Pull My Blockchain

Why Bitcoin Is Destined To Fail

Apart from some very specific use cases (like the purchase of illegal goods on the black market and money laundering), Bitcoin is not going to gain mass adoption as a currency. Traditional money does everything Bitcoin is attempting to replicate, only better. Just think how easy it is to Venmo someone money or pay online using a credit card! Sure, a bank usually charges a fee as the intermediary, but the convenience is worth it.

It's For Speculation, Not Currency

Many people have bought into this idea of a crypto future were most transactions live on the blockchain. However, the thought that cryptocurrency can replace government-issued money is pure fantasy.

Money has three basic functions: as a unit of account, a store of value, and a medium of exchange. Bitcoin fails two of these measures, and perhaps even the third.

Source: Charles Wheelan. Naked Money: A Revealing Look at what it is and why it Matters. WW Norton & Company, 2016. [B046]

See Also: functionofmoney.com

And as Quinn and Turner (2020) point out: "Its volatility [makes] it useless as a store of value or unit of account"². For instance, Shiller (2019) reports that at one time, "the US dollar price of Bitcoin rose 40% in forty hours on no clear news"³.

The problem with this type of volatility is that:

An asset that is rising and falling unpredictably in value makes for a miserable currency, electronic or otherwise. Money works best when it maintains relatively constant purchasing power. [...] Any currency with such wild swings in value is miserable for longer-term transactions. Imagine the financial danger of taking out a mortgage, or entering into any other contract, in which you commit to making payments that could end up being ten or twenty or fifty times what you expected in real terms.

Source: Charles Wheelan. Naked Money: A Revealing Look at what it is and why it Matters. WW Norton & Company, 2016. [B046]

Despite its breadth of ownership, few people actually use Bitcoin for its intended purpose (i.e. money). Basically, nobody pays for anything in crypto unless they have to. "Even the Bitcoin Foundation doesn’t really pay its people in bitcoin"⁴.

The Speculation Fuels More Speculation

The price appreciation of Bitcoin is well documented. But here's a refresher for anyone who needs it: it started out at a fraction of a cent when launched in 2009¹; it now trades at well over $10,000. Hence, the ride up was spectacular and exciting, including this noteworthy period (underscoring its inherent volatility):

The value of a single bitcoin grew 5,000 percent between January 2013 and January 2014. The climb was not steady. Bitcoin began the year at $15, climbed to $230 in April, fell to $70 in July, then climbed vertiginously above $1,000 in November.

Source: Charles Wheelan. Naked Money: A Revealing Look at what it is and why it Matters. WW Norton & Company, 2016. [B046]

Speculation has inflated the price of most major cryptocurrencies, not just Bitcoin. Oddly enough, their values rose right when the market was being flooded with ample supply.

In August 2016, one Bitcoin was trading at $555; in the next 16 months its price rose by almost 3,400 per cent to a peak of $19,783. [During that time, ICOs] attracted $6.2 billion of money from investors in 2017 and a further $7.9 billion in 2018.

Source: William Quinn and John D. Turner. Boom and bust: A global history of financial bubbles. Cambridge University Press, 2020. [B214]

Note that the rampant speculation in crypto-assets continued unabated after that, creating "a bubble that reached over $1.8 trillion at its peak" in 2021¹.

How Crypto Works

Background for the uninitiated:

When one party wants to send Bitcoins to someone else, the network computers check their logs to verify that the person offering up the bitcoins actually owns them. […] The process is the electronic equivalent of opening a bank safety deposit box, which typically requires the simultaneous use of two keys: one kept by the bank and one kept by the owner of the box. […] After a bitcoin transaction takes place, every computer in the system automatically updates its log to reflect the change in ownership. […] It is a list of authorized transactions, beginning with the creation of the unit by a miner and ending with the current owner.

Source: Charles Wheelan. Naked Money: A Revealing Look at what it is and why it Matters. WW Norton & Company, 2016. [B046]

But It Is Not For Everyday Transactions

Can you imagine a situation where paying for a cup of coffee required a one-hour wait to confirm the transaction?

[Cryptocurrency's] popularity exposed the inability of its system to process large numbers of transactions, resulting in long delays in transferring Bitcoins and substantial transaction costs.

Source: William Quinn and John D. Turner. Boom and bust: A global history of financial bubbles. Cambridge University Press, 2020. [B214]

Cost-per-transaction averages between $1 and $2, but can spiked temporarily to over $4 or $5 (not to mention the historical high of over $50 in 2021).

Source: https://ycharts.com/indicators/bitcoin_average_transaction_fee

Bitcoin's Origin Story

Bitcoin has anarchist undertones, which seems to resonate with people:

The coins are anonymous and free of government control, management, and reach. [...] Adding to the romance of the Bitcoin narrative is a mystery story, for Satoshi Nakamoto has never been seen by anyone. [And] the idea that savvy young people understand Bitcoin, but that old fogies never will, appeals to many.

Source: Robert J. Shiller. Narrative economics: How stories go viral and drive major economic events. Princeton University Press, 2019. [B118]

By the way, if founder Satoshi Nakamoto kept his original Bitcoin stake, he could have been the richest person on Earth. But he/she either lost his private key, is deceased, or just doesn't care about material wealth. Either way, it's a fascinating story!

Bitcoin is literally built on mistrust of the government.

