In a never-ending effort to battle online fraud and deception, American Commodity Futures Trading Commission (CFTC) released a “customer advisory” .pdf which advises potential crypto investors to use caution when buying digital coins or tokens. The publication is meant to alert crypto customers to exercise caution and always perform extensive research before engaging in cryptocurrency trading.
The crypto market is probably one of the youngest asset markets around and as such it struggles with the usual growing pains. Volatility and uncertainty which surround almost every aspect of crypto encourages fraudulent behavior. With hundreds of various use cases, thousands of platforms currently being live and many more being planned in the future it is hard to determine which projects are worth investing into and which aren’t.
Still, the lack of certainty doesn’t bother crypto investors and more and more people are looking to invest their money into purchasing these digital tokens. Ultimately they hope that the asset will live to see the same faith as one of the current market leaders like Ethereum or Bitcoin and are sometimes willing to bet more they can afford on that. This doesn’t always pan out as hoped for, as studies and reports have shown that most projects don’t live up to the expectations or turn out to be straight up frauds.
“Estimates of fraud range from 5 percent to more than 80 percent of ICOs. One report also identified nearly 300 offers that contained plagiarized investment documents, promises of guaranteed returns or fake executive teams. Another report indicates that after one year from their ICO, nearly half of the projects or companies have failed or shut down,” says a report from Wall Street Journal.
So it definitely is a jungle out there, and CFTC is looking to limit the chances that innocent, uninformed people will get hurt while trading. The report advises users to take note if the project that’s issuing a token promises return on your investment or even a share in the company, as this automatically classifies said asset as a security. Such assets fall under federal jurisdiction and can be affected by future government regulations much harder than regular digital commodity/derivative coins.
Finally, CFTC offers 10 important factors that one should consider before investing, as they could impact the value of your investment significantly in the future. Those factors are:
- The potential for forks in open-source applications that could split away market participants, increase the number of digital coins, or make your coins obsolete.
- Decreasing mining or validation costs (if price is tied to those factors).
- Acceptance of other currencies, coins, or tokens for offered goods and services.
- The link between the value of a digital coin or token and the offered product or service.
- Adoption of the digital coin or token as a broad medium of exchange or store of value.
- Future competitors or technological changes that could disrupt the underlying business.
- Future demand or uses for an application, network, product, or service.
- Liquidity in the market for a specific digital coin or token.
- Changes to the underlying technology that could devalue your digital coins or tokens.
- Risk of theft from hacking.
CFTC doesn’t stop here, as they give investors a short overview of how to recognize a scam. Ease of access to the developers and people surrounding the project should be a must. If you can’t find or communicate with these individuals, that’s a major red flag. Among other things, you need to ask these people if the coin you are investing in is a security or not. If it is, you will need their confirmation that the coin has been registered with the SEC. Then you should ask how your investment money will be spent and is there a way of getting it back. If you are promised quick riches from the start, then the project is probably looking to scam you.
Ultimately, you are the master of your faith on the crypto market. Doing “due diligence” before investing will significantly raise your chances of success. Keep in mind that there is no such thing as a guaranteed investment so never invest more than you are willing to lose.