Bitcoin, scams, and all things too good to be true

A high-profile Bitcoin court case gripped the world of finance this year. At the centre of the story, a brilliant young man who made billions trading bitcoin, but left his clients high and dry. It’s yet another sorry tale in a long list of scams, get-rich-quick schemes and other investment smoke and mirrors. And like all these takes, there’s a moral to the story.

The ‘Bitcoin King’ loses his crown

We’ve been gripped by the story of the former king of crypto currencies, Sam Bankman-Fried.

There’s an interesting parable here about the lure of the next big thing – and that human desire to get rich quickly.

To recap, Bankman-Fried lived a gilded life. He’s the son of two highly regarded Ivy League university professors. He studied at Massachusetts Institute of Technology. And he launched a cryptocurrency trading and investing firm called FTX in 2019.

So successful did this become that he – according to media sources[1] – lived in a $30m Bahamas penthouse with an orchid-shaped pool. He hired a box to watch the 2022 Super Bowl and was joined by Katy Perry, Orlando Bloom and Kate Hudson. On Sunday 6 November 2022, Sam Bankman-Fried’s net worth was $15.6 bn.

By Friday, 11 November his companies filed for bankruptcy. And now’s he’s going to jail, convicted in recent weeks of fraud and money laundering on a massive scale.

Emperor’s new clothes

It’s as good a moment as any to remind ourselves that, in the world of finance, something too good to be true is usually best avoided.

Cryptocurrencies are perhaps one such example.

First Wealth can’t give advice on crypto. It’s unregulated. Proper financial planning is a methodical, evidence-based process. We wouldn’t advise a client on crypto any more than we’d comment on tips in the Racing Post.

That’s because Bitcoin, or any other cryptocurrency, is little more than a gamble at the moment.

It’s volatile – which means frequent rises and falls in price – with a standard deviation of 2.12%[2]. In other words, Bitcoin’s daily price over each of the last 30 days sits an average of 2.12% away from the average of those 30 days taken as a whole. This is a lot of movement. Gold is about half that. Moreover, a 75% tumble in the value of Bitcoin in 2022[3] exceeds just about anything stock markets could offer.

There are other criticisms: Bitcoin mining is carbon intensive (with emissions as high as those of Portugal or Bolivia[4]) and such currencies are beloved of organised crime (with US $8.6bn laundered in 2021 alone[5]).

Let me explain…

Invest in reputable funds that allocate to shares and / or bonds, and you know the fund manager has conducted meticulous analysis on a company’s strategy, its corporate governance, the quality of its management and the broader market in which it sits.

And, when markets, inflation or interest rates move in a certain way, this analysis gives a fund manager a good insight into how their investments might perform.

At First Wealth there’s almost a double layer of assurance: we analyse the fund managers who, in turn, analyse the shares and bonds.

There’s none of that in Bitcoin. Just the ups and downs of supply and demand.

Scams

It might be too strong to say Bitcoin is a scam in and of itself.

But there are sufficient scam-like characteristics for it not to pass the ‘sniff test’. For example, payments in cryptocurrencies come with none of the legal protections you might associate with ‘normal’ payments, there are no refunds and there’s always the possibility that information about your transaction might enter the public domain.

As we’ve seen above, the scale of criminality linked to Bitcoin can mean that scammers are never too far away.

For example, according to the UK Action Fraud website, criminals advertise schemes that promise high ‘investment’ returns through cryptocurrency investing or mining. These are often promoted through social media – and are designed to obtain money and / or personal information.

‘Endorsements’

Action Fraud goes on to say, “One common tactic used to defraud victims is the use of celebrity endorsements. Criminals will present professional and credible looking online adverts, send emails and create websites to advertise fake investment opportunities, including cryptocurrency. Often, fake testimonials are accompanied with a picture of a well-known figure to help the investment seem legitimate.”

In the year to March 2021, Britons reported some 558 frauds linked to bogus celebrity endorsements – and almost four in five (79%) involved cryptocurrencies.

Get-rich-quick schemes are almost never that – they are all too frequently a short cut to financial loss.

Instead, we follow the evidence, and aim to help our clients get richer slowly. And use that wealth to achieve and protect what matters most to them.

[1] https://www.ft.com/content/c38d2f8a-5707-41ae-815e-7a9e79d9027d and https://www.bloomberg.com/graphics/2023-sam-bankman-fried-ftx-wealth-timeline/?leadSource=uverify%20wall

[2] https://buybitcoinworldwide.com/volatility-index/#article-sources

[3] https://knowledgehub.transparency.org/helpdesk/cryptocurrencies-corruption-and-organised-crime-implications-of-the-growing-use-of-cryptocurrencies-in-enabling-illicit-finance-and-corruption#:~:text=Cryptocurrency%20is%20not%20only%20restricted,such%20as%20bribery%20and%20embezzlement.

[4] https://ceepr.mit.edu/wp-content/uploads/2021/09/2018-018.pdf

[5] https://knowledgehub.transparency.org/helpdesk/cryptocurrencies-corruption-and-organised-crime-implications-of-the-growing-use-of-cryptocurrencies-in-enabling-illicit-finance-and-corruption#:~:text=Cryptocurrency%20is%20not%20only%20restricted,such%20as%20bribery%20and%20embezzlement.

This document is marketing material for a retail audience and does not constitute advice or recommendations. Past performance is not a guide to future performance and may not be repeated. The value of investments and the income from them may go down as well as up and investors may not get back the amount originally invested.