With Bitcoin and some other cryptocurrencies it’s also possible to leave a message in the transaction data. In the first ever produced genesis block of Bitcoin, Satoshi Nakamoto, the unknown founder, left one note hidden in the transaction: ‘The Times 03/Jan/2009 Chancellor on brink of second bailout for banks.’ The founder of Bitcoin wanted to make it clear to the world that the digital currency was created in response to the global failure and the manipulation that is the world’s banking system.

Source: Erica Stanford. Crypto Wars: Faked Deaths, Missing Billions and Industry Disruption. Kogan Page, 2021. [B189]

Inflation Proof?

A fixed supply may seem like a key benefit for a 'store of value' like a currency, but in reality, it isn't. Even gold doesn't have a fixed supply, as its quantity continues to grow as mining technology improves and new deposits are found. Ideally, gold supply (and money supply) would grow at the same rate as the economy. By contrast, the number of Bitcoins to be mined is unfortunately finite, limiting its long-term viability.

The original program was written so that 50 bitcoins would be discovered on average every ten minutes, with the discovery rate to fall by half every four years. As I write, there are roughly twelve million bitcoins in circulation with the expectation that only nine million more will ever be given out. [...] The quantity of bitcoins that will ever be mined is ostensibly fixed, unlike fiat money, which can be produced at will by a central bank.

Source: Charles Wheelan. Naked Money: A Revealing Look at what it is and why it Matters. WW Norton & Company, 2016. [B046]

See Also: functionofmoney.com

In reality, Bitcoin doesn't share much in common with gold, except goldbugs tend to spout the same discredited theories about the cataclysmic impacts that the collapse of the Bretton-Woods agreement (in the early 1970s) would have on the economy. Crypto proponents are equally sanguine about the dangers of inflation, even though independent central banks have proven to be better managers of the money supply than goldbugs give them credit for.

Nevertheless, gold has had an enduring popularity through time. As Shiller (2019) pointed out: "People value gold primarily because they perceive that other people value gold"³. Whether that level of confidence can be replicated with Bitcoin is debatable. Though, it might be too soon to determine either way considering the timespan that would be required to generate a meaningful track record (i.e. hundreds of years) over a historical scale. Right now, however, different cryptocurrencies are still jockeying for market share, each with their own competing standards and technologies. It's still early in the game to call Bitcoin a winner based on its sizable market capitalization.

Nothing New Under The Sun

Bitcoin isn't as cutting edge as most people think.

[Bitcoin’s] underlying concepts and theories, such as the Merkle tree or the Elliptic Curve Digital Signature Algorithm, or to describe Bitcoin as an equilibrium of a congestion-queuing game with limited throughput. [...] The RSA algorithm, the original cryptography algorithm that may have started the Bitcoin revolution, dates back to 1977.

Source: Robert J. Shiller. Narrative economics: How stories go viral and drive major economic events. Princeton University Press, 2019. [B118]

When Bill Gates told Warren Buffett that the internet would change everything, Buffett retorted "will [it] change the way people chew gum?"⁵. The hype regarding the blockchain sounds awfully familiar.

[Blockchain] was highlighted not just as a technology but as the miracle technology to solve all problems. Blockchain, it was promised, would revolutionize every existing industry. Industries and markets that had existed for centuries and were worth trillions of dollars would be disrupted, collapsed and turned on their heads. Banks would collapse, and every industry from retail to religion, real estate to dentistry, porn to dating would be on blockchain.

Source: Erica Stanford. Crypto Wars: Faked Deaths, Missing Billions and Industry Disruption. Kogan Page, 2021. [B189]

Public Companies Rush In To Cash In

Stock promoters always love to jump on the bandwagon. For example, "USA-based Long Island Ice Tea Corp famously changed their name to Long Blockchain Corp. Their stocks jumped 289 per cent overnight"¹.

See Also: stockfads.com

Imitation As The Sincerest Form Of Flattery?

Charles Wheelan (2016) joked that he could create 'Charlie Coins' and give them to people who run laps around his house⁴. But, as he astutely points out, "that doesn’t mean anyone will want to accumulate them, let alone accept them for goods that have real value, like a pizza or a car"⁴.

The list of Bitcoin knockoffs is virtually endless. There's been "alphacoin, fastcoin, peercoin, namecoin, worldcoin, flycoin, zeuscoin, and even bbqcoin"⁴.

Most ICOs had zero real-world worth or use-case. [...] From 2016 onwards, it was just too easy to launch a new cryptocurrency. [...] Roughly 99 per cent of ICOs had one thing in common. They had no need or use for a cryptocurrency or blockchain or any value to offer anyone else.

Source: Erica Stanford. Crypto Wars: Faked Deaths, Missing Billions and Industry Disruption. Kogan Page, 2021. [B189]

The case of OneCoin is illustrative of the industry's flagrant oversupply.

OneCoin was to be the biggest cryptocurrency, ‘the Bitcoin killer’, and promised to do things never done before. [...] And yet, OneCoin was the only cryptocurrency not listed on any other crypto exchange; there was literally no way given to exchange it into bitcoin or into real-world government currency. [...] Rather, OneLife was building its own exchange – xcoinx – a platform on which investors would be able to cash out their OneCoins into real money. When OneCoin launched, the exchange wasn’t live yet. [...] To get OneCoins, you had to buy their educational packages. [...] Already from early 2016, OneCoin was denying all but a very few withdrawal requests. [...] OneCoin, in practice, only had any real-world value if the coins could in fact be cashed out into euros when their owners requested. [...] OneLife had the whole time been using an SQL database to store the data and values of OneCoin. [At one] time, 70 billion OneCoins had been Created. [...] This made the value of OneCoins in circulation greater than the value of all the US dollars in circulation on earth. [...] The Forbes cover wasn’t a cover. It was a paid advertisement OneCoin had taken out in Forbes’ affiliate in Bulgaria that OneLife had designed to look like a front page of Forbes International. [...] Speaking at the Economist convention was also bought – OneCoin was the Platinum sponsor.

