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With cryptocurrency prices dropping, investors may be tempted to invest some money in these speculative assets. What should advisors tell them about the risks?
Are you a professional financial advisor? Sign up for Globe Advisor and then sign up for our weekly newsletter on our newsletter signup page. Get exclusive investment industry insights and news, the week’s top headlines, and what you and your clients need to know.
With cryptocurrency prices dropping, investors may be tempted to invest some money in these speculative assets. What should advisors tell them about the risks?
The market’s explosive growth has attracted many naive investors who fear they may miss something, says Greg Taylor, chief investment officer at Purpose Investments Inc. in Toronto, which offers cryptocurrency exchange funds (ETFs).
“There was a greedy factor that came in,” he says. The hype blurs the line between investing and gambling and attracts some hateful characters.
“When you get excess of speculation, you have to be wary of fraud. It happens in every bull market.”
These scams are many and varied. In some cases, cryptocurrency exchanges themselves are guilty. In 2020, the Ontario Securities Commission described the QuadrigaCX exchange in Vancouver as a Ponzi scheme after leaving users with a $169 million shortfall.
Different types of tricks
Some scammers focus on altcoins with a small market capitalization, says Dragan Boskovic, research professor at Arizona State University and founder and director of the Blockchain Research Lab. These are classic targets for scammers who amplify and debunk coins through social media posts.
“There is a lot of activity and the price of those assets with very low market capitalization and large volumes are rising relatively quickly,” he says. Naive investors, perhaps remembering the explosive growth of bitcoin, are piling up.
“Once these bad actors are satisfied, they sell all their assets and then the price drops very quickly.”
Initial coin offerings (ICOs) are a variation on the topic. These token sales are usually associated with decentralized online services and promise significant returns. Many have been exit scams where founders misused funds and did not deliver the promised services. Canadian and US regulators suppressed these sales, considering them to be securities.
Other scams directly steal assets from victims’ cryptocurrency wallets.
Michael Zaghari, associate portfolio manager at Mandeville Private Client Inc. In Montreal, a phishing email targeted the owners of the ethereum blockchain. The perpetrators exploited an upcoming change in the way the Ethereum blockchain generates its Ethereum. He told owners that they need to open access to their crypto wallets to prepare for the change. Whoever did that got their money stolen.
Ethereum owners didn’t really need to do anything to prepare for the change, says Mr Zagari, but the emails were persuasive enough to deceive people unfamiliar with the technology.
