Autor Cointelegraph By Elizabaeth Gail

Leveraged trading of cryptocurrencies — i.e., trading crypto with borrowed funds — comes with significant risks. This is mainly due to the capricious nature of the market.In May, the cryptocurrency market, which had grown significantly over the past couple of years, recoiled violently following a cascade of negative market events, losing over 50% of its market cap. The pullback, which caused a jarring $2 trillion market wipeout, also exposed some of the market’s biggest weaknesses. One of them was the reckless use of leverage in a market that is historically mercurial.This aspect was recently affirmed by billionaire investor Mike Novogratz. Novogratz, a fierce crusader for the industry at large and a once-ardent supporter of the Terra ecosystem before its downfall.He recently acknowledged that he underestimated the amount of leverage in the market and the losses that this would bring.”I didn’t realize the magnitude of leverage in the system. What I don’t think people expected was the magnitude of losses that would show up in professional institutions’ balance sheets, and that caused the daisy chain of effects,” he said.Speaking to Cointelegraph earlier this week, KoinBasket Founder and CEO Khaleelulla Baig, reinforced the view that the market was indeed overleveraged and will take a while to recover:“Crypto markets are still in R&D phase, and we shouldn’t be surprised to see a few more crypto projects going bust, especially those built around collateralization and leverage.” He added that regulators were likely to look into the leverage loophole in order to protect investors, stating, “Albeit these events have opened doors for regulators and industry participants to build robust mechanisms to avoid such catastrophes in the future.”What is leverage?Leverage refers to the use of borrowed capital to trade, and is usually the preserve of professional traders with significant experience in risk management.To trade leveraged products, investors are usually required to make a minimum deposit with a broker that supports this type of trading. Platforms that support margin trading effectively lend money to investors for the purpose of opening bigger positions.Positions that are held beyond a certain amount of time incur interest fees that are deducted from the money held as collateral. The charges usually vary and are based on the amount of money extended to open margin positions.Since profits and losses on margin accounts are based on the full size of the opened position, gains and deficits are magnified. As such, inexperienced investors using high leverage strategies are likely to be over-exposed during moments of high market volatility.Recent: Where in the world are the 3AC founders? Speculation aboundsNot surprisingly, leveraged trading in crypto leads to a lot of liquidations due to the unsteady nature of the market. According to data derived from Coinglass, a crypto data analytics and futures trading platform, the crypto market experiences hundreds of millions of dollars in liquidations every week.On June 13, for example,over $1 billion in tokens were liquidated within 24 hours after the market dropped without warning. Most of the liquidations were attributed to overleverage.Historically, overleveraged trading leads to a bubble burst if a significant number of key players get liquidated simultaneously, especially in the wake of sustained negative market forces.Baig, whose firm helps investors to trade in crypto indexes and diversified crypto portfolios, highlighted some of the common mistakes that many retail and institutional traders make when dabbling in crypto. According to the CEO, many crypto traders have poor risk management skills, especially when it comes to limiting losses. He stated that crypto investment risks should ideally never exceed 15% of one’s portfolio. Of course, this rule is rarely adhered to, hence the perpetual liquidations.He also spoke about the need to spread risks when it comes to crypto investments in order to avoid such scenarios, and said that investors should spread their risks among long-standing assets to avoid being rekt.The use of leverage by crypto corporatesLeverage can improve a company’s balance sheet by freeing up capital needed to support more profitable ventures. However, it is a double-edged sword that can easily wreck a business.Looking at some of the most recent developments related to this, the fall of the Three Arrows Capital (3AC) hedge fund was, for example, catalyzed by outsized debts and the use of leverage.The company had sizeable leveraged investments in cryptocurrencies such as Bitcoin (BTC) and Ether (ETH), which lost over 50% of their value in May from their peak in November 2021.The liquidation of the hedge fund’s positions caused a domino effect that ultimately affected dozens of connected firms. Most recently, the Vauld cryptocurrency lending service, which is based in Singapore, halted withdrawals due to the ripple effects of the 3AC saga. According to a blog post published by the firm, financial difficulties related to its partners affected its operations.The firm reportedly loaned money to 3AC and is now unlikely to get the funds back.The Celsius crypto lending firm is also reported to have collapsed partly due to the use of leverage. According to an investigative report published by blockchain analytics firm Arkham Intelligence, Celsius apparently entrusted approximately $530 million of investors’ money to an asset manager who used the funds to carry out leveraged trading.The company apparently lost about $350 million due to the risky move.The fall of the titans demonstrates just how bad things can get when there is irresponsible use of leverage.Reining in crypto leverage risksSome major jurisdictions have taken it upon themselves to protect crypto investors from leverage risks by imposing stringent regulatory requirements.In an exclusive interview with Cointelegraph earlier this week, Chris Kline, COO and co-founder of Bitcoin IRA, a crypto retirement investment service, said that increased regulation of the crypto sector was likely to streamline rules for the industry and enhance investor confidence.