Source: Erica Stanford. Crypto Wars: Faked Deaths, Missing Billions and Industry Disruption. Kogan Page, 2021. [B189]

Not all cryptocurrency launches are a roaring success. The Prodeum ICO for instance "barely raised $100"¹.

See Also: www.deadcoins.com

Fraud Magnet

ICO stands for Initial Coin Offering, cryptocurrency's answer to stock IPOs (initial public offerings). For better or worse, "ICOs brought to the world a new way of fundraising"¹.

Law enforcement would in time go on to deem over 98 per cent of crypto ICO projects to be scams or failed projects, or projects that lost their investors’ money. [...] Less than two years after the main ICO bubble began, 81 per cent were declared to be scams and 92 per cent had either lost all or the vast majority of their investors’ money. [...] Whilst 81 per cent of crypto ICO projects ended up being or turning into scams, 6 per cent failed and 5 per cent died. [...] Only 1.9 per cent of all ICOs have turned out to be successful.

Source: Erica Stanford. Crypto Wars: Faked Deaths, Missing Billions and Industry Disruption. Kogan Page, 2021. [B189]

The barriers to entry are amazingly low.

Ethereum [is] the digital currency for the blockchain platform that most of them were built on top of. [...] For a few tens or hundreds of dollars anyone could get an ICO website built, a logo done, a whitepaper written to explain what the project purported to do, the tokenomics (like its financial and technical model – what should be a rather crucial element) and its social media done to promote it. Some ICOs went a little further to promote their token sales, paying gig workers $5 or $10 to create videos or write (fake) reviews or testimonials about their projects, saying how good the projects were and pretending to be happy customers.

Source: Erica Stanford. Crypto Wars: Faked Deaths, Missing Billions and Industry Disruption. Kogan Page, 2021. [B189]

Unscrupulous promoters are only rivaled by the perverted ones.

SexCoin launched its own literal sex coin – aimed at preventing scams in the sex industry – although how they intended to do this was never explained. The only place one could spend SexCoins was in their own virtual sex shop called SexCoin Maid, which never really took off. Slightly limiting. Payment in the porn industry is a big and ongoing problem. People, for whatever unknown reasons, don’t want porn purchases showing up on their bank statements – presumably some partners and family members would give them a hard time over the revelations. Camgirls and sex workers also struggle to get banked. Whilst some are happy to accept Amazon vouchers for payment, this isn’t sustainable for micropayments for smaller deeds or for paying rent, and thus a whole flurry of ICOs sprung up to target the sex industry to take advantage of the failings of traditional finance for this particular space, without seeing that blockchain wasn’t necessarily the answer. SpankChain – founded by Spanktoshi Nakabooty – a play on the name of the pseudonymous Bitcoin founder Satoshi Nakamoto – came in to save the day with their micropayments for porn services currency SpankCoin. [...] Unfortunately [...] the platform never launched. [...] TittieCoin had perhaps the best offering of all to the crypto industry, [and] Dirty Coin offered a ‘fast and discreet way to pleasure’.

Source: Erica Stanford. Crypto Wars: Faked Deaths, Missing Billions and Industry Disruption. Kogan Page, 2021. [B189]

Other themes include: "Prayer Token made itself out to be backed by prayer. [...] Sand Coin offered a way to buy sand. Wine Project’s WINE tokens offered their investors a far more complicated way of buying wine than would be possible with a credit card or any other conventional payment method"¹.

Opportunities for Opportunists

As Erica Stanford points out in her book 'Crypto Wars', "Who wouldn’t want a way to create money out of thin air?¹"

After Bitcoin, thousands more cryptocurrencies were created out of thin air. It was too easy to do so. Anyone could create a whole new cryptocurrency for very little effort or money. Project after project launched in a new crypto fundraising method known as an initial coin offering (ICO), giving themselves names ranging from Jesus Coin to Sexcoin to PotCoin to TrumpCoin to Catcoin. [...] Some examples of ICOs that were blatant on that front were PonziCoin, which still raised $250,000, and ScamCoin, which promised to be ‘The only ICO you can be certain of! Get 0 per cent return from 100 per cent of your investments, guaranteed!’

Source: Erica Stanford. Crypto Wars: Faked Deaths, Missing Billions and Industry Disruption. Kogan Page, 2021. [B189]

The markets can go crazy sometimes following the latest fads. Cryptocurrencies are just the latest example. For instance, most market participants severely underestimate the success rate of ICOs. Erica Stanford quotes data that shows that "only 8 per cent of ICOs even hit exchanges"¹.

See Also: stockfads.com

Investing – if you can call it that – in cryptocurrency requires a leap of faith. "There are now several thousand cryptocurrency projects that once raised money [...] then disappeared"¹. Not surprisingly, the industry is teaming with charlatans.

Manipulation of markets has gone on since trading began. [...] It’s easier to get into crypto than penny stocks. [...] Larger exchanges tended to charge higher listing fees and had slightly tougher criteria for accepting cryptocurrencies, meaning that the smaller cryptocurrencies tended to dominate the smaller, more decentralized crypto exchanges.

Source: Erica Stanford. Crypto Wars: Faked Deaths, Missing Billions and Industry Disruption. Kogan Page, 2021. [B189]

There are often some obviously red flags.

