Understanding the Risks of Crypto Investment
One of the founders of Crypto-Watch Indonesia, Christopher Tahir, explained that fraud in crypto asset investment often involved insiders, such a dealer who made up the value of the crypto assets to cheat investors.
This May 12, 2021, file photo shows an advertisement for the cryptocurrency Bitcoin displayed on a tram in Hong Kong. As the biggest cryptocurrencies flirt with record highs in value, they are increasingly becoming a bigger source of revenue for charities. However, the number of charities accepting the virtual currencies, known for their volatility, remains limited.
Anything is possible in investing in crypto assets. Their value can jump or fall sharply in a matter of hours. In fact, there is a lot of fraud in crypto investment.
JAKARTA, KOMPAS — As transactions continue to increase both inside and outside the physical market of crypto assets, investors must be prepared for all investment risks, such as fraud and scamming.
2021 was a phenomenal year for crypto asset trading in Indonesia due to the sharp increase in the value of transactions during the year. As of November last year, the transactions of crypto assets reached a total of Rp 802.5 trillion (about US$55.70 billion), according to data from the Commodity Futures Trading Regulatory Agency (Bappebti). The figure far exceeded the transaction value of Rp 64.9 trillion recorded last year. Likewise, the total number of registered investors in crypto assets on the physical market reached 10.5 million people in November of last year.
Most of these entities attracted investors with memberships and using multilevel marketing (MLM) schemes.
Along with the increase in transactions, the number of fraud cases in crypto assets has also risen sharply. The Investment Alert Task Force (SWI) blocked at least 70 crypto asset entities that were illegally operating in Indonesia from 2017 to 2021. Most of these entities attracted investors with memberships and using multilevel marketing (MLM) schemes.
The risk of such fraud can be even greater if investors do not have basic knowledge about the relatively new investment model. An investor in such a business, Ryan Filbert, said the concept of “non-repudiation and permanence” in crypto asset investment was not well understood. Meanwhile, beginners generally know crypto only as a place to earn big profits, and they get involved in the business without knowing its risks, he said.
"It will be dangerous if it is not accompanied by good and reliable education. There will be many people who come here to cheat and take the advantage of people's ignorance," said Ryan.
Business models
There are at least four schemes used by perpetrators to cheat investors in crypto asset investment. For example, some developers offer crypto assets that rely solely on price spikes and ignore their purpose. The crypto asset developers can simply abandon their projects and run away with investors’ money, a practice known as a rug pull or a malicious maneuver in stealing assets through physical stores (exchanges) and offering trading business applications to raise funds.
Salvadoran veterans of the army and the guerrilla, march to protest against the economic measures adopted by the government, in San Salvador, on August 27, 2021. - The march participants protested against the implementation of Bitcoin in El Salvador and demanded the repeal of the law that will give legal effect to cryptocurrency in the country from September.
One of the founders of Crypto-Watch Indonesia, Christopher Tahir, explained that fraud in crypto asset investment often involved insiders, such a dealer who made up the value of the crypto assets to cheat investors. For example, a dealer buys a crypto asset first and holds it for some time. During that time, the dealer takes care of the asset and keeps it from being exposed by the media, and after that, the developers spread news that could attract people to buy the asset so that the price will increase sharply. When the price reaches a certain level, the developers sell the crypto assets they previously accumulated to make a big profit.
"In the stock market, the practice is often called ‘dealers dumping their assets’," said Chris.
A more sinister maneuver in making up a price is called a rug pull. The Squid Game token was one of such scheme. On 1 Nov., 2021, at 4:35 p.m., the price per token was Rp 40.68 million (US$2,856.64). Five minutes later, the price plunged to Rp 11.29.
In addition to coins or tokens that are dubious, a market whose operation is not reliable is often used by fraudsters to steal people's money. Take, for example, the South African crypto asset market firm Africrypt which ran away with $3.6 billion of investors’ money. The founder of Africrypt claimed there was a hack.
"It turned out that after being investigated, there was no hack at all. It was purely a scam," said Chris.
‘Trading Robots’
Fraud is also often carried out through a crypto trading business application. It is more tempting for people who do not fully understand investing in crypto assets when the perpetrators offer a trading robot.
The perpetrator steals the investors’ money by, for example, asking investors to transfer funds to the manager of the robot application. A similar case occurred in the Mark AI trading robot application in Indonesia. This entity rented five crypto robots to customers along with tiered investment packages.
A man protests against the circulation of Bitcoin in San Salvador on September 7, 2021. - El Salvador on Tuesday becomes the first country in the world to accept bitcoin as legal tender, despite widespread domestic skepticism and international warnings of risks for consumers.
For Robot 1, for example, investors were offered a crypto asset for $32, with a promised gain of 14.85 percent per month. Meanwhile, for Robot 5, the investors were required to invest $10,500 with a promised profit of $4,950. Mark AI used a rupiah exchange rate of Rp 15,500 per US dollar.
Mark AI also promised commissions for members who could invite new members. There were three types of commissions that could be earned based on the amount of the deposit paid, the type of robot rented and the amount of profit the members made. The commission is in the form of free robot rental and money.
Commencing operations in early 2021, the Mark AI site became inaccessible on 17 Oct. 2021. Two days earlier, Mark AI issued a notification that the deposit and fund disbursement processes were being frozen. Mark AI on its social media accounts said this suspension was due to the entry of illegal funds from Sunton Capital, another money application that uses robotic investment.
Some investors who were unable to withdraw their money reported Mark AI to the police. One of them was Fisiharto who suffered a loss of around Rp 126 million.
"There were approximately 200,000 investors. For example, if they invested about $100 each, the total loss could reach $50 million or Rp 700 billion,” said Fisiharto, who was previously active in stocks and foreign exchange trading.
Ryan emphasized that investors interested in robot trading practices should choose an application that did not raise funds from the investors. The money invested should remain in the customer's crypto exchange wallet account, and the robot should connect to the market via an application programming interface.
The chairman of the Physical Market Crypto Asset Traders’ Association, Teguh Kurniawan Harmanda, agreed about the risks of crypto assets.
However, the risk of fraud also exists in other investment products. According to Teguh, what is important is to educate investors about risks and types of fraud in crypto assets. Investors should also understand whether the crypto assets they buy are registered under Bappebti.
"It is important to see the recommendation from Bappebti on crypto assets that can be traded in Indonesia. Don't ever buy a dubious crypto asset. As a precautionary measure, you should buy or trade crypto assets that have been registered with Bappebti through a physical market,” said Teguh.
Bappebti has selected types of crypto assets that can be traded in Indonesia to reduce the risk of fraud.
This illustration photo shows the Coinbase logo on a smartphone in Los Angeles on April 13, 2021. - The arrival April 13, 2021, of cryptocurrency exchange Coinbase on Nasdaq is one of the most anticipated events of the year on Wall Street, where enthusiasm for record-breaking bitcoin is in full swing, despite questions about the sustainability of the market.
So far, there are 229 crypto assets that comply with Bappebti Regulation No. 7/2020 on crypto assets that can be traded on the physical crypto asset market.
These assets have have met at least three criteria, namely they are based on distributed ledger technology, they are in the form of utility crypto assets or crypto-backed assets, and they already have been assessed using the Analytical Hierarchy Process (AHP) method determined by Bappebti. (DIV/JOG/FRD/BIL)
(This article was translated by Hendarsyah Tarmizi).