“New proposals from policymakers will add enhanced clarity of the rules and guardrails of this emerging asset class and bolster confidence that’s meant to protect investors. I think new policy tightening will only help investors be better protected and help further legitimatize the industry.”Some jurisdictions, such as the European Union, have already drafted rules to be imposed on the crypto sector, especially related to liquidity and transparency, which will reduce instances of overleverage.According to the latest EU statutes,all crypto-related businesses will in the near future be guided by the Markets in Crypto-Assets (MiCA) rules. This will oblige them to abide by set capitalization and disclosure requirements and help to prevent a lot of the needless losses that have hit the crypto industry in recent months.That said, EU regulators have yet to place uniform hard limits on leverage.U.S. regulators have, on the other hand, been more aggressive when it comes to clamping down on crypto brokers offering margin trading as they do not provide licensing to crypto platforms offering leveraged trading to clients.Exchanges are beginning to conformMajor crypto exchanges around the world are beginning to limit leverage in order to avoid regulatory discordance with major jurisdictions.Binance, for example, sent a notice to users in December indicating that it was stopping British investors from using its crypto leverage products. The move was in line with the company’s desire to conform with the United Kingdom’s Financial Conduct Authority (FCA). The financial regulatory body had, in June 2021, censured Binance and ordered it to stop all unregulated activities in the country.Following the warning, Binance reduced its leverage from 100x to 20x for new accounts in July 2021 to presumably avoid a regulatory storm. The FTX crypto derivatives exchange also reduced its leverage offerings last year from 100x to 20x soon after Binance’s adjustments. The FCA forbids the offering of leveraged crypto trading products to retail U.K. investors.Recent: What the Taliban crackdown means for crypto’s future in AfghanistanNotably, there are currently few regulatory rules limiting the amount of leverage provided to traders by crypto exchanges. As such, risk management is largely down to individual trading preferences. The recent crypto downturn highlighted the need for closer monitoring of crypto firms and more robust regulations for companies with significant assets under their control.As witnessed in the aftermath of the downturn, the lack of clear regulatory framework makes it possible for some crypto agencies to accumulate more debt than assets through leverage. This increases the risks for their investors and creditors.

Scammers have been taking advantage of blockchain’s decentralized and immutable nature to swindle crypto investors since the advent of the technology.And, according to the latest FBI fraud report, fraudsters are using fake crypto apps to steal money from unsuspecting crypto investors. It highlights that American investors have lost approximately $42.7 million to swindlers through fake apps.The schemes reportedly take advantage of heightened interest in cryptocurrencies, especially during bull market runs, to beguile crypto users.How fake crypto app scammers lure usersFake crypto app scammers use myriad techniques to entice investors. The following is a breakdown of some of them.Social engineering schemesSome fake crypto app scammer networks use social engineering strategies to entice victims.In many cases, the fraudsters befriend the victims through social platforms such as dating sites and then trick them into downloading apps that appear to be functional cryptocurrency trading apps.The scammers then convince users to transfer funds to the app. The funds are, however, “locked in” once the transfer is made, and the victims are never allowed to withdraw money. In some cases, the scammers lure victims using outlandish high-yield claims. The ruse comes to an end when the victims realize that they can’t redeem their funds.Speaking to Cointelegraph earlier this week, Rick Holland, chief information security officer of Digital Shadows — a digital risk protection firm — underscored that social engineering remains a top strategy among crooks because it requires minimal effort.“Relying upon the tried-and-true method of social engineering is far more practical and lucrative,” he said.The cybersecurity manager added that social engineering makes it easy for scammers to target high-net-worth individuals.Recognizable brand namesSome fake crypto app scammers have resorted to using recognizable brand names to push fake apps because of the trust and authority that they wield.In one case highlighted in the latest FBI crypto crime report, cybercriminals posing as YiBit employees recently hoodwinked investors out of some $5.5 million after convincing them to download a bogus YiBit crypto trading app.Unbeknown to the investors, the actual YiBit crypto exchange firm ceased operations in 2018. Fund transfers made to the fake app were stolen.In another case outlined in the FBI report, phishers using the Supay brand name, which is associated with an Australian crypto company, swindled 28 investors out of millions of dollars. The ploy, which