One Asian ICO showed a headshot of a very attractive team member, whose role in the project read ‘Experienced graphic designer with a clear focus on identities and illustration’. Presumably the team behind the project weren’t aware quite how famous the actor Ryan Gosling is, as they didn’t seem to realize that using his photo for their ICO might raise a few eyebrows. And yet the ICO in question still raised $830,000 from 380 investors.

But:

For everyone who wanted to see red flags, others were there to dismiss any negative talk as just greed spread by those who they thought just wanted to push the price down so they could buy in cheaper.

Source: Erica Stanford. Crypto Wars: Faked Deaths, Missing Billions and Industry Disruption. Kogan Page, 2021. [B189]

Charles Ponzi Would Be Proud

Investors that get in first usually do better than the later adopters. The influx of new participants allows insiders to dump their stakes into a hot market:

In the big, slightly underworld game of multi-level marketing, where there is a genuine product to sell, it’s called network marketing. Where there isn’t, it means the money coming in isn’t coming from the sales of any product, but rather from the next set of investors. When this happens, it’s a pyramid scheme – or a Ponzi. Ponzi schemes are illegal, but the difference between MLM schemes and Ponzi schemes is often grey at best.

Source: Erica Stanford. Crypto Wars: Faked Deaths, Missing Billions and Industry Disruption. Kogan Page, 2021. [B189]

The dynamics of cryptocurrencies are often an invitation for Ponzi schemes.

BitClub Network [was] a then relatively unknown crypto cloud-mining company. [...] Only 40 per cent is used for mining and the rest for commissions. [...] As with any multi-level-marketing scheme, there comes a point where there aren’t enough fresh people left to bring in. [...] The company that had promoted itself in its videos as being ‘the most transparent company in the history of the world’ [...] had failed.

Source: Erica Stanford. Crypto Wars: Faked Deaths, Missing Billions and Industry Disruption. Kogan Page, 2021. [B189]

Outlandish Promises

If it's too good to be truth, ... well, you know the rest!

PlexCoin said it would give out debit cards that would far surpass the feats achieved by every known bank to date. ‘Revolutionary and unprecedented, PlexCard will be accepted everywhere in the world, regardless of your country’s currency. Your card will adapt to the geographical area in which you are located.’ [...] Another great claim: ‘PlexCoin may be used just like traditional money to pay bills.’ [...] PlexCoin was sold at 13 cents per token to its first ICO investors. [...] By the end of 2018, they put into their promotional materials that they estimated that PlexCoin would be sold at $14.

Source: Erica Stanford. Crypto Wars: Faked Deaths, Missing Billions and Industry Disruption. Kogan Page, 2021. [B189]

Celebrity endorsements don't bring any more legitimacy. For example, "Floyd Mayweather and DJ Khaled were amongst those fined for failing to declare their paid role in promoting an ICO called Centra Tech, which turned out to be one of the bigger scams going"¹.

Cryptocurrency trading platforms are not blameless either.

Some crypto exchanges hid behind technical issues, citing technical faults as the reasons there were delays in processing withdrawals and why some people weren’t able to access their money.

Source: Erica Stanford. Crypto Wars: Faked Deaths, Missing Billions and Industry Disruption. Kogan Page, 2021. [B189]

Enablers

Trading volume may be inflated to generate buzz, in either direct or indirect ways. As Erica Stanford warns: "many crypto exchanges make a habit of creating fake accounts to simulate enhanced trading volumes"¹. She also highlights how exchanges fuel the speculative bubble in more passive ways by "storing crypto on exchanges, [which then means people] having more money available to trade or send straight to invest in the next ICO"¹.

In addition, trading exchanges have a role to play in ICO legitimacy.

Crypto exchanges got away with charging projects up to millions of dollars just to list on their exchanges. Exchanges knew that they were essential to the ICOs being traded and knew that the ICOs were raising millions, so charged accordingly.

Source: Erica Stanford. Crypto Wars: Faked Deaths, Missing Billions and Industry Disruption. Kogan Page, 2021. [B189]

FOMO

The fear of missing out is a powerful human emotion. "The greater fool theory—buying something today in the belief that someone else will pay more for it tomorrow—has had a seat at the table for every bubble in the history of human civilization"⁴.

If there's any need to prove crypto is/was a bubble, here are some tidbits to illustrative the irrational exuberance of the Bitcoin era.

Fiverr.com and paying gig workers $5 each to write the name of their company on their bodies¹.
In Lithuania in early 2018 an ICO launched to sell vegetables on a blockchain¹.
In 2013, a Japanese meme of a Shiba Inu dog became popular across the country. Later that year, a joke cryptocurrency was formed using this meme of a cartoon dog as their logo. Dogecoin was never intended to be serious¹.

Last Refuge

Nicaragua has jumped on the Bitcoin bandwagon by taking its foreign aid and gambling with it. It, however, isn't the only desperate economy to try a Hail Mary effort to rid itself of unreliable fiat money.

Acapulco, [...] the once popular Mexican coastal town [has] one of the highest murder rates in the West in recent years. The area is considered to be pretty lawless. US citizens are advised not to visit Guerrero, the state that Acapulco is in. US Government employees are banned from visiting it altogether, a fact welcomed by the attendees and which makes the resort the perfect place to host an anarchist conference, [called] Anarchapulco. [...] Local businesses, starved of tourist dollars, now accept payment in crypto for anything from juice and snacks to rides in Mexican horse-drawn carriages.

