While the cryptocurrency market is still in its infancy, there is a lack of credible resources for new investors, couple this with the stories of “massive returns” and a lack of regulatory oversight you have a market ripe for fraud and scams. Some popular scams include:
*ICO exits
*Phishing
*Hacking
*Fraudulent Giveaways
However today I want to focus on lending platforms. The downfall of bitconnect has thankfully shed some light on these kind of platforms. When referring to lending platforms, I am talking about platforms whereby users give their cryptocurrency as collateral (collateral for what exactly is the question!) and then receive a return for doing so. Basic understanding of finance/economics will tell you that these lending platforms are ponzi schemes.
You hear it time and time again “if it’s too good to be true, it usually is”. In the case of lending platforms, you need to ask yourself; “How are the platforms generating money from my assets?”. In traditional markets, this is common practice. You leave your money in a savings account and the bank rewards you with interest. In banking it is easy to see how the bank rewards you with interest, the money you deposit at the bank can be lent out to borrowers at a higher interest rate than the rate you receive on your savings. A very simple example:
Depositor: Receives 2%
Borrower: Pays 3%
Bank: profits on the margin between the borrower and depositor (3%-2% = 1%)
Now think how does the lending program generate a return on your assets? Could the lending platform also deposit your funds in a savings account? Well this would require liquidating your cryptoassets and then buying back at a later date which would obviously be at the mercy of market forces with regards to price. Could the cryptoassets be used for staking? Well yes however again that would require liqudating your assets into relevant staking coins and then again converting back at the risk of market forces. Or could they use new depositors as a way to pay old depositors? This is the answer, also known as a pyramid scheme. All pyramid schemes come to an end eventually as there is no sustainable model for their continuation just as we saw with bitconnect.
Any platform that is offering a return on your crypto assets should be a red flag. Ask yourself how can the platform generate sustainable risk-free returns (even savings accounts are insured by the government)? Unfortunately there are some spruikers out there that endorse these platforms, again ask yourself why are they doing so? Just out of the goodness of their hearts? Hopefully as time goes by the market identifies these scams and individuals are not at risk of being duped.
Stay vigilant.
