Blockchain is the future of finance. Blockchain is a revolution. Blockchain will disrupt the industries and sectors.
Wow, awesome! But, what is it that is causing such crazy hype?! Is investment in Blockchain or Bitcoin safe?
Let’s understand the basic terms first.
Blockchain is a technology that facilitates the functioning of cryptocurrencies. It is a type of distributed ledger, where records can be stored and organized into blocks. That means there is no central authority maintaining the ledger, and data is maintained by a group of peers.
It is understood that Blockchain can remove the intermediaries and foster an environment of trust and transparency due to distributed ledger mechanism.
Cryptocurrency is a digital currency stored in the blockchain.
Bitcoin is the most popular cryptocurrency for which the blockchain technology was invented.
But, are Blockchain and Bitcoin scam?
There are two parts here: Blockchain technology and Bitcoin.
Blockchain technology is amazing. It can change the way the industries work. It is transparent, accurate, distributed, permanent and cheap. It can have positive applications in banks, financial institutions, voting, automotive industry, heatlthcare, etc. However, there are no existing regulations that govern this technology.
The other is Bitcoin. The world is going gaga over Bitcoin and its value. Its price touched around $4,500 mark. People are buying Bitcoins in a hope that it will surge further. They also don’t want to miss out an opportunity to make money. So, Bitcoin has become a tradeable instrument offering lucrative return.
But, let’s not forget, with high returns, come high risks. Stock markets too have witnessed such surges disguised as scams. All the gold rush ends one day. Before you mark Bitcoin safe, let’s walk around some risks attached.
What looks risky in Bitcoins?
Volatility: Volatilities exist in stock markets too, but are much higher in Bitcoins. Anything that goes up comes down. Someone who bought majority of Bitcoins since inception will surely dump it to someone. What if you are the one?
Regulations: Stock market can still boast about having regulators (like SEC in US, SEBI in India, etc.) to protect the interests of consumers, but what does Bitcoin have? If the prices of Bitcoin crash, who will you claim your money from? It is better to wait for the governments to adopt this technology and set some rules and regulations to protect the interests of people trading in this currency.
IT Risk: This is merely a code, and can be hacked. If someone gets access to your public key, you may end up losing your ownership. Again, there is no regulator to protect your interest.
Money Laundering: Owing to anonymity of these transactions, it is also likely to be used by criminals for money laundering. There are no taxes involved. If the government decides to ban it, its value can crash terribly.
These Bitcoins very much resemble stock markets. Let’s walk around the traits of scams that have rocked the stock market.
What do the scams look like?
The scammers can organize a scam in such a systematic and polished manner that it may be hard to unwrap the truth. They market you the garden of flowers, but little do you know that there is a crematory right under it.
One of the most popular stock schemes is called “pump and dump.” Here’s how it works.
A group of crooks buys up a block of stock in a little known company, preferably one that has a semi-exciting technology name. They advertise it massively and begin flooding cyberspace with false rumors about how this company has some breakthrough technology or just signed a super deal.
They may even develop phony letterhead and send out press releases about the company, and carry out every such thing that lures people into buying that stock.
With more and more people buying the stock, price of the stock starts increasing and the crooks’ smile starts widening.
After the stock price goes up, the crooks finally decide to dump the stock and book fat profit. When they sell, the price stumbles steeply and all the people they conned into buying lose money heavily.
Game is not over yet. Sometimes crooks themselves short that stock then hop on the Internet and spread lies about how the company is in trouble or about to face some criminal proceeding. When the stock drops, the short sellers cover their positions for a big profit. Scam happened. Crooks won, gullible people lost.
Schemes come in various forms to extract money from your pocket. They all have one thing in common: very high returns. The sad truth is that many people fall for these schemes because their greed overcomes their reason. Don’t let this happen to you.
Famous Scams in History
- Jordan Belfort (Stratton Oakmont)
The Wolf of Wall Street. Stratton Oakmont was a typical pump-and-dump firm in the 90s, where brokers would drive up the price of stocks and then Belfort and his partners would cash out causing the stock to plummet in value. He hired hundreds of ambitious brokers to cold call unsuspecting people, selling worthless stocks. In 1998, Belfort was indicted for securities fraud and money laundering.
- Charles Ponzi
The term “Ponzi scheme” is named after Charles Ponzi’s famous pyramid scheme. Ponzi infamously promised returns of 50% in 45 days, which were actually paid with by funds from new investors. The scheme eventually failed in 1920 leaving 5 banks and all investors ruined. Charles Ponzi made $20 million through his pyramid scheme, in those days.
- Ketan Parekh
Ketan Parekh can best be described as the Pied Piper of Dalal Street. For two years, marketmen followed his every action because all he touched turned to gold. Be it investment firms, mostly controlled by promoters of listed companies, overseas corporate bodies or cooperative banks, all were ready to hand the money to Parekh, which he used to rig up stock prices by making his interest apparent. In no time, scrips like Visualsoft rose from Rs 625 to Rs 8,448 per share and Sonata Software from Rs 90 to Rs 2,150. But the vicious cycle of fraud did not end with price rigging. The inflated stocks had to be dumped onto someone in the end, for which Parekh used financial institutions like the UTI. But the party ended rather abruptly a day after the Union Budget was presented in February 2001. SEBI investigated, it was evident that bank and promoter funds were used to rig the markets. Parekh was arrested in March that year and was in custody for 53 days. In the aftermath of the scam, many gaping loopholes in the market were plugged.
Surge in Bitcoin value is a coincidence? Maybe or maybe not! You decide. Let’s take Blockchain and Bitcoin value as separate things and just hope that the future of finance will be shaped by the Block Chain Technology in a positive dimension.
Disclaimer: Views shared by Moneyम्जी are personal. Feel free to act on your own understanding.