Photo by Jeremy Zero on Unsplash
August 13, 2021
By Aara Ramesh
Acouple of months ago, members of an esports organization called FaZe Clan started promoting a new cryptocurrency called “Save the Kids,” which promised to “build a better world for kids” through donating some proceeds of the sales of its tokens to charity. This drew the attention of their millions of followers, many of whom were young and not knowledgeable about investing.
Fans put their money into these new and exciting tokens, believing and trusting the people endorsing it and hoping to make money from it. But over the month of June, the value of “Save the Kids” plummeted 60%, causing many who had invested to lose their money. Influencers who had promoted it pulled their ads and FaZe Clan was forced to suspend four members who had marketed the coin.
This is but the latest in a long string of influencers, celebrities, and other famous people using their social media platform and “clout” to promote cryptocurrencies. These people often have millions — if not hundreds of millions — of followers, many of whom look up to them and trust the products they vouch for.
For instance, Kim Kardashian has, in the past, promoted an altcoin to her 228 million followers. Though she indicated on the post that it was an ad and also said she was not offering financial advice, there is reason to believe she could have made up to half a million dollars just for that one post. Other celebrities like boxer Floyd Mayweather and YouTube personality Logan Paul have also promoted various cryptocurrencies.
In today’s piece we look at why such influencer-backed cryptocurrencies can be dangerous and how you can protect yourself from falling prey to a scam.
Just as a refresher, the term “cryptocurrency” refers to purely digital financial tokens that are an alternative to fiat currency. Traditional forms of cryptocurrency may be familiar to the layperson, including such tokens as Bitcoin, DogeCoin, and Ethereum. With the rising infamy of crypto, however, has come a flood of “altcoin,” a phrase that is used to refer to less-legitimate cryptocurrencies, such as those based on an internet meme or joke.
The way crypto works makes it easy for skilled coders to create billions of their own tokens that use an existing blockchain and that cost “hardly anything.” This has led to an exponential growth in the number of crypto varieties available in the market, with one source estimating that this figure has doubled in the last year alone, up to nearly 10,000.
Once they’ve created these altcoin, all that is left for the developers to do is to bring enough attention to it so that people buy it and raise the token’s value. This is where influencers and celebrities come in. They are sought out as brand ambassadors, who can go so far as to endorse the coin itself or may just direct their followers’ attention to the new, probably unheard-of token.
These so-called ad campaigns can take many forms, such as “giveaways” or trade deals on social media platforms mainly frequented by young, often-inexperienced investors, including on TikTok, Instagram, YouTube, Reddit, Discord, and Telegram. In return, the influencer may receive a standard monetary compensation like in any traditional ad campaign, or they may receive, for free, some of the altcoin that they can then sell off once the value goes up.
Young People And Investing
Experts who have studied the financial proclivities of young people say that they tend to invest more based on “competition” or “novelty,” and are less concerned with things like building up savings for retirement or their kids’ college funds — the more “conventional, more functional reasons” of previous generations.
One study in the UK found that young people are more likely to invest in cryptocurrencies than in stocks, bonds, or other share-based items. A JPMorgan report said that during the pandemic, older investors in the U.S. turned to gold as an investment vessel, while young people were more likely to eye bitcoin.
Part of the allure of crypto, according to some, is that there is a measure of the risk-taking, thrill-seeking behavior often ascribed to youngsters in investing in a market so novel, so volatile, and so heavily promoted by celebrities. Others say that after seeing the financial crisis in 2008, young people tend to be more distrustful of centralized banking systems.
On the other hand, “traditional crypto” like Bitcoin, Ethereum, and DogeCoin may have become mainstream enough to be too expensive for the average youngster. Thus, they are turning more and more to altcoin, which they learn about through social media tutorials, rather than from standard sources.
Why Is This A Problem?
While this may seem like a harmless, innocuous way for young people to get started with investing early, the trend of glamorous influencers promoting bitcoin to their followers has raised concerns among many. The market, watchdogs say, is rife with scams and fraud. As one article put it, “Where there’s money to be made, scammers aren’t far behind.”
A few months ago, we wrote about Federal Trade Commission (FTC) data that showed cryptocurrency scams, as reported by consumers between October 2020 and March 2021, had spiked 1,000% in terms of value lost and 12X in terms of the volume of complaints received, as compared to the same period the previous year. One study found at least 355 instances of cryptocurrency scams over a period of seven months, wherein investors lost big and organizers made off with millions.
In that report, the FTC also said that “people in their 20s and 30s have lost more money on investment scams than on any other type of fraud.” Roughly $35 million or over half of the losses to investment scams reported, they added, were tied to cryptocurrency alone, with Elon Musk being a particularly popular subject to impersonate in such scams.
Old-school stock investments had their “pump-and-dump” scams, cryptocurrencies have their “rug pulls,” i.e., pulling the rug out from under investors. Both are just roses of a different name, in the end. They both involve seemingly trustworthy people promoting the token, enticing people to invest in it to raise the value. And when the value is sufficiently high, the scammers sell their own horde of the token and get rich, while the average investor is left to bear the losses as the price tanks.
