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$2.863 Billion Evaporated Due to Crypto Scams or Theft (In Only the Past 2 Weeks)

It's 2006 all over again. Just add a whoooooooooooooooole bunch of zeros.

This is bad. And not just “kind of” bad. Really bad. The ones who suffer the most are writing the code that will change the world, permanently for the better.

In the past 2 weeks alone, roughly $2.863 billion USD has evaporated due to a string of either blatant fraud or theft in the world of cryptocurrencies. That is NOT a typo and I'm NOT sensationalizing this. That's a real number that few people have added up, because we are, in a sense, “getting used to” scams in crypto. Proponents are going to raise the pitchforks against me quickly, so before we go any further, let's source out this massive amount of money:

SEC Files Fraud Suit Against Crypto Bank ICO (AriseBank, $600mm)

$530 million cryptocurrency heist may be biggest ever (Coincheck, $530mm)

A crypto startup that vanished and changed its website to the word ‘penis’ allegedly stole the identities of its team (Prodeum, $11 million)

CFTC Sues Obscure Crypto Scheme “My Big Coin” for Fraud (My Big Coin, $6mm)

The Owner of Bitgrail has just scammed it's users out of millions of dollars causing the price of XRB to fall over 50%. Could someone who lives in Italy contact the authorities & find out if something can be done (BitGrail, current dollar amount unknown, but Raiblocks has lost appx. $626mm in market cap after this announcement – figure is omitted from the total)

Bitconnect Hit With Second Lawsuit Over Ponzi Allegations (appx. $1.761 billion in market cap lost as of 1/30/2018)

…..and there are more, but they lack the front page attention that these have garnered.

Yes, its 2006 all over again, except this time, we are deep in the billions of dollars, not just thousands or millions. For those of you who were with us back then, let's recap:

“Forex” became a synonymous buzzword/scamword for “making money”, opening the doors to every wannabe trying to get a cut of the “multi-trillion-dollar market that never sleeps”. In comes the spam:

  • 1000% websites spawn overnight catering to the flooding of bountiful riches from “Forex”
  • Guys with southern accents find new purpose by hosting scammy webinars
  • Panama and New Zealand receive 100,000 business applications in a window of 30 days
  • Trading expo industry explodes. Only $15,000 for a “diamond” package and you can speak for 25 minutes (but you still have to pay full price at the Marriot bar).
  • Referral programs and affiliate marketing have one target: “Forex”, because “this one, undiscovered crypto, could make you a millionaire!”
  • Trading bots that clearly don't work are worth a couple million to the developers/marketers, at minimum
  • Everyone is instantly an expert. Everyone
  • Investment ponzi schemes – heck, who doesn't like a good Ponzi? 1% a day? Uhhhhh, yeah!

And then, this little known organization, known as the Commodies and Futures Trading Commission, says something crazy like, “Wait a minute. 1% every day seems kind of fishy. Even insider trading will only get you around 25%/year on average. Maybe we need to set some rules here.”

I, like many of you (to a varying degree), have caught the bug, but for other reasons. I have always been obsessed with technology, and this is one hell of a monstrous wave. The uses of these blockchains are being absolutely dwarfed because their issued coins and tokens are holding such extreme value. And the value of these instruments has skyrocketed, as most of you know.

There is so much good that can come out of blockchain technology, which is why much of this persistent nonsense really, really ticks me off.

But the money is also one of the main reasons blockchain tech has taken off.  From a financial sense, we have created new currencies, securities and commodities. At the end of the day, blockchains serve any purpose you can dream (from a record-keeping standpoint). Would we know so much about blockchains if it weren't for the fact that 1BTC=~$10,500 (soon to be 20% more or less by the time I hit “Publish”)?

Probably not.

Last year, I became part of a group based here in Denver that caters to blockchain tech. Through it, I've had a lot of interesting conversations. There is one thing that continues to astound me, and that is the naivety of the tech crowd when it comes to the financial side of this business.

They don't get it, and their arrogance is very, very frustrating. You can tell that most of them are at the stage of the drug where they feel as invincible as superman and absolutely nothing can stop them. These are guys who, in my honest opinion, float in the gray area of the business. They like both the technology and the money, and they comprise (in all estimation) the largest segment of this market.

I have worked with people from both the SEC and the CFTC over the the years, and they all say the same thing: they are just looking at the protection of investors. These are not the “bad” guys. People hate them for drawing up rules and regulations, but they're the first ones people run to when they get defrauded. Funny how that works, eh?

