Why Are So Many Crypto Startups Scams?

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Why Cryptocurrency Scams Are So Common 4
Credit: Creative Commons / Antana

In the modern era, cryptocurrency is becoming a normal part of everyday life. But that doesn't mean it's becoming accepted as just another way to do business, it means it's becoming well-known as a way for scammers to separate you from your hard-earned cash. But why is that the case? Is it the technology's fault? Are bad people just flocking to crypto? Not to worry, because in this article we'll explain why so many crypto startups are scams.

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Why Cryptocurrency Scams Are So Common

Why Cryptocurrency Scams Are So Common
Credit: Creative Commons

This comes down to a relatively fundamental misunderstanding of what cryptocurrency actually is and does.

Why do you think most people get involved with crypto? To make money, right? Right. But that's actually a big problem. To understand this, let's think of cryptocurrency like dropshipping, i.e. buying something at a lower price and selling it at a slightly higher price online.

If you heard that all these people out there were getting rich doing dropshipping, you probably wouldn't think much of it. You wouldn't think so because to make money dropshipping you need to have a supply of good products you can get at a lower-than-retail price, which naturally you won't be able to without connections and a lot of work.

This is because dropshipping is just a method. It's a tool. A way of doing business. It isn't actually anything itself. You'll need to actually dropship stuff to get somewhere. Now, cryptocurrency works the same way, but people don't realize that crypto isn't itself any kind of product that's worth anything.

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See, outside of a few well-established, well-invested cryptocurrencies (which are themselves struggling at the moment) like Bitcoin that can actually, to some extent, function like utilities in the world, the vast and overwhelming majority of cryptocurrencies out there were made to make money.

The problem with that is, as described, that crypto isn't actually a product. It's a digital currency. So if your master plan is to A) create a virtual currency and sell units of it at a low price and then B) advertise the currency to generate interest in it and finally C) sell the currency at a higher price than you paid because people are interested and are buying into it, you've created a scheme and not a product. There is no product in these cases.

Now, if your currency is tied to a video game, website, service, or any actual business that sells actual products or services, this may be a different story. However, when you're favorite influencer announces their new cryptocurrency, the fact of the matter is that they aren't actually making anything, they're just trying to take some money and make it into more money.

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This might sound shallow and obvious to avoid, but it's actually more complicated than that. Even if you know all of the above, you still might think that you can get in early enough before the advertising really hits its stride so that you can actually make money. This is the dangerous part of the crypto proposition a lot of the time.

How to Spot and Avoid Crypto Scams

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First and foremost, if a particular cryptocurrency is being started by an influencer or celebrity, just go ahead and write that off. As you might know, influencers and celebrities aren't businesses, they don't make products. Not the vast and overwhelming majority of them, anyways.

This is to say that, say, Obama announces Obamacoin. Naturally, Obama isn't trying to sell you anything, outside of maybe his book, so the only real reason you'd invest is that you think you can buy low and sell high. Just like with the stock market, this kind of practice is not worth risking your hard-earned money on unless you already know the space really well, like stockbrokers with stocks.

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But what about the cases like with Logan Paul, where although he was just an influencer he announced a whole video game was coming with his cryptocurrency. An actual product. Something that could generate actual value. Well, you'll need to judge the actual product, the video game, like you would any other video game, in this case.

What does that mean? Well, say I told you that LinusTechTips was making a video game. Even if you like LinusTechTips, well, you probably already know that he doesn't have experience making games. He doesn't have hundreds of full-time game developer employees. He doesn't have experience managing and leading a project like a video game's development.

Now, maybe he could find the right people to help him make an amazing video. It's possible. But if you were going to bet on it, as you do with actual cryptocurrency, you wouldn't put your money on LinusTechTips doing that, because it has a relatively low chance of happening. Unless, of course, you had tons of money to spend and it didn't matter at all if you lost it.

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So, if you apply this logic to Logan Paul's cryptocurrency and accompanying game, you'd come to the conclusion that, no, that wouldn't be a good investment. As a rule of thumb, speculative markets are best avoided if you're asking the question of whether or not to get involved.

Speculation means you're spending money with the intention of making more money while also taking on risk, like the stock market. And just like the stock market, if you don't have the appropriate education, it's best avoided.

What Do Good Crypto Business Ideas Look Like?

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First off, it's important to understand that a crypto business idea might be good in the sense that it's not an outright scam that will take your money and in return give you nothing but that does not mean it's a good investment. It doesn't mean you'll make money. You probably won't.

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But, there is a big difference between an influencer starting up a cryptocurrency and other kinds of cryptocurrency proposals. So, for example, say Rockstar decides to make a cryptocurrency game. It's just as big and ambitious as GTA but in the game, you'll be rewarded with tiny amounts of cryptocurrency for completing in-game activities.

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Then, you can choose to reinvest that currency into in-game stuff, or you can choose to cash it out for real money. You know there's a good chance of the video game being successful, and considering Rockstar's popularity, you know there's a good chance lots of people will try the game out.

So, deciding to buy some of the game's currency and play the game isn't too much of a terrible idea. At worst, you'll have spent some cash on a game you didn't end up liking. At best, maybe you find a relatively chill way to make a few extra bucks a month on the side. This would be a good cryptocurrency business proposition. Not necessarily a good game, and certainly no way to get rich quickly, but unlikely to be an outright scam.

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A crypto business that isn't a scam will offer up more than just gambling. But just because there's more to a particular business than gambling, don't assume that because something isn't a scam it's worth investing in. That's a much more difficult needle to thread and a thing to call. Most importantly, unless there's a game attached to crypto you really want to play, don't spend your money on anything crypto-related unless you can afford to lose it.

There may be some niche exceptions to this, like if you live in a country where your currency isn't reliable and a cryptocurrency like Bitcoin is actually more reliable. But for the vast and overwhelming majority of people, crypto is simply best left avoided if you have any question in your mind at all as to whether or not you should involve yourself with it.