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Suffering a total loss with crypto: How to tell if it’s a scam?

When you invest money, you need knowledge of the asset, the market environment, and a lucky hand. Anyone who already has previous experience in the stock or crypto market knows that luck and prosperity are not always scolded. Instead, it is part of the daily business for investors as well as day traders to have to accept that investment can also lose value and does not recover.

Because cryptocurrencies are highly volatile and the market is poorly regulated, the topic of suffering a total loss is much more relevant for crypto than in the stock market. For many investors, the question often arises as to whether they have fallen for a scam or whether they have simply bet on the wrong horse.

In the following, we would like to differentiate for our readers when it is a bad investment and when they have fallen for a scam.

How investors losing money in crypto

In the case of less fortunate investment decisions, several actions and market events can be narrowed down as examples, which are often associated with total losses, but do not constitute fraud or a scam:

  • Leverage: When using leverage, investors enter the market with a multiple of their capital. This increases the chance of a particularly juicy profit, but at the same time threatens the liquidation of all funds if the price goes in the wrong direction. When it comes to crypto, certain rumors persist to this day. This includes, for example, that the trading platforms trade against their users and abuse their knowledge of their client's account balances and orders. Although there have been cases in the past in which such fraud has been committed, there is usually only one cause for a total loss due to leverage: the respective trader.
  • Fatal events: For the crypto scene, some events are particularly typical and can also result in a total loss. This may include the developer ceasing work on the crypto project, after which investor confidence is lost and sell-offs begin. If crypto exchanges delist certain assets, then this is also associated with price slumps, which can lead to a total loss.
  • Bad timing: Another reason is investor timing. Many retail investors usually get in when the price reaches its all-time high. Since the corrections in the crypto market can be very harsh, those affected buy at peak prices and then experience losses that are close to a total loss. Taking into account past market cycles, losses typically range from – 85% to – 99%, so it's clear that after such a loss, an impossible rally would have to start to reach break-even.

Of course, many other reasons are conceivable and, of course, individual cases in which a total loss is realized without any fraud going on. Nevertheless, many retail investors often feel cheated, although it is much more because they do not have the necessary knowledge or experience to navigate the market. This distinction from genuine fraud is essential because these are offenses that, depending on the legislation of the country concerned and their severity, can result in severe prison sentences.

When is it a scam?

Although investment fraud also occurs in the cryptocurrency market, it is comparatively rare. On the other hand, computer fraud is more common, as most criminals gain access to the computer systems of their victims. Phishing is particularly noteworthy as a method of fraud because private keys or the seed phrase are attractive targets for criminals. If they get access to the secret or manage to convince the victim to take a certain action, then the perpetrators irrevocably take possession of the cryptocurrencies.

However, to consider fraud and not just a bad investment decision, some preconditions must be fulfilled from a legal point of view in German criminal law. Here one also speaks of objective prerequisites, which must be proven:

  • The act of deception
  • The excitation of error
  • The disposal of assets
  • The financial loss

One can imagine the evaluation in such a way that the above-mentioned characteristics must interlock so that one action leads to the next. There must be a causal relationship between each link in the chain. Here is an example:

Person A tells person B that they have won the lottery, but a payout is only possible if B makes a prepayment of €500. Because B now assumes to receive back a much higher sum from A, B transfers the demanded payment to A. After A receives the money, he disappears and never reports back to B.

What may seem absurd to some of our readers is common practice on the Internet. In most cases, victims are contacted by e-mail and instead of a lottery, an investment is advertised that does not exist or promises returns that can never be earned.

As can easily be seen, a causal relationship between individual links is sometimes difficult to prove when it comes to crypto investment. Typically, one will try to begin by proving an act of deception. However, this is problematic in many cases. For example, one could assume that many ICOs are offered fraudulently, but deception is in principle only present if the tokens are not transferred after payment has been made or if the funds raised are not used for the promised purpose.

But especially the last point will be almost impossible to prove. After all, many projects collect the necessary funds in this way to advance the development of blockchain technology, which often exists only as a concept paper. If these development plans fail and the token associated with the project becomes worthless, then this does not automatically constitute fraud.

How to get help in the event of fraud?

However, the examples listed above are by no means meant to be discouraging. Because in cases where investors are defrauded, the signs of fraud are often very clear. To provide complete evidence, it is particularly important to seek professional help. This is because the causal chain described must be recorded and proven as completely as possible.

Crypto-Tracing has specialized in providing services that secure the traces of the perpetrators with the help of blockchain forensics and documents them together with the financial losses of the victims. The Internet and blockchain technology ultimately offers no hiding place for the perpetrators, who often believe that they cannot be dealt with. We also provide help from lawyers with whom we work so that individual fraud cases can be dealt with in their entirety.

Are you a victim of fraud? Have you transferred cryptocurrencies or money and feel that you have fallen for a scam? Do not hesitate and contact us immediately. We provide advice and give you an assessment of how to proceed to achieve the best results in your case and situation.


    Timo Züfle

    Timo is a lead investigator and cryptocurrency expert. He explains how to protect yourself from fraud and how to track down perpetrators.