So for those of you just joining us here in 2018, or come from a technology background, allow me to tell you the future (prediction not necessary):

  • Retail will get “hit” the hardest from a regulatory standpoint. No, fraud is not cool, and there is already way too much of it. When a blatant ponzi scheme can hold a market value close to 2 billion dollars, you bet that they are listening (there are even honest ponzi schemes). The CFTC/SEC defines “sophisticated” investors by dollars and cents. You are either an eligible contract participant (CFTC) or a qualified eligible participant/accredited investor (SEC). The rules have and always will be looser on this crowd, and larger institutions don't want retail clients because 1. they don't pay the bills and 2. they're too much work = overhead = money down the drain.
  • The CFTC will cover exchanges. Already, Coinbase is using disclaimers my eyes are well conditioned to seeing because I come from the commodities space. These are not your standard SEC-issued disclaimers. They are defining high net worths as “ECP”s and not “QEP”s. And yet, at my meetings, all these guys talk about are the SEC. Again, they don't get it….yet.
  • Anything that “spreads the wealth” (tokens) or “collects the wealth” (any ICO) will fall under the hood of the SEC. This is basically anything that goes through the Howey Test and says “yes, I'm asking people for money in return for something”.  I imagine ANY ICO (security or not) is only going to be taking QEPs only at some point. Filecoin is a good example of this. If, for the only reason: they don't want the headaches that come with asking for retail money. The vast bulk of fundraising dollars (or ETH, or whatever) come from people with money, regardless. Distribution of wealth 101.
  • The CFTC will put a minimum reserve requirement on exchanges, to prove their solvency. This is going to knock out a huge pile of them currently taking US clients. Like retail Forex, US customers will likely only have a handful of options.
  • The CFTC and SEC will go after, with a fury, anyone currently engaging in illegal behavior. The most common of these types are: promising or false representation of profits, or engaging in an activity for which you require registration.
  • The money will find its way over to the institutions. This part has already begun. The “people's” money…..nope. Again, distribution of wealth, 101. Millionaires will be made, no doubt (many already have been), but at some point it will become institutionalized. Many of the guys who fight against “the big guys” have already started creating carbon copies of preexisting institutions. Same stuff, all over again.
  • The market will get less volatile. This is a function of age and use. The more money, the more liquidity, the more friction of price movements. Up to this point, institutions have been tiptoeing in (here's looking at you, Jamie Dimon) but it is only going to get bigger.
  • “But its decentralized! The government can't do anything about it!”  <——this guy hates reality.

I'm part of a small group of fund managers based all around the US. This is basically an open chat where we talk about business. Definitely nothing exciting, but just good to connect. There are a fair number of participants already buying up piles of ETH (or anything else they can squeeze in a Reg D) like hungry hungry hippos. Behind the scenes, hedge funds and your few larger prop firms are all getting in the trade. There is absolutely zero sign of this trend halting anytime soon. And then the smaller money controls the media, blogs, social media, etc. Its in your face every single day now.

But changes are coming. Its new, its exciting, but it presents problems, like anything else. I generally think of blockchain as the internet of money. Just like the early days of the internet, you had people screaming up and down about the potential horrors that can be committed through such a mechanism. Just 1/3 of a generation later, nobody can live without it. We're human.

Regardless, the current baggage is astounding. There is no way this is going to continue. The SEC and CFTC are already clamping down on blatant fraud, with much more to come. This is only the beginning. If I, sitting at a desk in Colorado, can spot other, blatant ponzi schemes happening all over again, then why the pause from regulators? Presumably, they're just stretched thin.

I had the pleasure of briefly meeting Kevin Owocki the other day, founder of GitCoin. He is a prime example of someone trying to push things forward, for the better. His focus is on improving the world in a way that was impossible prior to blockchain. I encourage you to read more about his project to see what good can come of an open source incentive program.

Much of the same can be said about Vitalik Buterin and other advocates for the technology as a whole.

But a “monster” has been created, and many would argue that it needs a leash. Despite the massive figure in the headline, it is still only the tiniest sliver of the market's total capitalization. As you all know, the media likes to focus on the bad, and much less, the good. Currently, there is too much of the above overshadowing the positive things yet to come.

In the end, there will be two big groups of winners of losers here:

Those who focus on the technology will win. Those who chase the buck, as usual, will be breathing burnt rubber.

So I encourage all of you reading this: if you are excited about the technology and space as a whole, then focus on it. Stop looking at the money. There is good and evil in everything that we do. But I like to think mostly good. Like anything else in this world, when the rubber meets the road, it takes off. So tread carefully, and make sure you're driving a real car.