Source: Erica Stanford. Crypto Wars: Faked Deaths, Missing Billions and Industry Disruption. Kogan Page, 2021. [B189]

Assorted Case Studies

The ICOs that are destined to fail are unfortunately not always quickly uncovered and exposed.

[With Bitconnect], investors would have to lock up their coins for between 120 and 299 days. [...] A lock-up of money or tokens is a classic tool used by Ponzi schemes. [...] For every direct referral, the promoter or influencer would get 7 per cent of their referral’s investment. If their referral then brought someone in to invest underneath them, the first referrer would also get 3 per cent of that investment. This went on [...] seven levels. [...] Bitconnect offered a very generous affiliate referral bonus structure. [...] Depending on how much one invested, Bitconnect would pay out interest of 47.5 per cent a month, or up to 570 per cent a year. Of this, 90 per cent a year was supposedly guaranteed. This interest could then be compounded. [...] If someone invested $10,010 for five years and re-invested all their interest pay-outs, instead of cashing those out, by the end of five years they would have $19,150,316,162,940,756.00. That’s over $19,150,316 billion, [or] roughly 95,751.58 times richer than Jeff Bezos, [who] has a net worth of just over $200 billion. [...] People heard [that] all early investors were paid out in full, at least 1 per cent interest daily. [Promoters were spending] $700,000 per week to spend on advertising the scheme in the USA. [...] To get people to go [to their conference], Bitconnect paid for their flights and accommodation. [...] Those coming from the UK would receive about £2,000 for their expenses. Two thousand people travelled there from around the world. [Yet] the website was full of spelling mistakes and poor grammar. Non-native English speakers can easily access online editors to quality check websites, or can hire native English-speakers to do some minor proofreading to correct the most basic of mistakes, for relatively low costs. The internet is literally full of sites or freelancers offering this service. [Even then, speculation] pushed the token to its peak price of $463, up from 17 cents just a little over a year before. [...] At its peak [Bitconnect] had a market cap of $2.8 billion and [had] raised up to an expected $4 billion. [...] Bitconnect was sent cease and desist letters from two US states. [Then] Bitconnect crashed 87 per cent in a day. [...] Bitconnect was delisted from almost all crypto exchanges, making the token literally worthless as nobody could cash it out or sell it. Yet the Bitconnect token continued to be traded for another eight months until 11 August 2018. When it was finally delisted from the last exchange, the last token sold for 68 cents, still giving the worthless, dead scam a market cap value of $6.69 million.

Source: Erica Stanford. Crypto Wars: Faked Deaths, Missing Billions and Industry Disruption. Kogan Page, 2021. [B189]

Then there is PlusToken.

Just as with OneCoin and Bitconnect, the organizers behind PlusToken knew how to draw crowds. [...] They released glamorous promotional videos with their Members. [...] This scam would go on to take up to $6 billion directly from its investors and reach a final $17 billion valuation before its founders left, with just one message for their investors: ‘Sorry we have run’. [...] PlusToken would pay out referral commissions down 10 levels of referrals. [That brought] an estimated additional $4 billion onto the PlusToken platform. [...] Frantic FOMO buying had pushed the token price up to $340 per token, giving the project a total market cap valuation of $17 billion. This would have made PlusToken the third largest cryptocurrency in the world had it been listed on popular crypto listing site CoinMarketCap. Except it wasn’t. They never listed it. [...] From PlusToken’s launch in June 2018, it only took a year until June 2019 when investors started reporting delays in being able to withdraw their funds. [...] To encourage its users to keep their crypto on the platform, [...] PlusToken had charged a 5 per cent transaction fee for any money moved out of the account. [...] The ringleaders of PlusToken have never been caught. [...] In PlusToken, it still isn’t clear who made off with the funds. [...] The raid on the six suspects in Vanuatu should have given police some hardware or clues to work with. According to the police report, it didn’t.

Source: Erica Stanford. Crypto Wars: Faked Deaths, Missing Billions and Industry Disruption. Kogan Page, 2021. [B189]

Another examples is "Canadian exchange Quadriga, [...] whose founder died leaving his users with no access to hundreds of millions of dollars of their money"¹.

Gerald Cotten, the [Quadriga] founder, was the only one who had access to the wallets storing the quarter billion of investors’ money it held. [...] Cotten bought himself almost instant loyalty for Quadriga by just sponsoring local crypto events. Giving people free beer and pizza must be one of the universally easiest ways to win over followers. [...] The world’s second largest exchange, Vault of Satoshi, and Canada’s then-largest exchange CaVirTex, [...] closed suddenly [...] in the same week. [As a result], Quadriga became Canada’s main bitcoin exchange virtually overnight, gaining a sudden, huge new influx of users. [...] In November 2018 Gerry made a will and married Jen, then flew to Delhi for their honeymoon. [...] Shortly after checking into the [hotel], Gerry complained of a stomach ache, was taken to a nearby private hospital and diagnosed with acute gastroenteritis. [...] Within 24 hours of his complaint of a stomach ache, however, his condition had deteriorated, his heart stopped twice, and he died. [...] It took Jen over a month to announce his death. [...] When sending crypto to Quadriga, you were signing away the control of your crypto. [...] in fact the assets were stored online in such a way that it made the hundreds of millions of customer funds easy to hack, and easy for Cotten to help himself to. There were no separate client accounts; all Quadriga funds went into one big centralized pool.

Following Cotten’s death, [...] Ernst & Young, the appointed administrators, also made a series of impressive blunders. [...] Before the exchange’s demise, Cotten did pay out to some investors. [...] Pay-outs were in cash, often sending paper bags or boxes of bank notes, [because] as a crypto company operating in Canada, Quadriga hadn’t been able to get a bank account.

