Some scammers focus on altcoins with small market capitalizations, says an expert.DADO RUVIC/Reuters
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With cryptocurrency prices at a low ebb, investors might be tempted to put some money into these speculative assets. What should advisors tell them about the risks?
When clients want to test the water, one of the first things advisors should do is help them avoid becoming shark bait. Scammers can smell fresh chum from miles away.
The U.S. Federal Trade Commission’s Consumer Protection Data Spotlight report published in June found more than 46,000 people in the U.S. alone had suffered from cryptocurrency scams since 2021, with losses totalling more than US$1-billion. That’s up from US$130-million in 2020.
The market’s wild growth lured many naive investors afraid of missing out, says Greg Taylor, chief investment officer at Purpose Investments Inc. in Toronto, which offers cryptocurrency exchange-traded funds (ETFs).
“There was a greed factor that got in,” he says. The hype blurred the line between investment and gambling and attracted some unsavoury characters.
“When you get speculative excess, you must be wary of fraud. It happens in every bull market.”
Those frauds are many and varied. In some cases, cryptocurrency exchanges themselves are guilty. In 2020, the Ontario Securities Commission described Vancouver-based exchange QuadrigaCX as a Ponzi scheme after it left users with a $169-million shortfall.
The different types of scams
Some scammers focus on alternative coins (altcoins) with small market capitalizations, says Dragan Boscovic, research professor at Arizona State University and founder and director of its Blockchain Research Lab. These are classic targets for pump-and-dump scammers who stoke the coins’ reputation with social media posts.
“There’s a lot of activity and the price of those assets with very low market caps and high volumes rises relatively fast,” he says. Naive investors, perhaps remembering bitcoin’s huge growth, pile in.
“Once those bad actors are satisfied, they sell all their assets and then the price goes down very quickly.”
Initial coin offerings (ICOs) are a variation on the theme. These token sales are typically tied to decentralized online services and promise big returns. Many have been exit scams in which the founders misused the funds and didn’t deliver the promised services. Canadian and U.S. regulators have cracked down on these sales, deeming them securities.
Other scams steal assets from victims’ cryptocurrency wallets directly.
Michael Zagari, associate portfolio manager at Mandeville Private Client Inc. in Montreal, recalls a phishing e-mail that targeted owners of the ethereum blockchain’s ether coin. The perpetrators exploited a forthcoming change in the way that the ethereum cryptocurrency blockchain generates its ether coins. It told owners that they had to open access to their cryptocurrency wallets to prepare for the change. Anyone who did so had their funds stolen.
Ethereum owners didn’t actually need to do anything to prepare for the change, says Mr. Zagari, but the e-mails were convincing enough to fool people unfamiliar with the technology.
Advisors need education
Mr. Zagari says as an advisor, it’s his job to update clients on these developments, adding that many of his colleagues are still unprepared to guide clients on the risks of cryptocurrency investing.
“They don’t understand it and are avoiding the conversation,” he says. “Dealership compliance departments haven’t invested in understanding it either.”
The first step for advisors in helping clients understand cryptocurrency is to educate themselves. Then, it’s down to a mixture of common sense and technical knowledge.
Advisors should persuade investors to understand what they’re buying rather than treating cryptocurrency as a purely speculative move, Mr. Zagari says.
“Look for a solid use case. What problem is it trying to solve?” he adds.
Investing in safer bets
Clients should be investing in assets with high market capitalization, says Mr. Boscovic, pointing investors to well-established coins with high liquidity.
Mr. Zagari cites bitcoin and ethereum as the two go-to assets. He typically advises clients to expose no more than 5 per cent of their portfolio to direct cryptocurrency holdings.
Rather than managing the security of those assets in their own wallets, many choose to invest in a cryptocurrency ETF from companies like Purpose Investments or Evolve Funds Group Inc. These ETFs own cryptocurrencies and store them with New York-based Gemini Trust Co. LLC, a custodian that holds them in “cold storage” – meaning the digital keys used to access the wallet are not accessible via the internet.
Mr. Zagari will also advise clients to hold a larger proportion of their assets – up to 10 per cent – in investments that expose them indirectly to the cryptocurrency markets. These are typically cryptocurrency services companies.
The appeal of cryptocurrency mirrors that of other disruptive technologies, Mr. Zagaripoints out. It offers potentially high returns.
“That means you don’t need a lot of cash to make a lot of money,” he says.
However, it’s up to advisors to explain the risks involved, informed by a robust understanding of the underlying market dynamics and technology. Then, they must apply that understanding to the client’s personal circumstances to factor in cryptocurrency investments as part of a broader investment strategy.
