“FOMO” and Crypto Scams

The dotcom boom of the late 90s and early 2000s will be remembered for giving the world technology giants of today, the Amazon, Facebook, Google, Twitter, the list is endless.

For some individuals involved in such companies, the journey has been a remarkable one. These individuals are now ranked as some of the world’s richest just because they stuck with the projects even when it seemed like they will fail.

The story of Sean Parker a serial Silicon Valley operative who used his connections with venture capitalists to help Facebook get on its feet or Jim Clark who staked his own money in Netscape, the world’s first internet browser are some of the alluring tales that the world witnessed. Clark and Parker are now billionaires, a handsome reward for their instincts.

The untold story of the dotcom boom

Sadly not all those involved in tech startups of this era were as successful. Millions if not billions of dollars were lost as many others tried to emulate the path taken by individuals mentioned above. 

Even when some of the projects have looked unconvincing, naïve investors—who were too eager not to miss out—simply plunged in, hoping to become the next multi-millionaires. The resultant losses were devastating and many lost everything.

Interestingly, some of those duped into investing are well educated and experienced individuals, the ones who normally should know better. Apparently, one’ educational background alone will not suffice when it comes to making the right investment decision.

Packaging scams

Sophisticated scammers are at work 24/7 attempting to hoodwink unsuspecting individuals including those with experience. These scammers constantly remind those who care to listen just how people like Parker turnaround their fortunes by joining Facebook at infancy and how Eduardo Saverin—an individual who actually started the Facebook project with Mark Zuckerberg—got a raw deal for losing faith.

For a bit of context, Saverin was Zuckerberg’s partner when they started the social media company. Saverin was the finance guy while Zuckerberg handled the tech side of things. When Facebook began to show potential, the two partners reportedly disagreed on the strategy of moving their venture forward. Saverin wanted the company to operate commercially while Zukcerberg felt he needed more time and funds to develop the application further hence there was a falling out of sorts.

When Saverin stepped back after this fallout, Parker arrived right in the nick of time to prod on Zuckerberg to move forward with the project while he arranged for further R&D funding which the latter wanted. Parker’s connections came through, Zuckerberg got the funding he was looking for but this came with a change in the ownership structure. Zuckerberg’s shareholding got diluted but he ultimately remained a significant shareholder while Parker got significant shareholding as did the venture capitalists that had financed the company. On the other hand, Saverin who prior to this change in the ownership structure, had a shareholding similar to that of Zuckerberg and now had to content with being a minority shareholder in a company he helped to start.

So as the story goes, it was Parker who was the winner while Saverin is the biggest loser in this simply because he lost faith at the critical stages of the project. Of course, there was legal a battle to reverse some of the controversial aspects of the new ownership structure, but Parker is sitting pretty despite the fact his was not a co-founder like Saverin.

Moral of the story, the world rewards those who stick to their dreams right through to the end.

Today scammers are able to fleece inexperienced investors substantial amounts of money by simply reminding them of stories like that of Parker and Saverin. So when an elaborate pyramid or Ponzi scheme gets packaged this way, it is easy to steal even from those already wealthy or those who must know better.

When the rational act irrationally

So what really drives rationale individuals into parting with substantial amounts of money in exchange for an unrealistic return?

Well, a fear of missing out (FOMO) partly explains why rational individuals act irrationally when it comes making investment decisions. The prospect of making an extremely huge return in a very short space of time blurs rational thinking apparently. Criminal elements and other bad actors are quite aware of this and have used this to good effect.

Today this FOMO is being used to dupe novice investors and there are always plenty of them.

After the dotcom boom, the focus has now shifted to the blockchain technology space and again this fear is being used generate financial support for dubious projects.

The crypto market boom that started in 2017 saw crypto assets prices experiencing an abnormal growth in just short space of time. Budding investors that were not invested in cryptos at the time rued this missed opportunity and are now on the look-out for the next big market boom. There are probably millions of dollars out there waiting to support projects that purport to be bona fide blockchain ventures.

Of course such scams have not gone unnoticed by regulating authorities.

Regulatory warnings

The Financial Conduct Authority (FCA), a UK based financial watchdog noted the effect of this FOMO phenomenon on some investors. This FCA’s observation is included in a consultation paper released earlier this year. Part of the text reads as follows:

‘The potential to misunderstand the nature of these assets can be compounded by poor practices in relation to advertising. Adverts often overstate benefits and rarely warn of volatility risks, the fact consumers can lose their investment, the absence of a secondary market for many offerings, and the lack of regulation. These (adverts) often play on consumers’ aspirations for ‘easy money and wealth’ and ‘fear of missing out’. Often social media plays a significant role in influencing consumers’ behavior.’

Indeed, looking back it is easy to see that many of the crypto projects that solicited for financial support from the general public were overhyped.

In fact, some studies have concluded that many of the blockchain startups were scams designed to appear as legitimate crypto projects and that the initial coin offering (ICO) market has been the legitimate avenue used by criminal elements to con gullible investors.

