Beware who you give your savings to when trading cryptocurrency

By Edward West Time of article published May 23, 2021

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CAPE TOWN - WITH THE Bitcoin and other cryptocurrency prices smashing through all-time highs this year, and the fact that the market is unregulated, it is little wonder that a growing number of scammers are seeking to take advantage of naive investors.

The Bitcoin price went well over $60 000 (about R840 000) in both February 2021 and April 2021 due to events that included Tesla announcing it had acquired $1.5 billion of digital coin, while the listing of the US’s biggest crypto exchange, Coinbase, also fuelled crypto prices.

Crypto currency prices have, however, been volatile of late, after speculation about US government regulation sent the price lower in April. Bitcoin’s price fell to as low as $30.066 on Wednesday, 54 percent below an all time high a month before on news that Tesla would not accept Bitcoin as payment for its vehicles and negative tweets on crypto currencies by Tesla founder Elon Musk as well as after a Chinese government crackdown on banks’ use of cryptocurrencies accelerated a long-predicted sell-off.

Chinese financial industry regulators said banks and payment firms were not allowed to offer clients any services involving cryptocurrencies, and warned of the risks linked to trading crypto assets.

While the country already has crypto exchanges and initial coin offerings, consumers are still allowed to own crypto assets.

Bitcoin and other crypto currency prices stabilised again somewhat on Thursday, with the Bitcoin price trading at $39 782.

South Africa’s Financial Services Conduct Authority (FSCA) told Business Report that its enforcement division currently has 13 crypto-related cases in the preliminary investigation, full investigation and enforcement stages. It had issued 22 warnings to the public to beware of investing with certain companies.

These investigations did not necessarily only relate to the investment platforms, the intermediaries were also being investigated, the FSCA said.

The FSCA said it was “not advisable” to publish the names of the entities under investigation at this stage because the matters were still under investigation.

However, one of the biggest cryptocurrency scams in South Africa thus far, and according to reports, the biggest crypto scam in the world in 2020, has been Mirror Trading International (MTI), where the FSCA was taking enforcement action against the firm, and there was concurrency liquidation proceedings against the firm.

The FSCA warned public investors to get out of Polokwane-based MTI in August last year, which had little effect on investor sign-ups, until December, when investors couldn’t get their money back. Some 23 000 Bitcoin worth are alleged to be involved after the firm duped over 300 000 local and international investors.

The FSCA said cryptocurrencies were a high risk and “there are countless BUSINESS 24/7 scams involving persons claiming to trade in crypto.”

It said the scams were relatively easy to hide, difficult to investigate and the funds were taken out of the country. “It presents a real risk to investors if they conduct business with the wrong persons or entities,” the FSCA said.

Although the authority did foresee that cryptocurrencies would one day become part of the formal and regulated investment world, it said that for now investors needed to be aware they were committing their funds into an unregulated environment.

If, however, the crypto trading amounted to trading in a derivative, such as a CFD – that allows investors to gear up to 10 times their initial capital in taking a position on the market – investors should check with the FSCA ro make sure the service provider was properly licensed.

“In most cases, trading is in a CFD,” the FSCA said.

Marius Reitz, GM for Africa for Luno, a global cryptocurrency company with more than 7 million customers in more than 40 countries, said in a statement yesterday that reports of the demise of Bitcoin “seem to have been greatly exaggerated.”

“Many former naysayers are now dipping into Bitcoin and other cryptocurrencies and adoption rates continue to rise. JP Morgan indicated that while more than $3bn had flowed into the Grayscale Bitcoin Trust in the last quarter of 2020, gold ETFs had bled $7bn over the same period.”

He said that while many had declared Bitcoin as dying, simply based on the latest changes in the price, the technology that drove cryptocurrencies like Bitcoin was one of the most important financial innovations, and the current price of Bitcoin had nothing to do with the long-term value that cryptocurrencies would bring.

“If you’re a trader, the volatility can be stressful and potentially profitable, but if you believe in Bitcoin as the future of money, your investment objectives are long-term and therefore short-term volatility matters less to you,” he said.

He said Bitcoin had grown exponentially and had surpassed a market cap of $1 trillion, yet this was still relatively small as an asset class.

He said unlike a pyramid scheme that recruited members by promising them payment or rewards for enrolling others, Bitcoin operated on a decentralised model with no hierarchy. There was no reward for buying coins, nor were there guaranteed returns. In addition, the blockchain on which Bitcoin was built was transparent and anyone, at any time, could inspect the public ledger.

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