Risks of the Cryptocurrency Market and Fraud Cases

Table of contents

Published: 09.01.2025 | Last updated 24.03.2025 by CryptoBreezeHubAuthor

Introduction

The cryptocurrency market attracts investors due to its potential for high returns, but it also carries significant risks. The lack of stringent regulation, high volatility, and the activity of fraudsters create considerable threats for both individual and institutional investors. This article examines the key risks of the cryptocurrency market and exposes various fraud schemes.

Volatility and Market Manipulation

The cryptocurrency market is notorious for its extreme volatility. For example, in 2018, Bitcoin’s value plummeted by 80% from its January peak (Forbes, 2019). This volatility is often exploited by market manipulators, who use tactics like Pump and Dump, where the price of a cryptocurrency is artificially inflated and then sold off, causing massive losses for retail investors (SEC, 2021).

In addition to Pump and Dump, another manipulation strategy is Wash Trading, where traders buy and sell the same assets simultaneously to create false trading volumes, misleading other investors about market interest. Spoofing, a tactic where traders place large orders they do not intend to fulfill to create a false sense of demand, is also prevalent.

High-Profile Fraudulent Schemes

Fake ICOs and Scam Tokens In 2017-2018, the ICO boom resulted in numerous scams. Over 80% of ICOs launched in 2017 did not survive beyond their first year (Satis Group, 2018). Fraudulent projects promised huge returns, with little to no transparency or regulation. One of the largest was the BitPetite scam, which raised millions before disappearing.

BitConnect One of the most infamous frauds in the crypto space was the BitConnect scam, which promised investors guaranteed returns. In 2018, the platform collapsed, leaving thousands of investors with substantial losses. The SEC classified BitConnect as a fraudulent investment scheme (SEC, 2022).

QuadrigaCX The QuadrigaCX exchange scandal involved the mysterious death of its founder, which led to the loss of $190 million of user funds. The exchange had no contingency plans for such an event, leading to widespread speculation and controversy over its legitimacy (Bloomberg, 2020).

OneCoin Another major fraudulent scheme was OneCoin, a cryptocurrency that was never actually based on a blockchain. It was promoted as an investment opportunity, with claims of high returns. However, it was later revealed to be a Ponzi scheme. The company defrauded investors of billions of dollars, and its founder, Ruja Ignatova, remains on the FBI’s most-wanted list.

Mt. Gox Mt. Gox, once the largest Bitcoin exchange in the world, collapsed in 2014 after hackers stole 850,000 Bitcoins, worth around $450 million at the time. This case is one of the most significant breaches in cryptocurrency history and led to major changes in how exchanges operate and secure funds.

Common Fraudulent Schemes

1. Ponzi Schemes and Fraudulent Investment Platforms

One of the most notorious scams in the cryptocurrency space is BitConnect, a platform that promised its investors consistent returns. In 2018, the platform collapsed, leaving thousands of investors without their invested funds. Later, the SEC classified BitConnect as a fraudulent investment scheme (SEC, 2022). This case contributed to the growing regulatory crackdown on such projects.

2. Fake Exchanges and Fund Theft

Some cryptocurrency exchanges operate without proper licenses and abruptly shut down, disappearing with users’ funds. A well-known example of this type of fraud is the QuadrigaCX exchange, where $190 million went missing after the mysterious death of its founder (Bloomberg, 2020).

3. Fake ICOs and Scam Tokens

Between 2017 and 2018, there was a boom in ICOs (Initial Coin Offerings). However, many of these projects turned out to be fraudulent, and over 80% of ICOs launched in 2017 did not survive even a year (Satis Group, 2018). Such schemes often rely on deceptive promises of high returns and a lack of transparency.

Regulation and Safeguards

Governments and regulators worldwide are increasingly focusing on combating cryptocurrency fraud. The SEC (U.S. Securities and Exchange Commission) has been active in cracking down on illegal schemes, while the European Union is working on the MiCA regulation, aimed at providing comprehensive oversight over crypto markets (EU Parliament, 2023).

In addition, jurisdictions like China have imposed strict bans on cryptocurrency trading and mining, citing concerns over financial stability and fraud. In contrast, the U.S. and the EU have taken a more balanced approach, encouraging innovation while introducing regulations aimed at protecting investors from scams.

To reduce risks, investors are advised to verify the legitimacy of exchanges, conduct in-depth research on projects, and avoid deals that promise unrealistic profits. Regulatory bodies emphasize the importance of Know Your Customer (KYC) practices and ensuring that exchanges comply with local financial laws.

Conclusion

While cryptocurrencies offer new investment opportunities, they also come with risks related to fraud and manipulation. A comprehensive regulatory approach, along with investor awareness and caution, can help mitigate these threats and make the market safer.