Just as unscrupulous businesses have preyed on the ignorance of the public around forex trading, authorities are becoming concerned about the increase in bitcoin and cryptocurrency business offerings that could be fronts for scams.
A joint warning was issued by the SA Reserve Bank, the Financial Services Board, the SA Revenue Service and the Financial Intelligence Centre about the risks associated with the use of virtual currencies for investments.
“While there are benefits associated with this new technology, it is difficult to assess those benefits against the risks of something so novel, innovative and technologically sophisticated,” they warned.
“Users of virtual currencies can therefore become susceptible to fraudulent or any other criminal behaviour as they may be less circumspect than usual when faced with the promise of high-return investment opportunities.”
Bitcoinzar.co.za, an information website for bitcoin investors, warns that there is a trend growing in South Africa of schemes using bitcoin hype to make money off “unsuspecting and ignorant people”.
It warns against any scheme “in the name of bitcoin, mining or cryptocurrencies that assure any form of fixed return. No fixed returns are possible.
“If any company is assuring fixed returns, we believe it’s a Ponzi/multilevel marketing/network marketing scheme, or a scam.”
Blake Cuningham contacted City Press after his mother was approached by a salesperson who told her about this “amazing” concept of buying a “contract” to mine bitcoin in their mining pool.
Blake is well versed on bitcoin as he has been an investor in the cryptocurrency sector since 2014 and did his homework before investing. His understanding of bitcoin suggests that buying mining “contracts” is, at best, a highly risky venture and, at worst, a front for a Ponzi scheme. Further research by City Press has found that bitcoin community websites, as well as websites dedicated to exposing Ponzi schemes, are posting articles questioning the validity of many schemes offering mining “contracts”.
Bitcoin mining is where sizeable amounts of computer processing power is used to secure the bitcoin blockchain, to increase the chance of earning newly created bitcoin.
“Finding enough computer power and enough energy to keep the system going has turned into a competitive secondary industry, making it ever more difficult to make a profit from mining – if at all,” says Blake.
To meet the large demand for computer processing power, massive warehouses have been set up in countries such as China and Iceland, where energy remains inexpensive. These warehouses are full of “application specific integrated circuits” designed specifically to mine bitcoin as efficiently as possible – unlike the processor in your computer.
Some bitcoin mining “contracts” work through a monthly subscription, where you indirectly purchase bitcoin mining hardware that gets installed in one of these warehouses, alongside other investors.
You receive bitcoin rewards for the use of the computer power according to how much you have invested. By purchasing a subscription rather than making an investment, the business does not fall under the Financial Services Board as an investment provider, so these tend to be unregulated.
Andrew, a financial adviser and bitcoin investor based in Johannesburg, attended a presentation promoting bitcoin mining. For him, the presentation raised more concerns than answers.
“The presentation was lacking in technical details and an upfront fee is required to invest, with a promise to pay additional amounts in respect of any person introduced to the scheme, as well as commissions,” says Andrew, who adds that, when he tried to ask technical questions, the salespeople became irritated and were unable to answer them.
“My concern is that any return for processing transactions is dependent on the capacity of the processors the cryptocurrency is being processed on. The astronomical returns they are projecting are not actually returns at all, but a function of a spike or bubble in the current bitcoin price.
“Bitcoin has already witnessed several severe price crashes in its short history and this does not provide the complete picture to the customer so that he or she can make an informed decision,” says Andrew.
If the bitcoin mining contract appears to be multilevel marketing, where you are paid returns for signing up new members, then you should ask questions about how returns are calculated – is it based on the actual return from the mining itself? How can these returns be verified? Are the returns funded from the entrance of new members?
If the answer to the last question is yes, this is a classic pyramid scheme structure.
The Financial Services Board confirmed that it was looking into enquiries it had received from the public about bitcoin mining offerings, but that, because the business is not a licensed financial services provider, it does not fall under its jurisdiction.
The problem with any of these schemes is that trying to prove their legitimacy is virtually impossible – it is all done on trust, word of mouth and just enough truth to make it sound viable.
But you need to ask yourself if the investment makes sense and what the real risk is – what if you lose all your money? There is no way to get it back. Investors usually only fully understand the real risk when all their money is gone.