually guarantees quick money, high earnings with minimum risk investments — the guarantee that cannot be practically fulfilled. If we go to investment basics, high returns imply high risk. Otherwise, investing would be a no-brainer for everybody.

Many crypto exchanges produce fake stories and fabulous business plans that have nothing in common with reality. We know cases where scammers inflated their projections and displayed creativity at its best. The acts of unprecedented generosity should also make things awkward for a trader: holiday crypto giveaways, 5,000 bitcoins for a Christmas present, or anything like this, is nothing but a scam. I mean, come on.

Presence in social media

Credible businesses invest much effort in social media presence for winning attention, interest, building trustful relationships with the audience. The way it is done, and the quality of the posts, tell a lot about the business and its intentions. Focus around market cap, message with emphasis on trade volumes, profit margins belong to manipulative levers pulled to give the appearance of market dynamics.

Consistency matters a lot: social media presence is about regularity, months-long pauses are a bad omen. Ultimately, mind the language a company speaks to you. Instead of friendly, plain and straightforward communication, scammers throw at you dry terminology and unreadable complex expressions just to look intellectual. Legit exchanges have no need for embellishment.

Mystery in lieu of transparency

Crypto exchanges working within the framework of the law use every opportunity to tell you: “Look, we are nice guys, we have nothing to hide, we comply with all existing standards, statutes, here is our documentation, here are the people behind this project”. The bad guys are in bad terms with self-reported data, accountability and transparency, and those gaps raise many questions. The absence of comprehensive, exhaustive information on a crypto exchange is a reason for being alert.

Any successful project has a number of bright minds behind itself. These talented people are something to be proud of. “About Us” is the first section I go to in order to see the faces of the team and learn about their background, expertise, skills, past projects. When this information is a mystery wrapped in enigma, it means a platform has motives for those people to keep their identities in secrecy. There is no place for charming mystery when we're talking about investments and business authority.

The worst possible scenario is being late and finding out about a scam after already engaging with it. In this case, a trader should immediately close all positions and withdraw all assets as soon as possible. Ideally, the crypto world should be approached soberly, prudently, with a level head. You do not normally entrust your money to strangers, you need to get to know them beforehand. In the context of crypto exchanges, a trader should do research on an entity, assess it from various perspectives — devil is in the details. Working with a registered crypto exchange which is licensed and regulated by jurisdiction, can give peace of mind, because in these projects security is embedded in the project and is of paramount value.