Advocates of Bitcoin and other cryptocurrencies say that those who did not invest have missed out on the biggest opportunity of our lifetime.
“We have watched people scurry to invest and have read about people who have made serious money out of the platform,” says Floris Slabbert, director at Ecsponent Financial Services.
“Sadly, we have also seen people scammed out of millions. For example, BTC Global promised investors guaranteed returns of 14% per week. More than 27,000 people lost money due to this scam that hit South Africa and Australia. And they did so by willingly sending their Bitcoin to BTC’s cryptocurrency wallet.”
Slabbert said that it is imperative for investors to understand where their money is going.
“There is immense hype around cryptocurrencies and blockchain. Several instant weekend-warrior financial advisers are urging people to invest. However, the fundamentals of investing stand true, regardless of whether you are investing unit trusts or cryptocurrencies. In the absence of due diligence and a comprehensive financial plan, investing can quickly become gambling. Are you prepared to gamble with your future?”
What is cryptocurrency?
Cryptocurrency is a digital currency that uses cryptography as security. It is not issued by any central authority, which theoretically renders it immune to manipulation. It is built on technology called blockchain. Blockchain is a digital ledger in which cryptocurrency transactions are recorded chronologically and publicly.
Besides unscrupulous groups who are out to defraud people, like in the BTC example, the technology is fraught with new developments that have the potential to be harmful if not treated correctly, Slabbert said.
For example, technology companies are building their platforms on a cryptocurrency, such as Ethereum. They then list Initial Coin Offerings (ICOs) with the aim of bringing investors and tech fans together.
An ICO is an unregulated way for a new cryptocurrency-based venture to raise funds. Tech start-ups use ICOs to bypass the regulated capital raising process required by banks or venture capitalists.
Business Insider UK explains that, “ICOs are where start-ups issue their own digital currencies, structured like Bitcoin. These tokens, which can be traded online despite the company being private, are sold for real money that start-ups then use to fund their projects.”
What kind of money are we talking about?
“To give you an idea of how different this world is, let’s look at how much money has been raised, and how fast,” said Slabbert. “Bancor raised $152-million in three hours. Brave raised $35-million in 30 seconds. Aragon raised a million a minute to hit $25-million in 25 minutes. With these kinds of numbers, is it surprising that there are fraudsters waiting to help you part with your hard-earned money?” asked Slabbert.
“While there are legitimate investment opportunities, there are a few red flags to be on the look for,” he said.
“When we advise clients or invest their money here at Ecsponent, we do it off the back of solid experience and wealth-creation knowledge. Our team is known, and we are accountable. Whenever you want to spot a scam, research the team. Many times, it has emerged that supposed tech gurus or CEOs don’t even exist. Their photos on the websites are stock images with fake names,” said Slabbert.
“This has been done so successfully that world famous DJ Khaled, in a now-deleted Instagram post, endorsed a company with a fake CEO.”
Look for the white paper. ICOs should provide a comprehensive breakdown of the startup, its niche, vision and how it intends operating. There should be SWOT analyses, and a roadmap that it will follow methodically with the proposed funds.
“The lack of a white paper is a red flag for sure. But it goes deeper. A poorly designed website and a sloppy white paper could be a sign that the creators are thinking about short-term money raising and not the long game,” said Slabbert.
Always look out for plagiarism, wared Slabbert. Whether it is the white paper, roadmap or any other element of the business you are researching, as past scams have been known to lift content from other companies.
Then there are the technical elements – does the ICO have a hard cap or soft cap. If there is an unlimited cap how does this affect the percentage gains of more money being spent? Are there legitimate use cases for the use of blockchain in the industry being discussed?
“The more open and transparent a project is, the more likely it is not a scam, but this is not full proof,” said Slabbert. “This is why we always advise our clients to stick with investment fundamentals. Rather than rush off to the next big thing, work closely with a reputable financial adviser and build a plan and portfolio that grows consistently over the long-term.”
Not all cryptocurrencies are bad. There are some that will in the long run prove to be the right choice, said Slabbert. The problem currently faced is how will it be regulated and taxed. We know that as soon as an asset or gain is achieved SARS would like their share. This makes planning difficult but not undoable.
The risk should be evaluated and form part of your strategic and long-term planning.
“A lot of blockchain enthusiasts argue that financial services companies and banks are hitting back at the technology because it is disrupting the industry at the expense of the traditional players.
“This couldn’t be further from the truth. Believe me, every financial adviser worth his salt wants to find the best investment vehicles. However, what we cannot do, ethically and professionally, is invest clients’ money in unproven and volatile environments,” said Slabbert.
“Embrace the digital world, invest with the times and understand the future, but do not forget common sense and always remember, if it sounds too good to be true, it probably is.”