Are Cryptocurrency Scams Discouraging Institutional Investors?

Author: Michael R.
February 06, 2019
Read time: 
6 minutes

While there certainly are cryptocurrency scams, are they stopping institutional investors from investing in the industry? In this article, we will find out if cryptocurrency scams are discouraging investors or if it is all a bunch of fear-based news.

While there certainly are cryptocurrency scams, are they stopping institutional investors from investing in the industry? In this article, we will find out if cryptocurrency scams are discouraging investors or if it is all a bunch of fear-based news.

Debunking the Cryptocurrency Scams Myth

There is no doubt that cryptocurrency scams are an issue. Cryptocurrency scams come in all forms from exchange owners running off with funds as seen with Cryptsy and Mt. Gox, or Ponzi-like schemes as seen with projects like Bitconnect. Many new industries, even the stock market back in the 1920s required regulation to weed out scammers coordinating pump and dumps and banning deceiving sales tactics to investors. Over the past year, we have gained some regulatory clarity around crypto, at least in the US. The SEC and FINRA in the US have begun to categorize cryptocurrency tokens as securities, and Bitcoin as a currency (for the most part). Taxes are owed, and more legitimacy is being brought about.

Furthermore, the community has grown more conscious of scams - generally only using secure crypto exchanges which are legally compliant and avoiding scams such as Bitconnect. Bitconnect has even been shut down by regulators.

Here are common examples of crypto scams:

  1. Shady Exchanges
  2. Ponzi Schemes
  3. Plagiarised white papers and code

Are they preventing institutional investors from investing?

1. Shady Exchanges

From history, we have seen cases such as Mt. Gox, Cryptsy, Mintpal and many other shady exchanges exceed 800,000 BTC and 30,000 LTC, worth well over $100M stolen from investors. These hits make waves in the industry, but judging by figures on, it is evident that a majority of trading volume is on exchanges like Binance, Coinbase, and others which are considered to be secure crypto exchanges. The community is catching on.

Are Cryptocurrency Scams Discouraging Institutional Investors?


Let’s briefly discuss how the community has learned to identify a secure crypto exchange. Primarily, it comes down to legalities. SEC and FINRA filings can be looked up publicly, and if you ask an exchange for proof of compliance, they should be able to provide it. Additionally, some exchanges such as Coinbase Pro offer insurance to US investors in case a certain amount of cryptocurrency is lost due to their mistakes.

While there are trusted exchanges now that retail users are going to, there are not many options for institutional level investors - who have 1,000+ Bitcoin and require lots of liquidity. Additionally, the long history of untrustworthy exchanges has left a bad taste in the mouths of institutional investors. The only healer for this is time and proof.


2. Ponzi Schemes

Identifying a secure crypto exchange is fairly straightforward in the sense of learning how compliant it is and if it has ever been compromised, but even these secure crypto exchanges can make mistakes by listing assets which are not honest. The latest and largest cryptocurrency scam is Bitconnect. It reached a market cap of over $1 billion leaving many investors at a complete loss. Fortunately, law enforcement has shut down Bitconnect.

Let’s summarize a few factors which cause institutional investors to think twice before investing in a crypto asset:

  • Anonymous team
  • Guaranteed returns
  • No utility

These three factors are major indicators that you may be investing in a scam. First off, the team should be transparent - why would they want to hide their identity? Second, no investment company can ever guarantee returns. This is an instant sign of a cryptocurrency scam. Lastly, many projects who sell tokens to raise money, commonly known as an ICO, has virtually no use. If the only use is for discounts in their online shop, then please avoid it. If a project has a transparent team, real utility, and does not guarantee any returns, then they are most likely doing this in a more honest fashion, trying to start a successful project. The lack of utility and transparency makes institutional and retail investors wary of which project is honest and which is not.

Are Cryptocurrency Scams Discouraging Institutional Investors?


3. Copied Whitepapers

Believe it or not, there are projects which have copied whitepapers and code without giving credit. This is illegal and immoral. These projects most likely do not have the technical know-how to innovate and are simply trying to play a marketing game to pump their coin. Do your best to vet the team behind the project and be sure that they are creating original ideas. A copied whitepaper is a clear sign of a cryptocurrency scam.

