The Rise of Fake Crypto Trading Bots: Steps Users Must Take to Avoid Getting Scammed

It has become the norm: each time the crypto market is dominated by bulls, the number of scam coins and projects promising unbelievable returns also increases. However, scammers are increasingly targeting inexperienced traders with so-called sophisticated trading software and trading bots.

How Scammers Use the Trading Bot Narrative

Trading bots, according to the scammers, ensure winning trades and zero losses. Since the prospect of making constant winning trades or above-normal returns is so tantalizing, many inexperienced crypto traders are losing money to scams that claim to use these ostensibly sophisticated mechanisms.

For instance, the masterminds behind South Africa’s infamous Mirror Trading International (MTI) were able to dupe ten of thousands after they repeatedly assured investors the company had a sophisticated trading bot executing trades on its behalf. As evidence suggesting that MTI was in fact a scam grew, key figures behind the company maintained their trading bot narrative.

However, just a few months after regulators in the U.S. and South Africa warned traders about investing in MTI, the company collapsed when CEO Johann Steynberg suddenly vanished along with investor funds. As subsequent investigations have shown, the much-vaunted trading bot proved to be nothing but a scam tactic designed to hoodwink investors. MTI never generated high returns for its investors because it was never a genuine investment company in the first place.

Africrypt, another South African bitcoin trading company, similarly used claims that its trading bot would generate unusually high returns for investors. However, just like MTI, Africrypt collapsed when its two young directors disappeared. While investigations into Africrypt’s collapse are ongoing, preliminary findings suggest that the trading bot narrative was again just a ruse used to hoodwink unsuspecting investors.

The Lure of Fantastic Returns

Smaller criminals are also using the trading bot narrative to defraud ignorant and inexperienced investors. They do this by convincing investors to buy trading software or bots that they claim will generate returns in excess of 100% in a short space of time. Often the scammers will use social media channels to target their victims. Many unsuspecting traders have fallen for this even after being warned.

With trading bot scammers still on the prowl, many more traders will continue to lose money to this type of scam. This begs the question: Who should use a trading bot? How does one know if a purported trading bot is in fact a scam? To get answers to these questions and more, Bitcoin.com News reached out to Dmytro Volkov, CTO at CEX.io.

In his written responses, Volkov concedes that some trading strategies do require quick actions and calculations. He says since humans cannot perform such trading strategies this task is left to a trading bot. However, according to the CTO, the “most successful trading strategies still require constant supervision and guidance from experienced high-skilled human traders – quants.”

Trading Bots Akin to Driverless Race Cars

To illustrate his point, Volkov uses the analogy of the Formula 1 racing vehicle which may be one of the fastest cars, but of course, still needs a skilled driver. In addition, trading bots will also perform well under certain conditions. Volkov explained:

Automatic trading bots are not universal and work well for some specific market situations and usually work well for a short time, not being able to adapt to significant market changes.

So while some traders might view a trading bot as an “autonomous intelligent self-learning program” that remains effective for months or even years, according to Volkov, such a bot does not exist. However, in instances where trading bots are in use, traders should be prepared for two possible outcomes, either they make a profit or they lose their money.

This idea about trading bots being risky is backed by the Kucoin team, as well as the CEO of Naijacrypto, a Nigerian cryptocurrency exchange. In written responses to questions sent by Bitcoin.com News, a Kucoin representative agrees that while traders are able to transfer funds to a trading bots platform, it still takes someone who works for the platform “to operate the trading software to obtain profits for investors.” In any case, this trading mode comes with risks, the Kucoin team is quick to point out.

Scammers Selling Bots

In another (perhaps less risky) scenario, The Kucoin team also outlines how trading bots can be used to generate positive returns for users:

Investors put their funds in the exchange, and the third-party trading bots platform links to the exchange via API. So, the third-party platform has the authority to manipulate the user’s account without the user’s knowledge, such as buying and selling coins in the user’s account.

However, this only happens with genuine trading bots, the Kucoin team asserts.

Unfortunately for traders, 99% of people selling bots are scammers, reckons Chiagozie Iwu, CEO of Naijacrypto. However, this often is not immediately clear to their victims. On the other hand, those with successful bots have no need to sell them for meager amounts, Iwu argues. So how then does one distinguish between a genuine and a fake bot?

According to Iwu, the obvious and perhaps the best giveaway that a trading bot could be a scam has to be the claim of “unrealistic returns” that can never be consistent. “If they make such returns consistently, the math shows they do not need to sell the bot for such meager amounts,” insists Iwu.

Verifying the Authenticity of a Trading Bot

One scientific way of determining if a bot is genuine is by using transaction records to prove whether the transaction strategy has been executed. For instance, Kucoin says users can check every order that they executed in their own account to prove that it is a real transaction. However, if the exchange utilizes a third-party platform, the trader can ask the exchange to provide transaction details to prove authenticity.

Alternatively, traders can develop their own strategies and get someone to convert these into a bot, suggested Iwu. He said: “A trading bot can be written around an index. However, this is very popular in traditional stock markets and only very few exist in the crypto markets.” The other way is by choosing trading software that provides trading strategies that are novice-friendly.

The chances of traders — particularly inexperienced ones — falling for scams are greatly reduced just by stepping back and looking at all offers with a critical eye, the above information in mind. Understanding these basic facts means when someone is offered an opportunity to invest in a trading bot that is risk-free and guarantees high profits, or one that is fully automated and does not require skilled supervision — they should be able to tell it is 100% a scam.