What to look out for when investing in cryptocurrency for the first time?
The volatile price of cryptocurrencies over the last 12 months has attracted people to set up companies to facilitate this new, digital asset. This includes exchanges, wallet providers, market makers and cryptocurrency-based contracts (Contracts for difference, CFD).
As such, investors have made significant amounts of money by buying and selling the asset at a favourable time. They do this by trying to buy them when they believe the asset is undervalued, and then selling them when they think they are overpriced.
This boom in the trade of cryptocurrencies has created a lot of discussion in the financial media about applications to the Securities and Exchange Commission (SEC) for a cryptocurrency Exchange Traded Fund (ETF). An ETF is an amalgamation of assets from an industry or group, which can then be traded on an exchange. This would see the likes of several cryptocurrencies being put into the ETF contract, which will allow investors to purchase an ETF which is a ready to buy, ranged portfolio.
The excitement and noise of all these factors have resulted in the media publishing stories about investors who have doubled, tripled, quadrupled etc. their investment by putting money into cryptocurrencies.
Naturally, this has attracted many members of the public to get involved, whether they are experienced investors or not – if it is that easy to make money in cryptocurrencies, then why not?
The rising tide of fraud
However, members of the UK police force have recently warned of a surge in cryptocurrency fraud, with more than £2 million apparently being stolen from unsavvy investors, in just two months.
Data from Action Fraud shows that in June and July this year, 203 investors fell victim to this kind of fraud, losing an average £10,096 each.
Fraudsters have been known to advertise on social media and even cold call unsophisticated investors and convince them to hand over their money.
What to watch out for
If you see an advertisement or get a phone call and you think to yourself, “I quite like the idea of cryptocurrencies, I would like to see if I can invest and make some money.” My advice would be to take a step back from the cold caller, or the social media advert and assess the situation. Be wary of fraudsters.
There are honest people out there, but there are also those who would not think twice about stealing hard earned money from unsophisticated investors.
Unfortunately, you can’t go to a traditional Independent Financial Advisor as cryptocurrencies will not be under their remit. However, you can use the internet to read up on what you need to know.
I suggest starting by researching sites, for example www.Investopedia.com. They have a good depth of knowledge and will provide you with a wealth of information about cryptocurrencies. In most cases, the literature is quite objective, but you should always question what you learn and make sure what you are reading is correct, which is why it pays to read multiple publications and sources.
Once you know which cryptocurrency you want to buy, you should look for a place to buy them. This is also an area which you need to be wary of, as many “companies” have been set up for investors to send money to scammers, and not receive anything in return – another form of fraud.
Look for an exchange that is based in your country and search to see if they are registered at the appropriate company registry. In England, this is Companies House. If the company is registered, then this will bring some assurance. It may also be worth looking for an exchange that will hold your cryptocurrencies for you.
Some exchanges require you to operate your own “wallet”. A wallet is a secure digital location where cryptocurrencies are stored using encryption, but as previously stated, some exchanges will hold them for you.
In doing your research and finding a bona fide exchange that holds your currency for you, you can be relatively assured that your investment is safe from fraudsters and criminals.
However, try to ensure that the account protection is adequate and do not share your account information with anyone. There have been many occasions where exchanges have been hacked, and funds removed from customer wallets. If you want to ensure you are protected, research wallets and then set up your own, you can then send your bought cryptocurrencies there to store safely.
The general rules for new cryptocurrency investors should therefore be:
- If someone approaches you, do not inherently trust them – somethings can be too good to be true.
- Do your research, take time to consider the investment and do not be led.
- If you feel like you are being defrauded, or you are sceptical about a company, get in touch with a reputable law firm that understands the industry, they will then be able to assess the situation and give you advice on whether the party you are dealing with is genuine.
The information provided in this material is for informational purposes only. It should not be considered legal or financial advice.
Thomas Hulme, a specialist in cryptocurrency law at Mackrell Turner Garrett Solicitors in London.