TORONTO – Canada’s main stock index was down more than 200 points in late-morning trading, weighed down by losses in the technology, base metal and energy sectors, while U.S. stock markets also fell.
The S&P/TSX composite index was down 239.24 points at 22,749.04.
In New York, the Dow Jones industrial average was down 312.36 points at 40,443.39. The S&P 500 index was down 80.94 points at 5,422.47, while the Nasdaq composite was down 380.17 points at 16,747.49.
The Canadian dollar traded for 73.80 cents US compared with 74.00 cents US on Thursday.
The October crude oil contract was down US$1.07 at US$68.08 per barrel and the October natural gas contract was up less than a penny at US$2.26 per mmBTU.
The December gold contract was down US$2.10 at US$2,541.00 an ounce and the December copper contract was down four cents at US$4.10 a pound.
This report by The Canadian Press was first published Sept. 6, 2024.
TORONTO – Canada’s main stock index was up more than 150 points in late-morning trading, helped by strength in technology, financial and energy stocks, while U.S. stock markets also pushed higher.
The S&P/TSX composite index was up 171.41 points at 23,298.39.
In New York, the Dow Jones industrial average was up 278.37 points at 41,369.79. The S&P 500 index was up 38.17 points at 5,630.35, while the Nasdaq composite was up 177.15 points at 17,733.18.
The Canadian dollar traded for 74.19 cents US compared with 74.23 cents US on Wednesday.
The October crude oil contract was up US$1.75 at US$76.27 per barrel and the October natural gas contract was up less than a penny at US$2.10 per mmBTU.
The December gold contract was up US$18.70 at US$2,556.50 an ounce and the December copper contract was down less than a penny at US$4.22 a pound.
This report by The Canadian Press was first published Aug. 29, 2024.
The crypto market has recently experienced a significant downturn, mirroring broader risk asset sell-offs. Over the past week, Bitcoin’s price dropped by 24%, reaching $53,000, while Ethereum plummeted nearly a third to $2,340. Major altcoins also suffered, with Cardano down 27.7%, Solana 36.2%, Dogecoin 34.6%, XRP 23.1%, Shiba Inu 30.1%, and BNB 25.7%.
The severe downturn in the crypto market appears to be part of a broader flight to safety, triggered by disappointing economic data. A worse-than-expected unemployment report on Friday marked the beginning of a technical recession, as defined by the Sahm Rule. This rule identifies a recession when the three-month average unemployment rate rises by at least half a percentage point from its lowest point in the past year.
Friday’s figures met this threshold, signaling an abrupt economic downshift. Consequently, investors sought safer assets, leading to declines in major stock indices: the S&P 500 dropped 2%, the Nasdaq 2.5%, and the Dow 1.5%. This trend continued into Monday with further sell-offs overseas.
The crypto market’s rapid decline raises questions about its role as either a speculative asset or a hedge against inflation and recession. Despite hopes that crypto could act as a risk hedge, the recent crash suggests it remains a speculative investment.
Since the downturn, the crypto market has seen its largest three-day sell-off in nearly a year, losing over $500 billion in market value. According to CoinGlass data, this bloodbath wiped out more than $1 billion in leveraged positions within the last 24 hours, including $365 million in Bitcoin and $348 million in Ether.
Khushboo Khullar of Lightning Ventures, speaking to Bloomberg, argued that the crypto sell-off is part of a broader liquidity panic as traders rush to cover margin calls. Khullar views this as a temporary sell-off, presenting a potential buying opportunity.
Josh Gilbert, an eToro market analyst, supports Khullar’s perspective, suggesting that the expected Federal Reserve rate cuts could benefit crypto assets. “Crypto assets have sold off, but many investors will see an opportunity. We see Federal Reserve rate cuts, which are now likely to come sharper than expected, as hugely positive for crypto assets,” Gilbert told Coindesk.
Despite the recent volatility, crypto continues to make strides toward mainstream acceptance. Notably, Morgan Stanley will allow its advisors to offer Bitcoin ETFs starting Wednesday. This follows more than half a year after the introduction of the first Bitcoin ETF. The investment bank will enable over 15,000 of its financial advisors to sell BlackRock’s IBIT and Fidelity’s FBTC. This move is seen as a significant step toward the “mainstreamization” of crypto, given the lengthy regulatory and company processes in major investment banks.
The recent crypto market downturn highlights its volatility and the broader economic concerns affecting all risk assets. While some analysts see the current situation as a temporary sell-off and a buying opportunity, others caution against the speculative nature of crypto. As the market evolves, its role as a mainstream alternative asset continues to grow, marked by increasing institutional acceptance and new investment opportunities.
