If It Sounds Too Good to Be True, It Probably Is

Beware of scammers when investing in cryptocurrency

It’s no secret that the cryptocurrency boom that catapulted Bitcoin past $20,000 a couple of years ago brought quite a few investing neophytes into the cryptocurrency ecosystem. At a time when prices seemed to be doubling every month, it seemed that the sky was the limit and that all you had to do was buy Bitcoin and hold it to get rich quickly. Reality struck, however, and Bitcoin eventually fell back to earth. But there are still individuals out there trying to capitalize on other people’s desire to make money in cryptocurrency.

Among them is a stablecoin that claims its users can earn up to 8% interest by leaving their funds in the stablecoin’s loan program. Those funds would be loaned to various other people both within and without the cryptocurrency ecosystem. It’s understandably attractive to those who would love to see 8% annual gains on their investments given our current low-interest rate environment. But is that a safe investment?

Remember that short-term Treasury debt is only yielding 2.4-2.5%. And junk bonds are currently averaging about 6.3%. Promising yields that are higher than junk bonds means that investors are betting their funds on some very risky lending, which could possibly lead to them losing all of their invested assets.

Then there are other firms promising that users who stake their cryptocoins can make gains of up to 5-25% annually. Again, in staking the user is required to tie up his cryptocurrency holdings for a certain amount of time. Who knows what happens to those funds or how likely default will be, but with promises of returns that are again far higher than junk bonds investors are playing with fire.

That’s why sticking to tried and true Bitcoin investments remains the way to go. Buying Bitcoin and holding it to gain from Bitcoin’s price accumulation means that there isn’t any counterparty risk, unlike schemes that want you to lend your Bitcoin. And when you invest through a Cryptocurrency IRA you can gain the additional security offered by Bitcoin custodians keeping your holdings offline or even vaulted storage, while keeping your gains tax-free until you take distributions. Remember the example of those investors who lost money investing with Bernie Madoff and Allen Stanford: if it sounds too good to be true, it probably is.

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