Are Crypto Exchanges just Billion-dollar crypto scams?

The # 1 mistake beginners make when buying crypto.

ORIGINALLY POSTED ON JULY 12, 2023

When I say the words crypto scammer, what is the first image that comes to your head?

Chances are you probably imagined some crusty man sitting in his underwear in a dark basement typing away at his computer.

And sure, there are still people that hack like that, but those are not the big threats.

The biggest crypto scammers are wearing suits and paying for Superbowl ads.

If you have kept up with crypto at all the last few years, then you are probably familiar with Sam Bankman-Fried, and the huge FTX crash that happened last year.

The FTX crash is one of the most notorious crypto currency exchange crashes, and for good reason. It was an awful thing.

Today, I’m going to be talking about one of the most dangerous crypto scams, and how you can easily protect yourself from it.

But before I get started, I wanted to lay out some basic crypto groundwork, in case you are unfamiliar with how crypto works…

Part 1: Cryptocurrency Basics + a Basic History…

(If you are already very knowledgeable in crypto, feel free to skip to the next section of the newsletter.)

So, let’s start from the very beginning and work our way up. Crypto currency is a digital currency. Cryptocurrencies were originally created with the goal of bringing power back to the people, instead of having currencies run by the Government.

And even though Bitcoin was originally made for this reason, I want to briefly mention that it is NOT private. Which takes away a lot of its power, you can read more about that here.

Cryptocurrencies can be created by anyone. That’s why there are over 22,904 total cryptocurrencies today.

But as you can probably imagine, they don’t all work out. In fact, the average lifespan of a crypto coin is 15 months.

Between 2013 to 2022 there were at least 2,383 crypto coins that died.

So, needless to say, the market is very volatile.

And one of the biggest problems with the market is the hype. The crypto market is filled with get rich quick dreams, but most people don’t make money on the market, and the chances of you making a ridiculous amount of money in a short period of time is next to none.

Bitcoin is by far the most popular cryptocurrency. It first went live in 2009 but didn’t start to gain really any value until 2011.

It was founded by an unknown person or group known as Satoshi Nakamoto.

At first, Bitcoin was almost worthless. In fact, the first real-world transaction involving Bitcoin occurred in 2010. When Lazlo Hanyecz purchased 2 pizzas for 10,000 Bitcoin.

The all-time highest value Bitcoin rose to was $68,789.63 for one Bitcoin. That means that if the person who sold those 2 pizzas held onto those 10,000 bitcoins, they would have had over half a BILLION US dollars.

That’s a crazy enough story to make anyone want to invest in crypto right away. But that bubble has come and passed.

Now it’s very hard to make money on crypto, and you can actually lose a LOT of money. But to be clear, I am not saying that crypto is awful, there are a lot of cool functions that they offer, and some coins (especially Privacy coins like Monero) are great at giving power back to individuals.

Now that you have a basic idea of what cryptocurrency is, and why there is a lot of hype around it. Let’s take a look at how crypto is made…

Since cryptocurrencies are all digital, there are no printing presses that are pushing out countless Bitcoin.

Instead, cryptocurrencies are “mined”.

Crypto is decentralized. That means it’s not all stored or created in one place. In fact, it’s stored all over the world in things called nodes. People use their own personal servers to create a web of servers all over the world. This is called Blockchain.

And in return for using the individual’s server, the user will receive small amounts of the crypto currency that they are dedicating their server to (this is what’s called mining).

So, if you ever hear someone talking about “Bitcoin” or “Crypto mining”. They are talking about setting up computers on their server that dedicate their computing power and network connection to the Bitcoin/Crypto network in return for some of the coins.

If this confuses you, don’t worry you don’t need to know this necessarily.

But what you do need to know is what a crypto exchange is…

Crypto exchanges are platforms that allow people to trade cryptocurrencies or digital currencies for other assets (typically just FIAT currency). Payments are typically made by credit card or wire transfer. Once your money is on the exchange you can use it to purchase crypto.

Most crypto exchanges are KYC (know your customer), which means they require you to tell them who you are, and they will know exactly what you buy.

That’s why I recommend you only use crypto exchanges that are non-kyc.

So now that you know the basics, let’s talk about the dangers of public exchanges, and why they are so dangerous.

Part 2: Are Crypto Exchanges the biggest crypto scam out there?

The biggest mistake you can make with crypto is storing your coins on an exchange.

It’s SUPER dangerous.

When you leave your coins on an exchange, you are trusting the exchange to actually keep them there.