Many institutional trading firms, such as hedge funds, have teams of analysts who do research, which includes analyzing whitepapers. It is likely that these analysts have found, and will continue to find plagiarism in the field. This is completely immoral and unprofessional, causing institutional investors to be more cautious investing in the space. Still, it is not completely stopping them as you can tell who the original creator is, usually. What this does though is slow down the rate at which funds feel comfortable investing.

The SEC says that Bitcoin is not a security, and hedge funds who are regulated by the SEC are not allowed to buy or recommend non-securities to their clients.

Okay, then Why Won’t Institutional Investors Buy into Cryptocurrencies?

To be blunt, most institutional investors are not interested in “get rich quick schemes” and understand how to avoid cryptocurrency scams. Scams certainly do inhibit the amount and rate at which institutional investors buy into crypto, but there is even more to the story. Even Bitcoin itself is having trouble attracting institutional investors, why?

Simply put, crypto investments come with their own headaches from both a legal and operational perspective. From a legal standpoint, SEC-regulated hedge funds are not allowed to touch Bitcoin as it is not categorized as a security. Second, if a fund is allowed to deal with non-securities such as commodities or currencies, then there is the headache of securely holding the assets, also known as custody. They need more custodial services so they do not need to worry about hackers or having their assets stolen, much like how custodians hold shares for funds.


Let’s explore a bit more deeply the two main points we just mentioned:

  1. Custodial Services
  2. Legal Clarification

1. Custodial Services

As mentioned, there is a technical and operational headache related to holding a large amount of cryptocurrency. Someone holding 1 Bitcoin has a much different infrastructure than a fund holding 5,000 Bitcoin. Rather than holding Bitcoin in a mobile wallet, they have complex multi-signature wallets, held offline which may require multiple people (i.e. fund owners) to meet in a physical location, at the same time, and sign their keys to gain access to move the funds. Setting this up requires technical expertise.

I will briefly bring up one more service called prime brokerage services, which may offer custodial services as part of their broader offering. The prime brokerage industry came into existence as the hedge fund industry rose. Prime brokerages, unlike ‘normal’ brokerages, service only hedge funds or extremely high net worth individuals and family offices. They will source liquidity amongst markets to get the best prices when buying and selling, in addition to helping with custodial services. They may also introduce investors to their fund - as hedge funds are not legally allowed to advertise aggressively. At a big picture, institutional investors are waiting for more professional services to help them in purchasing and storing cryptocurrencies. 

2. Legal Headache

Many funds that we think of, who trade stocks, are regulated by the SEC. This means that unless they are a futures fund or forex fund, they are only permitted to recommend and trade securities for their clients. For example, Ric Edelman, a well respected Wall St veteran spoke about some of the headaches from his perspective, despite being bullish on Bitcoin. Many hedge fund managers (who are regulated specifically by the SEC) are getting requests from clients to diversify their portfolio into crypto assets, but legally, they cannot. The SEC says that Bitcoin is not a security, and hedge funds who are regulated by the SEC are not allowed to buy or recommend non-securities to their clients. If Bitcoin was a security, then yes they can.

Source: paddy hirsch YouTube Channel  

So, hedge funds and many institutional investors are waiting for Bitcoin ETFs and other investment vehicles which will allow them to speculate on the cryptocurrency market for their clients without touching the asset itself. The Bitcoin ETF would get rid of all legal headache for them. They must be careful when approaching crypto investments.

Should I wait for institutional investors to buy in?

Assuming you are not running an SEC-regulated hedge fund, then no. There is no need to wait for institutional investors to buy in. As a matter of fact, it is better to get in now before they do. Theoretically the earlier you buy in, the more you will profit. You can stay ahead of the curve by learning how to buy and hold cryptocurrencies. We recommend checking out our start investing guides to get started. You will thank us later.

Posted by Michael R.

Michael is an entrepreneur who has been deeply involved in the cryptocurrency industry since early 2014. He joined Cryptomaniaks as a cryptoanalyst, helping to create accurate and digestible content.


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