ran between Nov. 1 and Nov. 26, caused $3.7 million in losses.Such schemes have been going on for years, but many incidences go unreported due to the lack of proper recourse channels, especially in jurisdictions that shun cryptocurrencies. Recent: How NFTs can boost fan engagement in the sports industryBesides the U.S., investigations in other major jurisdictions such as India have in the recent past uncovered elaborate fake crypto app schemes.According to a report published by the CloudSEK cybersecurity company in June, a newly discovered fake crypto app scheme involving numerous cloned apps and domains caused Indian investors to lose at least $128 million.Distributing fake apps through official app storesFake crypto app scammers sometimes use official app stores to distribute dodgy applications.Some of the apps are designed to collect user credentials that are then used to unlock crypto accounts on corresponding official platforms. Others claim to offer secure wallet solutions that can be used to store a diverse range of cryptocurrencies but pilfer funds once a deposit is made.While platforms such as Google Play Store constantly review apps for integrity issues, it is still possible for some fake apps to slip through the cracks.One of the latest methods used by scammers to accomplish this is registering as app developers on popular mobile app stores such as the Apple App Store and Google Play Store and then uploading legitimate-looking apps.In 2021,a fake Trezor app masquerading as a wallet created by SatoshiLabs used this strategy to get published on both Apple App Store and Google Play Store. The app claimed to provide users with direct online access to their Trezor hardware wallets without needing to connect their Trezor dongle to a computer. Victims who downloaded the fake Trezor app were obligated to submit their wallet seed phrase to start using the service. A seed phrase is a string of words that can be used to access a cryptocurrency wallet on the blockchain.The submitted details allowed the thieves behind the fake app to loot user funds.According to a statement provided by Apple, the fake Trezor app was published on its store through a deceptive bait-and-switch maneuver. The app developers are alleged to have initially submitted the app as a cryptography application designed to encrypt files but later on converted it to a cryptocurrency wallet app. Apple said that it was not aware of the change until users reported it.Speaking to Cointelegraph earlier this week, Chris Kline, co-founder of Bitcoin IRA — a crypto retirement investment service — said that despite such incidents, major tech companies in the space were resolute in fighting fake crypto apps because of the potential damage to their integrity. He said:“Tech companies are always looking for better education and security for their users. The most reputable players today put security at the forefront of their roadmaps. Users need reassurance that their digital assets are safe and providers are keeping security top of mind.”That said, the fake app problem is more prevalent in non-official app stores.How to spot a fake crypto appFake cryptocurrency apps are designed to resemble legitimate apps as closely as possible. As a crypto investor, one should be able to discern between legitimate and fake apps to avoid unnecessary losses.The following is a breakdown of some of the things to look out for when trying to ascertain the authenticity of a mobile crypto application. Spelling, icons and descriptionThe first step in ascertaining whether an app is legit is checking out the spelling and icon. Fake apps usually have a name and icon that looks similar to the legitimate one, but something is usually off.If the app or developer names are misspelled, for example, the software is most likely phony. A quick search about the app on the internet will help to confirm its legitimacy.It is also important to consider if the app has a Google Editor’s choice badge. The badge is a distinction provided by the Google Play editorial team to recognize developers and apps with outstanding quality. Apps with this badge are unlikely to be fake.Application permissionsCounterfeit apps usually request more permissions than necessary. This ensures that they glean as much data as possible from victims’ devices.As such, users should be wary of apps that require off-center permissions, such as device administrator privileges. Such authorizations could give cybercriminals unfettered access to a device and allow them to intercept sensitive data that can be used to unlock financial accounts, including crypto wallets.Intrusive app permissions can be blocked via a phone system’s privacy settings.The number of downloadsThe number of times that an app has been downloaded is usually an indicator of how popular it is. Apps from reputable developers typically have millions of downloads and thousands of positive reviews.Inversely, apps with just a few thousand downloads require greater scrutiny. Confirming authenticity by contacting supportIf unsure about an application, contacting support through the company’s official website could help to avoid financial losses due to fraud.Furthermore, authentic apps can be downloaded from a company’s official website.Recent: Crypto contagion deters investors in near term, but fundamentals stay strongCryptocurrencies are underpinned by relatively new technology, so it is only natural that there are teething problems when it comes to use and adoption. Unfortunately, in recent years, black hats have targeted naïve crypto enthusiasts using fake crypto apps.While the problem is likely to persist for several years, increased scrutiny by tech companies is likely to temper the issue in the long run.