Source: Erica Stanford. Crypto Wars: Faked Deaths, Missing Billions and Industry Disruption. Kogan Page, 2021. [B189]

Distributed Ledger

Decentralization might be worthwhile, but it is not a cure-all.

Centralized institutions are notoriously vulnerable to being hacked; countless companies who have stored their data on centralized servers have been compromised, with hackers sharing their users’ private data for all to see. [So] anything that mentioned the word decentralized was deemed – woefully optimistically in some cases – safe.

Source: Erica Stanford. Crypto Wars: Faked Deaths, Missing Billions and Industry Disruption. Kogan Page, 2021. [B189]

Public disclosure of misdeeds does happen with a centralized system, but its nature is more accidental. The blockchain is public by design, hardly the type of thing you want when anonymity is a key selling point.

Data held on a single centralized database, such as how Ashley Madison stored their data, is prone to being hacked, so it is in a way true that storing this data on a blockchain would make it more secure. But this is completely missing the point of how blockchain works. Blockchain holds a permanent record of information stored on it. Therefore, storing the data of profiles and dating messages as permanent data entry records – a rather pertinent feature of blockchain – would be the literal exact opposite of what anyone would want.

Source: Erica Stanford. Crypto Wars: Faked Deaths, Missing Billions and Industry Disruption. Kogan Page, 2021. [B189]

Not As Anonymous As People Think

With the exception of some privacy-centric cryptocurrencies – Monero for instance – specific wallets can be publicly tracked up and down the ledger. Crypto forensic scientists are able to detect when certain funds are moved and even uncover details about the owner.

As Erica Stanford describes: "with Bitcoin and Ethereum, all transactions can be publicly seen on the blockchain. This has made it easy for crypto analytics firms to track the coins associated with "some of biggest scams of all time", like PlusToken¹.

No Central Authority Means No-Takebacks

As Erica Stanford writes: "with ICOs, you never quite knew if the crypto address you were sending your money to was the right one, or if you would get anything back for it"¹. Hence, losing your money is easy and usually irrecoverable.

Bitcoin and its competitors […] can easily be lost or stolen. Each bitcoin has a personal key—a string of numbers—that can be stored electronically in an electronic wallet. […] If the personal key is lost, so are the bitcoins, forever. […] Now imagine looking for a yellow Post-it note frantically, because if you don’t find it your retirement savings will be gone forever.

Source: Charles Wheelan. Naked Money: A Revealing Look at what it is and why it Matters. WW Norton & Company, 2016. [B046]

Eventually, everyone will lose their private keys. If the trend continues, in a couple generations, no one will have access to their crypto-wealth anymore.

Crypto can be stored securely behind coded passwords, known as private keys. If you have the private keys, you can access your crypto. If you don’t, crypto isn’t a bank where you can call up or change your password online. [...] There are hundreds of stories of people who lost the private key to their digital currency or accidentally threw away the device it was stored on, and in so doing lost their access to their fortune. There wasn’t – and still isn’t – anything anyone could do.

Source: Erica Stanford. Crypto Wars: Faked Deaths, Missing Billions and Industry Disruption. Kogan Page, 2021. [B189]

Famous Fails

The amazing increase in Bitcoin prices has generated some funny stories of regret.

In 2010, when a pioneering bitcoin enthusiast, Laszlo Hanyecz, made a post on a bitcoin message board offering 10,000 bitcoins to anyone who delivered him two pizzas. Another bitcoin nerd accepted the deal and had two Papa John’s pizzas delivered to Hanyecz. By 2015, those 10,000 bitcoins were worth $2.3 million. Cryptocurrency enthusiasts now celebrate the anniversary of that seminal transaction, May 22, as Bitcoin Pizza Day.

Source: Charles Wheelan. Naked Money: A Revealing Look at what it is and why it Matters. WW Norton & Company, 2016. [B046]

Or consider this other example:

The popular singer Lily Allen turned down an offer in 2009 to do one performance and be paid in Bitcoin. This narrative has a memorable punch line: Allen is kicking herself in regret today, for if she’d accepted the offer and held on to her Bitcoin, she would have been a billionaire by 2017.

Source: Robert J. Shiller. Narrative economics: How stories go viral and drive major economic events. Princeton University Press, 2019. [B118]

Target For Hackers

Wallets are often the weak link, both online and offline (think pickpocket!).

The team behind Pure Bit then sent that $2.8 million in crypto out to one single crypto wallet. This is the equivalent to storing that amount of money in cash in a physical wallet – it can be safe depending on what type of wallet you choose and where you store it.

Source: Erica Stanford. Crypto Wars: Faked Deaths, Missing Billions and Industry Disruption. Kogan Page, 2021. [B189]

It became apparent as early as 2014 that Bitcoin wallets had some fatal flaws. The two most prominent examples at the time:

In February 2014, the largest bitcoin exchange, Mt. Gox in Tokyo, reported that 744,400 bitcoins were missing, presumably stolen by cyberthieves. […] About a week later, a Canadian “bitcoin bank” closed down when hackers stole all the bitcoins in its “hot wallet”.