The FCA’s paper again comes to a similar conclusion:

‘2018 saw a significant reduction in the amount of capital raised in ICOs compared to the 2017 amount. Global ICO funding was $65m in the month of November 2018, compared to over $823m in the month of November 2017.There are a number of reasons for this fall, with (some) commentators identifying investor caution as a response to the large amount of fraudulent ICOs as well as a high failure rate of new enterprises that use the ICO process. This can also lead to ICOs missing their target collections. The underlying volatility of cryptoassets used may also be an issue as they are used, in many cases, for payments in ICOs.

The ICO market may have tanked but criminals are still fleecing investors with new methods but basically using the same tactics.

So what are some of the signs of a possible crypto scam?

The largely unregulated crypto space has been growing quite rapidly hence it has been hard to distinguish genuine projects from bogus ones with pinpoint accuracy.

How to flag crypto scams

Nevertheless, there are ways which investors or those who choose to participant in future token offerings can do before deciding to part with money.

There are a number of key signs to look out for and below we list and expand on some of the usual signs;

  • Too good to be true—as the sayings goes, if something is too good to be true then it probably is. Any investment has a potential to earn healthy returns for investors and equally, any such investment has an element of risk, an investor can lose everything. So when an ICO promises big on returns but is completely silent on the downside, there is a potential problem and investors need to approach this token offering with caution. Usually a higher return means a higher risk. So if you are less risk averse, then a murky token could be the thing for you. Investors need to always remember this, there is no such thing as a free lunch, and anything that promises surreal returns could otherwise be a scam.
  • Depth of the whitepaper—the whitepaper is the equivalent of a prospectus that crypto businesses seeking funding from the public usually issue out. The main difference however is a prospectus comes with set standards. If such a document fails to meet expectations, it will not be sanctioned for distribution to the public by regulators. At the moment there seems to be no such standards when it comes to crypto whitepapers, all that is needed is a flashy website to host the paper. In addition, the information contained in many whitepapers inconclusive, even Facebook’s Libra whitepaper has been attacked for being scant when it comes to providing vital information. An informative whitepaper must have in-depth details of the token offering process, the objectives of the fund raising and the background of those behind. A potential investor could well use the services of an experienced crypto advisor to give an opinion about an offering based on the information from gleaned from a whitepaper. Nevertheless, a novice investor will still be able to unmask outright exaggerations on issues like the professional experience of the proposed project’s key drivers. Crypto-currencies have been around for about 10 years now, therefore it stands to reason that all professionals in this field cannot have years of experience that exceeds ten years. Therefore when a chief executive officer in his mid 20s tells potential investors that he has more than 10 years experience, that could be the clearest sign of a potentially fraudulent token offering.
  •  No cap on maximum funds to be raised—dubious ICOs will not state the exact amount that needs to be raised, it is an open ended exercise. A document that essentially invites members of the public to participate in any fund raising activity must clearly state how much needs to be raised, the period of the fundraising exercise and to finance what? Transparency or lack thereof on this aspect will be essential in determining if a token offering is genuine or not.
  • Current project status—for companies operating in a regulated space, the initial public offering (IPO) has been used by businesses that are seeking to raise capital from the public for the first time. The funding is usually needed to augment capital of an existing business. So this means potential investors can seek clues and a better understanding of what they are getting into by examining the existing business. The IPO prospectus document usually contains historical information about the existing business. It stands to reason that a similar principle needs to be applied to crypto offering even as they space remains unregulated. A whitepaper should have similar information available, there must be something happening already that investors can look at in order to get a feel of the business that they are about to invest in. Whitepaper that has in-depth details of the business’ history will undoubtedly enhance the credibility of the crypto fund raising exercise.
  • Core team— An IPO prospectus is usually contains names of the management team, the identity of directors and the shareholding structure. A prospectus will go as far as publishing pictures of the managerial personnel, the residential addresses of directors as well the capital seeking company’s physical and contact addresses. This enhances the credibility of the offering, potential investors know who they are financing and where they can find them. Whitepapers are not standardized yet but any start-up that wants to endear itself with investors should borrow a leaf or two from IPO prospectus. At the same time, a shrewd investor should avoid investing in a faceless organization that only lists mobile phones as contact information!
  • Overhyped projects—it may be natural for a capital seeking business to project success but that should fall inside parameters of what may be deemed reasonable. Overhyping means the revenue or profit projections maybe unrealistic when contrasted the present usage of cryptos in general. An overhyped project could potentially be the signal that a coin offering is really a Ponzi scheme. There is no denying that all cryptocurrency related projects face challenges that make the achievement of core objectives impossible, at least in the short term. So it should concern investors when a start-up promises a quick turnaround in a market that everyone agrees is far from reaching full potential.

There are many more sources of information and diligent investors must always do more to get enough before committing to invest. Criminals are on the prowl and smart investors will avoid falling victim if they stick to some of the suggestions outlined above or if they engage a professional adviser.