Investing In Blockchain: What Could Go Wrong?

The unstoppable rise of Bitcoin, cryptocurrencies, tokens, ICOs and Blockchain projects, in general, has attracted millions of new investors and leaves most of us wondering: Am I missing out?

Over the last three years, the price of Bitcoin has increased almost 50-fold, while another commonly traded token, Ripple, temporarily increased almost 200-fold before losing over half of its peak value just a month ago.

Not all investments have done well, however. Looking back at the most popular cryptocurrencies of January 2015, we see PayCoin in spot #5, which has entirely collapsed in value even before its founder Josh Garza plead guilty to securities fraud charges in what turned out to be a pyramid scheme.

Look Out For These Cryptocurrency Pitfalls Cryptocurrencies

Cryptocurrencies and smart contract platforms that have their own Blockchain are most of the time relatively similar in their function to Bitcoin. Don’t get oversold on hype and promises, but instead try to use these Blockchains for yourself and seek out others who have actively integrated these technologies into their business workflow.

Plenty of cryptocurrencies are no longer under active development but instead have been taken over by effective marketing teams that advertise the coin to potential investors. These marketers are liquidating their own stock, which they often created out of thin air. Have a look at their open source code to see if there are enough people actively contributing. There is plenty of work to be done!

Tokens And Initial Coin Offerings

Plenty of projects are not Blockchains themselves, but instead, tokens built on other blockchains. Tokens can be similar in concept to vouchers, IOUs, stocks, and bonds, meaning that they are not intended to be used as currency (though some are), but rather, represent a share in a company or usage rights in a product.

Most tokens resemble securities, like stock, but issuing securities is a highly regulated activity. Tokens are not automatically a workaround for regulations, so remember that just because tokens are issued on the Blockchain does not automatically make them legal.

Many countries, like China and Korea, have gone as far as banning the issuance of these tokens regardless of what they are for, while others will let their complicated judicial systems decide which tokens are securities, and which not.

There is an immense risk on the side of the investor, as founders landing in jail typically is the end of any project. Unlike cryptocurrencies, which don’t necessarily need a backer or issuer, tokens represent some kind of right or privilege from a real company or product, and this product can be shut down.

Being such a young industry, few of us really understand the technical mumbo-jumbo that comes in the form of whitepapers and code. We are unable to separate pseudo-scientific scams from real innovation.

Scammers exploit this half-knowledge by launching an endless stream of fraudulent ICOs. All have a smart-sounding whitepaper, a beautiful website and a founding team that sounds smart on stage, but will and can they deliver?

Finally, in tokens, you are not only betting on the viability of the product but the entire idea of tokenization as a whole. It is relatively unproven whether we will see a future in which we need a separate token for each app that we use, or whether there will be a single cryptocurrency to rule them all.

Token Market Scam

The trading markets as a whole are entirely unregulated, and there is no consumer protection. Professional groups use this environment to ‘pump and dump’ their coins and tokens, meaning they convince others to sell tokens cheaply, and later dump their cheaply bought coins on gullible investors.

Pump and dump schemes are carried out with DDoS attacks, false press releases, mass panics and even hacks. Many times the members of such group end up becoming a victim of their own puppet masters as they pull their final exit.

Exchanges exist in a hostile environment where it feels everyone at times is after them: Hackers, disgruntled customers, dishonest employees, regulators, banks, and competitors. As a result, most exchanges will probably not exist anymore in five years. Even if the token you bought is worth millions then, you might lose it all on an exchange that went bust because of a hack (like MtGox) or money laundering allegations (like BTC-e).

Always keep your tokens and coins in a wallet that you can control! If wallet software is not usable or not readily available, that may be a good hint that the token you are holding is technologically immature.

Be Careful Anytime You Invest Money

The market is not ripe for orderly investments on a large scale. It might be fun to play on global exchanges and markets that trade around the clock or to go from zero to millionaire and back, but it is also very easy to lose money, house, job, and partner.

Be prepared for taxes. Your gains from holding or trading Bitcoins are likely taxable income in your country, and you will need to show proof and documentation for all the coins that you bought and sold. If you are unable to do so, your tax authority might do the guessing for you, under much less favorable terms!

Never invest more than you can afford to lose, and don’t touch savings that you have created for other things, such as your education, retirement, or emergencies.