Source: Charles Wheelan. Naked Money: A Revealing Look at what it is and why it Matters. WW Norton & Company, 2016. [B046]

Mt. Gox

Speaking of Mt. Gox, here's a detailed history from Erica Stanford that is truly fascinating:

Within three years, Mt. Gox had gone from controlling over 80 per cent of all crypto transactions to declaring bankruptcy, its wallets empty. Then in an even more bizarre twist of fate, due to the sharp increase in the price of bitcoin, it found it had so much more money left that, even after three-quarters of its bitcoin were lost to hacks, it would be able to repay its investors several times over but is still in a legal wrangle with the courts, unable to due to Japanese bankruptcy law. [...] Many people assume that Mt. Gox is named after a mountain. [Instead] Mt. Gox stood for Magic: The Gathering Online Exchange. [It started] running a site trading niche playing cards. [...] By 2010, [...] Jed McCaleb, Mt. Gox’s founder, [...] transformed the site, changing everything except the domain. Instead of a card game exchange, Mt. Gox was suddenly a crypto exchange. [...] Karpeles had bought the exchange on the understanding that Jed [...] wouldn’t be liable for anything that came of it – an agreement that would come to haunt him later. Karpeles inherited Mt. Gox for free, Jed got 12 per cent of its profits for a term, but that was it, the responsibility was now fully Mark’s. [...] In October 2011, [...] the exchange accidentally sent 44,300 of its bitcoin to 48 different users’ accounts. [...] [Another] software [bug] ended up sending 2,609 bitcoin to a broken address – which in bitcoin terms means it was lost forever.

Mt. Gox was hit by a whole string of hacks in 2011 alone, hack after hack after hack, six in total. [...] One of the hackers [...] returned the 300,000 bitcoin they had stolen, which would go on to be worth billions of dollars, for a 1 per cent (3,000 bitcoin) fee, in exchange for not being threatened with legal action or investigation. [...] Mt. Gox’s first hacker [used admin] stolen credentials to enter Mt. Gox’s internal systems and manipulate the price of bitcoin, dropping the price from $17 to one cent. The hacker took their chance to buy 2,000 bitcoin at this new artificial valuation of one cent per coin, and then sell these bitcoin back to Mt. Gox users at its normal rate of $17 before making off with their profit. The hacker didn’t make much, less than $34,000 in value at the time, and was never caught or seen from again. Some Mt. Gox customers also managed to take advantage of this hack – those who got lucky were on the exchange at the right time, buying 650 more bitcoin at this discounted rate. [...] Whilst his team and those volunteers who had rallied around worked through the weekend until the exchange was back online, Mark was nowhere to be seen from Friday evening until he came back to work on Monday. [...] The volunteers who had all given up their free time were pretty unimpressed by his lack of apparent concern for or dedication to the cause.

When it came to filling out some forms, Karpeles had been asked two crucial questions about Mt. Gox in relation to its dealings with crypto. ‘Do you deal in or exchange currency for your customer?’ and second, ‘Does your business accept funds from customers and send the funds based on customers’ instructions (Money Transmitter)?’ The only possible legal answer to these two questions is ‘yes’. Karpeles answered no, to both. It’s not known quite how or why he came to that answer, but Karpeles had broken the law and $5 million worth of funds from their bank accounts were seized for their US operations. [After that] Mt. Gox couldn’t accept or cash out US dollars. [...] Customers started experiencing delays lasting months on end in being able to withdraw their funds. Mt. Gox’s Japanese bank also implemented a pretty heavy restriction limiting the exchange to processing only 10 transactions a day, down from 300,000. [...] By now, Mark Karpeles was facing five years in prison.

Withdrawals suddenly stopped [on] February 7 [2014 with] the excuse of a software bug. [...] Less than two weeks after withdrawals stopped, the price of bitcoin on Mt. Gox had plummeted. Mt. Gox bitcoin was now trading at less than half of what it had been, a clear indicator of how much trust in the exchange had been destroyed. By 24 February the exchange was gone, shut down for good. [There was] one bit of good news: 200,000 of the 850,000 missing bitcoin were there, they’d been put away in an old wallet and hadn’t been found since. This was solely down to poor accounting records.

[In] February 2014, [...] they checked their bitcoin reserves. They should have had one million bitcoin. It had gone. [...] The exchange had been losing its bitcoin not in one recent hack, but slowly, methodically, bitcoin by bitcoin, ever since it was first hacked in 2011. Mt. Gox had lost 850,000 bitcoin in total. [...] Some 740,000 of these bitcoin were stolen from Mt. Gox customers and the rest from the exchange itself. [...] In three years, no one at Mt. Gox noticed that bitcoins were slowly but routinely leaking out of the exchange until they were all gone. [...] It’s speculated that when Karpeles acquired the exchange in 2011, up to 80,000 bitcoin were already missing. [...] To get the bitcoin, the hacker had copied Mt. Gox’s private keys that guarded their crypto, so for the next three years nine out of ten of the bitcoin deposited into the exchange were stolen as soon as they came in. [They] set up a series of automations which sent all of the bitcoin out of the exchange gradually over a period of three years until all the bitcoin were gone. [...] The hackers could, in theory, have taken all the bitcoin at once, had they wanted. The problem in crypto, and especially in its early days, was liquidity. [...] The hack accounted for a huge percentage of all of the bitcoin in total circulation, and given that most bitcoin were owned and held in hard wallets by their owners and therefore didn’t add to the liquidity pool on exchanges, cashing out in one go would have flooded the market.

