With anti-Russia sanctions growing tougher, and tightening currency controls, retail investors are increasingly contemplating other options, including digital assets. At the same time, such investments carry a high degree of risk. And it’s not just about unclear regulatory practices at home – European countries are also restricting the servicing of crypto wallets held by Russian owners. The Federal Foundation for the Protection of Investors and Shareholders’ Rights and the Eurasian Economic Commission have held the 7th international conference, Territory of Financial Security, where the discussion focused on the biggest risks and challenges faced by private investors in the cryptocurrency market, as well as on effective ways to avoid them. We share the highlights of the discussion with Invest Foresight readers below.
Beware of scammers
Fraudulent projects remain one of the key crypto market challenges facing retail investors. Investing in such projects can entail huge losses, judging by several exposed crypto scams. According to Artem Genkin, Doctor of Economics, President of NPO “Center for Protection of Bank Clients and Investors”, one crypto pyramid project – PlusToken – has swindled more than $3 bln out of tens of thousands of private investors around the world. By the way, the scheme continued to operate even with its six masterminds already behind bars. But OneCoin was the biggest scam ever – before it ceased operations in 2017, the people behind it had cheated investors out of $4 bln to $15 bln, according to various estimates.
Some market participants are so gullible they willingly believe even in most outlandish projects.
“David Segal, a columnist for the New York Times, while honestly declaring his intentions, tried to create his own crypto, as an experiment. All he had to do to launch his exemplary scam, the Idiot Coin, was to build a website, find a blogger with the right audience, start a channel on Telegram and post an announcement on Reddit. In all, the coin cost him about $1K, and 300 potential buyers immediately lined up, craving the miracle token,” Artem Genkin notes.
The semi-ironic tutorial on how to create and promote scam coins, posted by blockchain expert Dan Arreola, daily gains about 1K new views, and has been watched by more than half a million people by now.
The paradoxes of trust
Interestingly, for market participants, their own strategies remain a source of serious risk. According to a survey by Cindicator, qualified investors accept their friends’ advice or listen to crypto market leaders, but above all, they rely on their personal expertise.
“One of the common types of qualified investors on the crypto market is an individualist who prioritizes qualification, intuition and faith in good luck. It is a rather dangerous strategy. Those who invest in conventional financial assets are not usually wired this way,” Artem Genkin says.
When it comes to non-qualified investors, it is an even bigger paradox. For example, according to a GamblersPick survey, American rapper Snoop Dogg is the third most trusted investment advisor while Tesla founder Elon Musk is the first.
The market being subject to manipulation is an extra challenge as stock prices may even depend on Twitter posts. After Elon Musk tweeted that his company may start accepting Bitcoin to pay for Tesla cars last March, the cryptocurrency’s price soared to over $60,000 in just three weeks by April 2021. In May, the billionaire spoke up against the potential impact of cryptocurrencies on global environment, sending exchange rates into a 13% nosedive in one day.
Moreover, you don’t have to be Elon Musk to shake up the cryptomarket.
“A member of the cryptocommunity was able to shake up the Bitcoin market and cause its 15% boost by simply posing as an Amazon insider and ‘revealing’ the company’s ‘plans’ to start accepting the cryptocurrency. Nothing of this kind would be possible on a conventional stock market,” Artem Genkin says.
It is most challenging for beginner investors. Their interest in cryptocurrency investment is mainly prompted by the promise of rising prices, soft regulation and the halo of going with a modern trend, says Director of the Federal Public Foundation for the Protection of Investors and Shareholders Marat Safiulin. At the same time, they should more carefully assess the situation on the market.
“I don’t want to appear too skeptical but capitalization is in decline, falling from $3 trillion to $1 trillion. Among other things, this is due to the crash of ‘garbage coins’ that have lost over 70% of their price in the past year,” Marat Safiulin explains.
The cryptocurrency market opens new niches for fraudulent operations. In the past month, 82% of Russians have encountered scammers and financial pyramids posing as cryptocurrency industry players. Aspiring investors often bite the crypto trading bait, or staking. Another common scam is resetting commitment on crypto tokens.
As a result, the cryptocurrency industry remains an actual minefield for investors, where trading sometimes brings deplorable outcomes.
“Too often, crypto happiness is short-lived,” Marat Safiulin notes.
Stablecoins are not an option
Investing in stablecoins, whose value is pegged to fiat currencies or exchange assets, is often seen as a way to avoid the risks in the cryptocurrency market, basically its unpredictable volatility. According to Pavel Komarovsky, the author of the RationalAnswer blog, there are also increasing efforts to use stablecoins as personal finances, such as for payments or international transfers, or even for creating financial safety net.
However, stablecoin investors are not immune to risks. Stablecoin value may drop following a dollar plunge, which is exactly what has been happening lately. A stablecoin wallet can be blocked, including at an exchange. Also, you should not forget about potential compliance risks.
“Those who make attempts to cash out stablecoins to fiat or swap their cryptocurrency for stablecoin in large amounts worth $100K and more may raise concern among banking and tax organizations – particularly in case these coins were purchased for cash in a currency exchange office without any KYC procedures,” Pavel Komarovsky notes.
Financial literacy and reasonable restrictions
According to the participants in the discussion, greater financial literacy may to a certain extent become protection against crypto market risks. At the very least, investors should be aware that cryptocurrencies are far from being the easiest tool.
“Cryptocurrency is a tool that requires competence. We should build up financial and investment awareness, provide detailed information on potential risks, and tell people about ways to use this tool properly,” says Alexandra Vald, founder of the Life and Invest educational project.
“People should start learning risk assessment skills at school. Maximum disclosure and update on potential risks will help both representatives of the cryptocurrency market infrastructure and investors to avoid negative experiences,” agrees Yaroslav Kabakov, Strategy Director at Finam Investment Company.
Restrictions on market operations appear effective as well, at least for non-qualified investors. For instance, Kazakhstan has introduced limits on purchasing cryptocurrencies through exchanges registered at the Astana International Financial Center (AIFC), says Yermek Rustembek-uly, founder of the Digital Law Center. The limit amounts to $1K per month without verification of income and assets.
“The mechanism of reasonable, objective and comprehensive control and monitoring will allow the cryptocurrency market to advance in a civilized manner and become a market for digital financial assets instead of crypto scams,” Artem Genkin concludes.
By Olga Blinova