According to some experts, this is nothing more than an attempt to capitalize on those looking for a “get rich quick” scheme or hoping to get in on the ground floor of a blockbuster investment opportunity. It is easy for those just casually interested in investing to fall prey to survivorship bias or “FOMO” (the fear of missing out).
Survivorship bias refers to the human tendency to look at a small sample of the ones who “made it,” the successful ones, and think it is representative of a whole population. For instance, it may be easy to look at a popular actor who started from nothing and became wildly successful and think anyone can make it. But focusing on that one case discounts the thousands — if not millions — of others in similar circumstances who didn’t make it. Statistically, the average person is more likely to fall into the latter category than the former. This is quite a well-known phenomenon in investment.
In the case of crypto, it is easy for an inexperienced person to see the successful stories of those who have gotten rich off crypto by investing in unknown coin early, or to look at a trusted celebrity endorsing a new coin, and worry about missing out on a golden opportunity. What they don’t realize, experts warn, is that they are not seeing the stories of the millions who lost their livelihoods or savings to crypto scams.
The problem is that unlike in the stock market, such Ponzi schemes in crypto are not illegal, with the market being largely unregulated and with a key feature of the currency being that it is not backed by a central bank.
So what can someone do to protect themselves?
What To Watch Out For
The FTC and many other sources have lists of things to look out for before investing in crypto and how to identify if you are being targeted by a scammer.
- Look out for the term “rug-proof” when it comes to crypto, because even if it may seem counter-intuitive, it more often than not is a sign of a “rug pull” scam.
- Be aware that you might be being taken advantage of or that your lack of knowledge about the subject may be misleading you.
- Do your own research. Reports find that young people are getting advice on investing from social media apps and influencers, which may be a good way to start the learning journey. But do not rely exclusively on that; vet the coin for yourself. The FTC suggests looking up the name of the coin along with the term “review” or “scam.”
- Be wary of anyone promoting a new, obscure coin too enthusiastically, particularly those who have rarely or never mentioned financial topics or crypto, and who suddenly start talking about it.
- Seek out professional advice from a knowledgeable person.
- As with all investments and past-times like betting, experts advise to never put in more than you are willing to lose.
- Be wary of emails or phone calls from people telling you you’ve won bitcoin, especially if you never entered a contest or giveaway to begin with.
- Never trade cryptocurrencies on dating apps.
- Do not trust guarantees or big promises in general, such as “quick return” schemes, “guaranteed” returns, “multiplied profits,” free money, etc.
- Be suspicious of those who make big claims about returns without providing specifics or explanations.
- Do not blindly follow a celebrity or a non-expert who says they know a better way to invest, even if you trust that person or have benefitted from their recommendations in the past.
- Look out for anyone demanding that a transaction only be settled via cryptocurrency. Like with wire transfers and gift cards, the money once gone is generally impossible to retrieve.
- Be aware that cryptocurrency scams also have Ponzi-scheme-like features, such as saying that you will be paid in a digital token for the more people you bring into a program, or that the more you pay the more you’ll earn in profits.
- Look up and vet for yourself anyone claiming to be an expert or an “investment manager.” If applicable, look up a license or certification standard for them to ensure they are legitimate.
- Be extra cautious of people pretending to be banks, other reputable institutions, or government agencies. They will never trade directly in bitcoin or ask you to first transfer money to get a return.
- Keep an eye out for unsolicited and fake job offers that involve cryptocurrency in any way. It might just be a way to lure you into a scheme or to steal your money and personal information.
- Do not fall prey to blackmail or extortion emails or phone calls, where someone contacts you to say that they have embarrassing, illegal, or compromising material about you and that they will release it to the public if you do not pay them in cryptocurrency. If you send them any money, there is no way to get it back, and they may just blackmail you for more. Instead, report the communication to authorities immediately.
It’s not all doom-and-gloom, though. There are some influencers out there acting as forces for good, and there are legitimate cryptocurrency investments.
There are influencers who know what they are talking about and can explain, in simple terms, how things like cryptocurrencies work and how to make money. This quick-bite, basic educational content may be easy to understand but should not, experts say, be construed as serious financial advice. For young people, watching videos on YouTube, Instagram, or TikTok may be a great starting point and a way to begin their financial literacy journey early, when they don’t have that much money to lose.
Other influencers dedicate their time to unmasking and warning followers about various crypto scams doing the rounds. But even these people are powerless to do much, beyond just warning of such schemes.
In the end, however, experts warn everyone to be cautious and extra vigilant when it comes to investing in cryptocurrency, as even the government cannot help retrieve money lost to a crypto scammer — regardless of how famous they are — in the end. With the industry being so new and unregulated, authorities’ hands are tied.
We will leave you here with a sage word of advice from the Securities and Exchange Commission: “It is never a good idea to make an investment decision just because someone famous says a product or service is a good investment.”
The information provided in this article should not be considered financial advice or a substitute for financial advice. Biometrica is not an investment firm and cannot offer financial advice.
If you believe you’ve been the subject of a cryptocurrency scam, you can report it to the FTC here .
If someone is attempting to blackmail or extort you using cryptocurrency, you can report it to the FBI here.