It took him a few years of painstaking digging, but by early 2016 [a Swedish software engineer called Kim Nilsson] had his suspect. Of the stolen funds, 630,000 bitcoin had gone to wallets controlled by the same person who had an account at Mt. Gox with the name WME. WME had one time given himself away on an online Bitcoin forum where he complained about another crypto exchange freezing his funds.28 Here, he posted a letter from his lawyer showing his full name. Vinnik was accused of stealing and laundering not only the 630,000 bitcoin stolen from Mt. Gox in a $4 billion theft that is still the largest theft in the history of crypto, but also of hacking smaller volumes of bitcoin from other exchanges. Vinnik is thought to be the operator, or one of the operators, of the Russian BTC-e crypto exchange. [...] Some think that BTC-e’s primary purpose was to launder the bitcoin stolen from Mt. Gox.

In 2014, when the exchange had collapsed, a database containing details of its trading, account balances, withdrawals and deposits was leaked onto the internet. It didn’t have everything, but it gave investigators, watchful onlookers and investors enough data and ammunition to play with. It didn’t take long for a very suspicious pattern of activity to show up that someone decided must have been a bot. The bot got named Willy. [...] The accounts trading were able to make their trades even when the exchange was closed down and no one else was able to. It was clear that Willy the bot had been programmed to make these trades. [...] In the court cases that followed, Karpeles admitted to operating Willy. [...] The new bot was named Markus. [...] The two bots seemed clearly to work alongside each other. [It showed the] market manipulation affecting the entire crypto markets. [...] The bots, by simulating volume and bitcoin traded and held on the exchange, helped this cause.

The hackers [...] made an estimated $20 million. The irony is, that bitcoin would now be worth many billions of dollars, [...] because they sold their stolen bitcoin into fiat straight away. [...] At the time of Mt. Gox’s insolvency, bitcoin traded at $489.

Source: Erica Stanford. Crypto Wars: Faked Deaths, Missing Billions and Industry Disruption. Kogan Page, 2021. [B189]

The McAfee Saga

While the Netflix documentary 'Running with the Devil: The Wild World of John McAfee' doesn't provide many insights (or answers), it is a entertaining inside look into his wild and turbulent past. For better or worse, the late McAfee will also forever linked to cryptocurrency.

John McAfee founded the now-global McAfee anti-virus software in 1989, making himself $100 million almost overnight when he sold his company shares just a few years later. [...] McAfee ran two presidential bids, coming second for the Libertarian party in 2016. [He once] faked a heart attack to avoid extradition back to Belize. [He also had] whirlwind relationship with a prostitute, Janice. They were married in 2013. [...] McAfee fled to Guatemala by boat, where he invited a Vice team of reporters to follow him. Vice made one mistake – they shared a photo that contained some geo-data they’d omitted to take out, giving away his location. [...] In 2016, McAfee was put in touch with a penny stock company called MGT Capital, [which was] effectively a shell company. [...] The company paid him a handsome salary, $250,000 a year plus a $250,000 bonus to put his name to the new cybersecurity rebrand. [...] MGT got that investment from Florida speculator Barry Honig, who put in $850,000 in exchange for a bunch of shares. Honig was described in subsequent trials as specializing in manipulating the prices of low-volume penny stocks to make them look like a more appealing investment to investors, effectively pump and dumps for the penny stock market. He has since been charged by the SEC for his involvement in various market manipulations. Honig’s efforts worked; the new stock jumped from 37 cents to $4.15 per share, leading the press to run headlines along the lines of ‘John McAfee’s mysterious new company is the hottest stock in America right now’. By now, Honig’s shares would have been worth $80 million, had McAfee paid out. But the company was now under McAfee’s management, which meant his rules. McAfee decided the existing share structure was too generous to investors. He changed the share structure, meaning Honig wouldn’t get paid unless he invested another $11,655 million.

On 17 July 2017 [McAfee] promised on Twitter that if the price of one bitcoin didn’t reach $500,000 in three years he would eat a certain crucial part of his anatomy on national television. To nobody’s surprise, three years later, he reneged on his promise and no body parts were eaten.

McAfee tweeted praise in favour of Verge, saying that the project ‘couldn’t lose’. [...] Verge was initially built as a privacy-based copy of Dogecoin known as a ‘fork’ of Doge, a practice of replicating cryptocurrencies that had become popularized. [...] That one tweet shot up the price of Verge by 1,800 per cent. [...] As with MGT Capital, where McAfee had felt his investor had got too good a deal, he now again felt cheated. He wanted his part of these $2 billion of speculative fortune he had tweeted out of thin air. He demanded from Peter the equivalent of $2 million in crypto for his tweet. [...] Sure enough, the next tweet from him on Verge seems intended to crash its market. In it, he said he had made a huge miscalculation, asked for apology for his unpardonable error and said the coin was never worth anything near as much as its newfound value. Sure enough, the market in Verge crashed.

Source: Erica Stanford. Crypto Wars: Faked Deaths, Missing Billions and Industry Disruption. Kogan Page, 2021. [B189]

Sources

¹: Erica Stanford. Crypto Wars: Faked Deaths, Missing Billions and Industry Disruption. Kogan Page, 2021. [B189]

²: William Quinn and John D. Turner. Boom and bust: A global history of financial bubbles. Cambridge University Press, 2020. [B214]

³: Robert J. Shiller. Narrative economics: How stories go viral and drive major economic events. Princeton University Press, 2019. [B118]

⁴: Charles Wheelan. Naked Money: A Revealing Look at what it is and why it Matters. WW Norton & Company, 2016. [B046]

⁵: Danielle Town and Phil Town. Invested: How Warren Buffett and Charlie Munger Taught Me to Master My Mind, My Emotions, and My Money (with a Little Help from My Dad); William Morrow; 2018. [B088]

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