R. Paul Wilson On: Crypto Scams (2/2)

R. Paul Wilson On: Crypto Scams (2/2)

The current craze surrounding cryptocurrency highlights how old con games continue to work on a new generation of suckers.

While there’s good reason to seek out potential profits on this new financial frontier, be aware that countless bad actors are repeating age-old methods to harvest naive investors and leave them holding all the losses.

Stock Market Scams

For over a century, most people have been aware that stocks and shares existed but had no idea how to buy or sell them unless they sought out a stockbroker.

The broker would then make purchases on the clients’ behalf to build a diverse portfolio of holdings that could hopefully increase in value over time and offer a fair return for their investment.

But that’s not the dream of beating the stock market that most people hope for – a dream of buying thousands of shares for pennies that quickly increase in value until they’re worth thousands or millions or squillions of dollars.

And while ‘squillions’ is not a real number, the dream of buying thousands of penny shares and cashing out for big bucks is equally false yet is the basis of countless con games where scammers secure thousands of shares for a tiny amount, then boost their value by reselling them and creating manufactured demand based on lies and exaggerations; or by manipulating the media to stir interest in a particular property based on false rumours or carefully constructed hype.

In the past, rooms full of lying, heartless salespeople would make thousands of cold calls a day to prospective first-time investors and sell them on the idea of a sudden, unique or short-lived opportunity to get into the market and make a fast profit.

Each sale increased the value of garbage shares but once the scammers sold their own shares at a profit (having bought them for a fraction of their final value AND collected commission on the sales they made), those prices would plummet as shares reverted to their true value with victims losing life savings as a result.

The Game Stop Affair

I recently watched the remarkable GameStop affair play out, eyes wide and jaw dropped as an old-school swindle appeared to be thriving on Reddit with a new generation of suckers losing their money once the wildfire of enthusiasm burned out.

Unlike similar runs in the past, this played out on an internet forum and via software that gave potential investors (or suckers) the means to act fast.

This was a key ingredient of the GameStop affair where the ability of victims to buy shares quickly in response to coordinated forum posts drove the price of those shares up and up as thousands of amateur investors threw their money away.

In response to this sudden demand, the rapidly increasing share price only served to prove the notion that more investors means more value when in fact, more demand creates higher prices and once that demand is gone, the price returns to normal and reflects the actual value of those shares.

My suspicion from the start was that the people driving this fervour almost certainly started with a large number of shares, which they sold before the price topped out, escaping with an enormous profit.

In other news, water is wet, the sky is blue and not everyone on the internet can be trusted.

Graph showing bitcoin volatility

A Financial Wild West

With crypto, I’ve been suspicious of this type of scam from the start and have allowed several genuine opportunities to slip through my fingers but that’s the price one pays for an abundance of caution and the curse of persistent paranoia.

Recently, however, I’ve seen public figures endorsing, recommending or hinting towards various forms of crypto or creating their own digital coins that they then pump up to new investors and while I’m not saying these are deliberate scams, there’s something awfully concerning about anyone in a position to increase the value of their holdings by manipulating perception through various forms of media.

It’s something of a financial wild west out there when people can generate their own currencies then use their own celebrity or public profile to boost the value of that currency based purely on popularity, or where a famous figure might be able to buy large amounts of an existing digital currency then inflate its value through a tweet or public comment.

I’d venture that if those public figures cashed out immediately after their remarks had boosted the price, there might be good reason to think they were cynically manipulating the market.

There are so many ‘experts’ ready to ‘help’ us invest in crypto that this is the perfect scenario for a new generation of boiler-room scams or pump and dump swindles where naive investors are simply resources to be harvested solely for the profit of others higher up the investment chain.

Old Wine, New Bottles

The increasing interest in digital currencies offers many more opportunities to con people using old methods.

If I were to design a scam to illustrate this, I’d grab any old con game and start rewriting the ‘hook’ accordingly.

A small-scale con game might go like this:

My wife and I have broken up and she’s still got my laptop. She doesn’t know I have a large amount of cryptocurrency or that my digital wallet is on that laptop. If I try and get it back or if one of my friends tries to buy it, she’ll suspect and might even have someone check the hard drive.

She listed it for sale last night and if you could call and buy it from her, I’ll pay you back whatever you pay her – but you have to act fast!

In return, I’ll pay you an additional thousand dollars once you have the laptop.

Naturally, my ‘wife’ would insist on a ridiculous amount of money for a laptop we found at the dump and the mark would be left holding that laptop when the scam was over.

In fact, this is just the old ‘violin scam’ reinvented with a crappy old laptop that supposedly has a pot of gold hidden on its hard drive.

The ‘419’ or Nigerian Prince scam is equally applicable to cryptocurrency, as are countless other old-school swindles that could target the crypto-curious.

The key to generating greater profits with new scams is the ease with which potential victims might respond to a scammer’s influence.

In the case of the GameStop affair, manipulating the price of those shares was made easier by being able to reach thousands of amateur investors through forum pages who were able to respond immediately through an app that permitted direct and immediate stock purchases.

Once more people take advantage of quicker and easier methods to purchase digital currencies, I predict these types of manipulation (deliberate or otherwise) will continue to happen.

As always, tread carefully in unfamiliar territory and beware of any proposition that sounds too good to be true.

Step back if you ‘feel the hustle’ or recognise you might be being pressured to make any decision quickly.