Investors need to be on their toes to avoid the crypto scammers

After a recent 99pc crash in one token’s value, Crypto.com warns ‘any get rich quick schemes should be looked at with caution’.

A man walks past an electric board showing exchange rates in won for cryptocurrencies — including bitcoin, top left — at an exchange in Seoul earlier this month. Picture: Reuters

Fresh from the recent success of being the most viewed series ever by Netflix, a cryptocurrency token inspired by Squid Game took the market by storm, rising by an astronomical 83,000 per cent in a few days.

But investors who bought in a 1c were unable to sell and realise their gains at $2856 and shortly after it all came crashing down, with the creators of the coin cashing out and sending the price crashing down 99 per cent.

Jason Lau, chief information security officer at Crypto.com, says: “Like with traditional scams out there, any get rich quick schemes should be looked at with caution.

“Investors should understand that cryptocurrency prices can be volatile, and they should invest based on their own risk appetite.

“While there are stories of some making millions, investors should do their due diligence before investing in any token and do their research to understand the different types of tokens there are. Generally speaking, if it looks too good to be true, then it may well be a scam.”

In terms of what were some of the flags with the Squid token, Peter Crump, BDO’s private wealth senior consultant and a former chair of the SMSF Association, says: “From an investment perspective, you have to ask yourself how much of your personal wealth do you want to have exposed to the potential risk of significant loss.

“With cryptocurrency scams, the rules are no different to other scams, including red flags such as spelling or grammatical errors on the promotional email or website, lack of proper information about how the cryptocurrency can be sold, and suggestions of the need to get in quickly before you miss out.”

While some may argue that all cryptocurrency investment is a scam, the recent decision by CBA to allow its customers to trade cryptocurrency from the NetBank app is in line with the increasing acceptance of cryptocurrency.

So for those who have cryptocurrency or are looking to buy, how do you protect your investment? If you use an exchange account to purchase cryptocurrency (just like you would use a stockbroker to buy shares), you will notice that there are limitations placed on what coins you can and cannot buy.

Different exchanges will have different levels of due diligence when deciding what their customers can access.

Caroline Bowler, CEO of Australian cryptocurrency exchange BTC Markets, says: “We don’t accept any money from projects, coins or tokens to list on our exchange. We list them entirely on merit and our own assessment.

“The process to list a new coin is quite stringent and takes up to a minimum of three to four weeks. So, by way of elimination, any ‘flash in the pan’ token such as the Squid Game coin would never make it to our exchange.

“The first place that proposed coins and tokens go to is our lawyer to make sure that these projects don’t somehow encroach upon existing securities law.

“Once it clears legal, it then goes to an internal assessment where we look at the project ourselves from a development point of view, the technology behind it, how we see it from a commercial point of view, and we look at the community behind the project.

“We look at longevity, the founders, their experience.

“We can’t make guarantees around the performance of any crypto. But to the best of our ability, we conduct due diligence on everything listed on our exchange.”

Byron Goldberg, country manager at cryptocurrency exchange Luno, says: “Each exchange will have different listing criteria, some are laxer than others and require only customer demand, some are more in depth. I can only speak for Luno, where we look for coins with a secure network, credible team, unique use case, market traction, no concern around fraud or ‘pump and dump’ arrangements, to name a few criteria.

“It is not just scam coins you need to be wary of. There are many scamming operations in place trying to access people’s data and steal their cryptocurrency holdings.”

Dianna Du, principal of Du and Associates lawyers, says: “Cryptocurrency investors need to ensure that their cybersecurity is up to date because novice investors need to understand that it is a whole new world out there and it is very easy to get hacked.

“If a hacker gets access to your ‘seed phrase’ (your cryptocurrency account password), then there is very little we can do from a legal perspective to recover those assets once lost.”

So if you want to add more protection, investors may move their holdings to a “cold wallet”.

Bowler says: “A cold wallet is a piece of hardware where you can send all your crypto holdings. Because it is not connected to the internet it can’t be hacked. You can pick them up for as low as $100.

“You download all your crypto into that USB stick and then store it in a safe place.”

Navigating the world of cryptocurrency is far from easy and stories of scams mean many investors may steer clear for now.

For others who want a more traditional path, consider some of the cryptocurrency ETFs that are appearing on the ASX such as the Betashares Crypto Innovators ETF or ETF Securities Fintech & Blockchain ETF.

James Gerrard is principal and director of Sydney planning firm www.financialadvisor.com.au