Blockchain Investing: How to Avoid the Piggyback Scams

Blockchain technology is taking the world by storm.

“That a 106-year-old company like IBM is going all in on blockchain shows just how far the digital ledger has come since its early days underpinning bitcoin drug deals on the dark web. The market for blockchain-related products and services will reach $7.7 billion in 2022, up from $242 million last year, according to researcher Markets & Markets,” as noted by Fortune.

But it gets even more exciting than that.  As Fortune also explained:

“Almost six in 10 large corporations are considering using blockchain, according to a Juniper Research survey of 400 executives, managers and tech staff. The technology is increasingly being tested or used by companies such as Wal-Mart Stores Inc. and Visa to streamline supply chain, speed up payments and store records. Deployments of blockchain should bump up sales growth in cloud services, databases and servers by 35 percent, according to Susan Eustis, chief executive officer of WinterGreen Research. Within five years, blockchain technology will push more than 55 percent of large companies with more than 1,000 employees to use the cloud instead of their own data centers, up from 17 percent today…”

No wonder investors are so excited for the possibilities.

However, when it comes to such technology, you must use caution when investing. 

A lot of companies have made claims of involvement in the space without really being involved.

Let’s first look at some of the most respected of the bunch.

Bank of America for example has 43 blockchain patents or applications.  

According to CEO Brian Moynihan:

“We have more patents, I think, than almost anybody in blockchain,” Moynihan said. “We believe in the idea of distributed ledgers, and smart contracts, and all the words you hear about that. We are developing stuff… But it’s not new concepts. The Registry of Motor Vehicles is a distributed ledger. We know who owns a car, we know who owns a house. The idea is that you can do it more electronically, and can do it across borders.”

Even Square Inc., which develops and provides payment processing, point-of-sale (POS), financial, and marketing services worldwide, is involved with cryptocurrency.  In fact, its Cash app is now giving users the option to buy or sell Bitcoin. 

According to a Forbes report:

“A Square spokesperson said in a statement: ‘We’re always listening to our customers and we’ve found that they are interested in using the Cash App to buy Bitcoin. We're exploring how Square can make this experience faster and easier, and have rolled out this feature to a small number of Cash App customers. We believe cryptocurrency can greatly impact the ability of individuals to participate in the global financial system and we're excited to learn more here.’”

According to Business Insider, Credit Suisse said Square's venture in crypto could be a tailwind translating into $30 million in revenues.

"See ~$30m revenue opportunity in two years: We estimate that if SQ can accumulate 10m bitcoin buyers over two years (tracking Coinbase’s growth), this could drive an incremental $30m in revenue (~2% additional growth to our current forecast). This assumes average bitcoin purchases of $200/yr and fees of 1.5%."

That’s just part of the reason shares of Square ballooned from $26 to a high of $57 recently.

Overstock.com, Inc. even became the first retailer to accept bitcoin and even made the coin offering through its exchange, tZero, according to CNN. In fact, according to analysts at DA Davidson, “Overstock stands head and shoulders above the others, when it comes to having developed a portfolio of companies with significant efforts to exploit blockchain technology.”

In December 2017, Overstock CEO Patrick Byrne made things a bit more exciting when he say he may want to sell OSTK’s e-tailing operations and put even more cash into speeding up the blockchain-business instead.

Unfortunately, there’s always that one bad grape in the bunch.

Sneaky companies are attempting to piggyback the boom by putting the word “blockchain” in their name or convincing unsuspecting investors they’re the next big blockchain player.

As a result, it’s causing many people to jump into volatile, risky ideas, without realizing they were being scammed. And while there have been many scams on the books, we could see another 100+ of them in the next year, say analysts.

For example, you may remember that The Long Island Iced Tea Company (LTEA) changed its name to Long Blockchain Corporation and rallied from $1.79 to $9.50.

In reality, it had no business at all tied to blockchain. 

In fact, it announced it did “not have an agreement with any of these entities for a transaction and there is no assurance that a definitive agreement with these, or any other entity, will be entered into or ultimately consummated.”

Even Croe Inc., which made fitness apparel changed its name to The Crypto Company, sending its stock up 2,700%. But it had no blochain technology either.  

Rich Cigars, a cigar maker that trades over the counter (OTC) tried it, too. 

"If history is a guide we'll see 100+ instances of this in 2018 — an academic study found that in the Dot Com bubble the instances of name gaming went from 13 in 1998 to 126 in 1999," Autonomous analyst Lex Sokolin said in an email, which started off with a section on "blockchain pretenders,” as quoted by Investors Business Daily.

In February 2018, the SEC suspended another three companies that were claiming involvement in the crypto and blockchain space, including Cherubim Interests, PDX Partners and Victura Construction Group. The SEC also said that recent press releases from those companies claimed that they "acquired AAA-rated assets from a subsidiary of a private equity investor in cryptocurrency and blockchain technology among other things."

How to Avoid the Scams

Blockchain technology has become so popular that even companies that make sofas and sports bras have attempted to make claims of involvement.

Even when there is no real involvement at all…

According to the Financial Industry Regulatory Authority:

“Do your research before purchasing shares of any company offering investment opportunities in cryptocurrency.  And don’t be fooled by unrealistic predictions of returns and claims made through press releases, spam email, telemarketing calls or posted online or in social media threads.”

“In today’s ‘hot’ cryptocurrency environment, it’s easy for companies or their promoters to make glorified claims about new products, services and other cryptocurrency-related connections,” notes FINRA. ”And, even when legitimate companies flock to a hot, new sector, fraudsters almost always follow suit, exploiting the news to launch their latest frauds du jour.”

One way to avoid scams is to stay away from any stock that’s over the counter, quoted with an OTC quotation platform. It’s also essential that you do your best due diligence before investing in any stock making such an outrageous claim.  A simple way to do that is by viewing securities records in the SEC’s EDGAR database.