As soon as you get your money or cryptocurrency from the exchange, you need to get it off. Whether it’s depositing your money in a bank account or sending your crypto to a cold/external wallet.

Think of it this way, the whole point of crypto is decentralization… why would you trust an exchange with your money instead of keeping track of it yourself?

In fact, crypto exchanges are even worse than banks, because at least banks are FDIC insured.

But I’m not here to make claims without backing them up with lots and lots of evidence.

So first, let’s take a look at FTX and how they lost creditors $8 BILLION dollars.

FTX was a crypto exchange that started in 2019, by a man named Sam Bankman-Fried. It gained popularity quickly, and by January 2022, the company was worth $32 billion.

FTX was not a small scam by any means. It was HUGE. They had aggressive marketing campaigns, like Super Bowl ads, celebrity endorsements, and naming rights to the Miami Heat’s arena.

The marketing campaigns promised that people could put their money in these accounts and earn higher yields than the average bank.

They also released their own digital currency called FTT.

FTX was all around showing signs of being a strong company, even when cryptocurrencies started to decline in the end of 2021, FTX kept purchasing its competitors.

That was until November 2^nd, 2022, when Coindesk published an article exposing FTX and its scam. Sam Bankman-Fried created another separate company called Alameda Research, that was HEAVILY dependent on FTX’s digital token (FTT).

FTX’s balance sheet was leaked and it showed $9 billion in liability, $900 million in assets, and entries showing a NEGATIVE $8 BILLION balance!

Sam’s other company Alameda Research took as much money as it needed from FTX. Later people found out that the funding was taken mainly from customer deposits! AKA he was stealing from the people who stored their money on his exchange..

When this article came out it was BIG NEWS. It triggered the “collapse of FTX” that lasted for 10 days.

First, Binance (another powerful crypto exchange) announced it was going to sell all of its FTT tokens because of how FTX had mishandled its customers’ assets. This caused the value of the FTT token to drop significantly.

Hearing this, as well as the article that Coindesk put out, investors got really nervous. Especially since other cryptocurrency platforms like Celsius and Voyager had crashed right before it. All of this combined triggered what was basically a “bank run” on the FTX exchange.

During the massive withdrawal FTX lost billions and Alameda Research had to sell assets to cover the capital for the withdrawals. Bankman-Fried also tried to get financing to cover the gap of almost $8 billion that was owed.

On November 8^th, FTX literally blocked customers from taking THEIR money out of the platform by fulling removing the option online. Hundreds of thousands of customers did not have access to their money.

The company still had $8 billion dollars of funds that could not be paid, so they officially filed for bankruptcy.

On December 12, 2022, Sam Bankman-Fried was arrested for multiple fraud charges about FTX. He was indicted on 8 criminal charges.

After which he was released from custody with the largest bond in history $250 million dollars.

Not only did the crash steal $8 billion dollars from investors, it also greatly damaged the crypto market as a whole.

Remember, if a cryptocurrency exchange files for bankruptcy, there is no backup (Unlike US banks that are at least FDIC insured).

FTX is just one exchange, but this has happened many times.

Blockfi was another exchange that filed for Chapter 11 bankruptcy. They had over 100,000 creditors with assets and liabilities ranging from $1 billion to $10 billion.  Their largest client had a balance of $28 million.

Another huge crash was Three Arrows Capital. At one point, 3AC managed over $10 billion dollars’ worth of assets. This was one of the first large crypto exchange/hedge funds to collapse. 3AC owes about $3 billion to its creditors.

Remember, just because there are a ton of people investing in crypto, and because large companies are advertising for the Superbowl doesn’t mean that it’s safe. In fact, these are some of the most successful scammers of all time.

Part 3: What Can You Do to Stop It?

Well, if you have come this far in the article, I hope the first step is already clear to you…

DO NOT store your crypto or any money on exchanges. That is most dangerous place that you can keep it.

Instead, I recommend that you get a digital wallet to put it on.

I use Cake wallet to store my crypto. You can check out their wallets here (not sponsored).

There are a lot of reasons that I like cake wallets, they are private, open source and they have plenty of features. You can even put your crypto currencies into gift cards that way you can spend them super easily.

I hope this article helped open your eyes. Because most people think scammers are just some sweaty hacker in a basement. Be careful who you give your trust to, especially financially. Because there are a lot of hidden motives behind the scenes.

In an area as new and volatile as crypto, it is better to play things safe.

Thank you!

Eric Meder