The Wild West of Crypto

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February 11, 2022

Every now and then, there is a promise of easy money hanging in the air. We’re living in times of another gold rush; only today’s prospector mine internet’s Bitcoins instead of Californian gold. It got us excited! But instead of rushing for a pickaxe with the enthusiastic crowd, we took the path less traveled and crunched some data.

How hard is it to become a cryptocurrency millionaire? It’s… surprisingly hard to tell. I mean, we spent several hours sweating the numbers, but they just don’t add up.

Panning for gold

We built a hypothetical portfolio of all coins in existence and plotted their value over the last 6 years. We expected many things, but not this:

It grew. A lot. I instantly felt like I was missing out on the best opportunity there ever was. But no more, now I could board this ship too! Hey, was that how the prospectors felt on their way to California? As thousands of thoughts were rushing through my head, Mike said, hey, these numbers are off.

It didn’t pan out

According to that chart, investing a $100 in 2017 would make us the most affluent men alive today. We could buy all the stocks, bonds, and real estate in the world many times over. If we needed a watch, we could instead hire Jeff Bezos himself to follow us and proclaim the time every minute. And that would easily be the most profitable venture of his life. But the last time we checked, Jeff wasn’t a clock, so clearly something was wrong.

Searching online, we realized that not every coin is a fair game. It was the free banking era all over again. You see, during the gold rush in the 19th century United States, almost anyone could issue paper money. The gold-seekers deposited their finds in local banks in exchange for their banknotes. However convenient, many of these banks disappeared, rendering their currency worthless.

Similarly, many of our coins seemed like fortunes, but there was no way to cash out. Today’s crypto bankers are issuing a new currency every week, only this time it’s all high-tech and fewer people understand how it works. Take the term coin – it sounds tangible, but it’s actually a computer program. And that huge price increase we saw? Turns out it could be faked, and that’s exactly what some malicious coin issuers did.

All that glitters is not gold

Not all crypto bankers are fair. Some will retain administrator rights for their coins. They can create new money out of thin air, steal money from your account, and even control who is allowed to sell.

Others will impose a trading fee that can be adjusted at any time. They can change it to 99% right before you click Buy. Even if your coin increases in value, you’ll become broke the minute you try to cash out.

There’s also the case of Scrooge McDuck holders. They own a significant portion of a coin, wait until the value increases, and then sell it all in a fraction of a second. In an instant, the market gets flooded, and your coin becomes worthless.

How can you easily tell apart a legitimate coin from a rigged one? Good question! If you find out, let us know.

I am a programmer, Mike worked in consulting, and we still didn’t have a good idea even after looking at the historical data. It really bothers us! There’s no telling if there’s a hidden admin user without reading the code. Different sites disagree about basic data like price, trading volume, and the legitimacy of different coins. It’s weird how the system built upon the premise of full transparency is so opaque.

This a robbery, don’t move!

Even a legitimate coin issued by a reliable company with the best intentions is not risk-free. Everything from exchanges to cryptocurrencies themselves is made of software, and software can be hacked. Simply misplacing the access keys cost the owners of Levyathan coin $1.5 million last year¹.

But the real gangster move is attacking exchange venues. Crypto.com lost $30 million just last month², KuCoin $281 million roughly a year ago³, and BitFinex lost $3.6 billion in 2016⁴. And that’s just off the top of my head! It’s crazy how perfectly the incentives are lined up: coins are valuable, easy to liquidate, and anonymous.

Snake oil! Fresh snake oil!

Now that’s all technology-related, but there’s still a lot of room for good old conventional malice. Just take Modern Tech. Seven people sold $660 million worth of crypto tokens for a promise of huge returns. They even generously paid some cash to early investors before disappearing with most of the proceedings.

This history repeated itself many times. In the case of the Squid games token, the scammers pumped their coin by lying about a supposed partnership with Netflix. The hype got real, many people bought in, but there was really nothing to it. As quickly as the price rose, it dropped forever:

So is it gold, or fool’s gold?

During the gold rush, some prospectors made their fortunes, but many were left with worthless banknotes. Crypto fortunes are just as fleeting – $14 billion worth of coins were stolen just last year⁵. You can’t be sure how much money you have until you try to cash out. Maybe your wallet actually holds millions, or maybe there’s nothing in there. It’s a complex and confusing market that we’re still learning.

It’s not all doom and gloom, though, we made some sense of all that data in the end. So, how likely are you to make some money? Stay tuned for the next article!

Adam's Perspective