Since the dawn of time, humankind has been cursed by charlatans and snake oil salesmen. The rise of Cryptocurrency may have given them a new product to peddle, but the rules of protecting yourself remain unchanged, writes David Crossley of BDO Wealth Advisers.
Some time ago, I wrote an article entitled “Beware the Snake Oil Salesman.” This dealt in some detail with the gullibility of people when faced with what appears to be a “not to be missed opportunity” to get rich quick or to own something unique or precious. I talked about Ponzi schemes and the temptation of the seemingly fantastic returns offered by such salesmen.
Fast forward a few years and we are being assailed on all sides by articles and explanations explaining how Cryptocurrency works and how the Blockchain method of security will create a “Hack-proof” platform for future investments.
Much of this content also mentions the amazing returns that can be achieved through investments such as Bitcoin — but it often fails to reference the crippling losses that can just as easily be incurred. After holding steady at around $10,000 for much of 2020, the value of Bitcoin spiked to over $60,000 in April 2021, before plummeting again in May. At the time of writing, it was hovering around the $34,000 mark.
The case of Africrypt
Recently it has come to light that a South African company called Africrypt, run by two brothers, collapsed with the brothers nowhere to be found and client investments in Cryptocurrency totalling a supposed $3.6 billion (this figure certainly warrants further investigation) having vanished into thin air.
Because Cryptocurrencies are not currently subject to registration by Institutions such as the FSCA, there is very little that these luckless investors can do to recover their investments.
There are a number of salutary lessons to be learned from this event:
Prospective investors were offered investment returns of five times the amount they invested. This is always the first warning sign: “If it looks too good to be true, it probably is.”
Because of the nature of the offer to prospective investors, this could be classed as a Ponzi scheme which relies on the innate greed of investors who throw reason out the window when they hear of the incredible returns offered.
Africrypt was not a registered Financial Services Provider in terms of the FSCA and therefore, investors had no legal way to bring the losses to the attention of the authorities.
An avoidable tragedy
Notwithstanding the essential illegality of the scheme, by far the most tragic part of the story is that Bitcoin, for all its volatility, is a relatively secure asset that’s based on advanced encryption and Private Keys.
The brothers sidestepped these checks and balances by offering to set up the Bitcoin investments on behalf of the prospective investors. These investors were asked to pay their money into Africrypt’s bank account, thereby surrendering all ownership of the money and access to their Bitcoin, including their Private Keys.
The brothers simply had to close their business, leave town and then access the Bitcoin investments made by their clients at their leisure!
The bottom line
Cryptocurrencies will become a more acceptable and common investment medium in years to come. That said, they must always be looked on as a high-risk, speculative investment, that should not be relied upon to accumulate wealth for retirement or other long-term goals. Rather, they should be regarded as a speculative, “fun” way of investing a small percentage of your wealth to create access to “fun” money that you can afford to lose.
Before you decide to invest a portion of your wealth in Crypto, make sure that you are the captain of the ship. Make the investment yourself and be sure to retain the Private Keys in a secure place that only you can access. What’s more, consider having a “Digital Will” drawn up to ensure that your legitimate heirs will have access to the crypto asset investments in the event of your death. That way, if you cannot enjoy the fruits of your investment, then at least a loved one will be able to.
PERSONAL FINANCE