Crypto! Skip Fires*, Scandals and Scams

[stowie]

Starting this thread although my understanding is very limited and almost certainly flawed.

The Crypto world has been busy imploding in multiple locations as the enthusiasm for the market has waned causing a decline in most currencies - even the most established ones.

Two stories caught my attention.

FTX bankruptcy and fallout. FTX was a crypto-exchange - a place to change "real" money into Crypto and exchange crypto coins, as well as a repository for customer deposits. FTX was huge. It had been valued at $32bn before the crash - for context that is more than the market cap of NatWest group, BMW group market cap is around $50bn. Sequoia Capital put in $200M, Temasek (an investment group owned by Singapore government) invested around $200. The Ontario Teachers Pension plan even dropped $75M into FTX. Total raised by FTX with investment rounds was around $2bn.

Anyhow, turns out shady things were happening between FTX and Alameda Research - a crypto hedge fund affiliate 90% owned by Sam Bankman-Fried. In essence, FTX claimed depositors money was fully backed with definite implications of Federal backing as well (like a bank). Turns out that was a big whopping lie. Alameda Research had been using FTX depositor's money as an unsecured, unlimited loan facility and then seemingly losing it. On top of this, the funds were effectively being double counted, one FTX books as depositor cash and on Alameda as capital. It seems more complicated than that with FTX tokens being used as collateral but I think that is the summary.

The CEO of Alameda research was Caroline Ellison who has plead guilty to charges already and is co-operating with the criminal investigation. SBF appears to be trying to spin it that he had no control or knowledge of what Alameda research was doing. This seems unlikely since he must have seen the funds transferred, owned 90% of Alameda, were house mates in a house in the Bahamas and also - allegedly - casual boink partners.

The fall-out is big, and will - at least to some extent - impact the "real world". Other crypto companies have been sunk due to FTX. And we know of at least one pension fund that invested. And of course, a lot of individuals have lost a lot of money.

CoffeeZilla covers the whole debacle very well, and indeed has shot to prominence with this coverage and his report on Logan Paul. - The full FTX playlist is at
View: https://www.youtube.com/watch?v=4o_jPzBZSIo&list=PL4qw3AkxFDSMxJRioymD9lFZu7JMdPWOU


Another Youtuber - Patrick Boyle - has a great video on FTX as well. He is a fund manager, professor at KCL and author. He also has a nice line in sarcasm and can barely conceal his total contempt of all involved in the FTX story.

View: https://www.youtube.com/watch?v=zTFhnpf-IE0&t=1025s


The Logan Paul debacle is probably simpler. Social media star with millions of followers hypes up his new project called CryptoZoo which has all the buzzwords - NFT art, blockchain, crypto. He calls CryptoZoo a "game" and is based on a premise I find too moronic to even begin to explain. Turns out most of those involved with the project appear to be shady as f*ck, and the software developer holds the code ransom (he says he wasn't being paid which is why he did it). No matter, from leaked messages it appears the group including Logan Paul viewed the "game" as a money-making scheme and my take is that his team managed to skim off the project before Logan Paul had a chance. The game never got launched, and the currency related to the project went, predictably, to 0 (0.0000045 USD to be precise). Coffeezilla did a whole series on the project, Logan Paul got uppity and said he was going to sue, and only today has now seemingly realised that this is a bad look after ripping off fans and is doing the contrite "mistakes were made, lessons to be learned" shtick.

This seems to me a typical influencer scheme where a social media star gets the fanbase all worked up over a new thing, whilst also rigging it so they get the lion share of the profits from it. Only this time, the influencer appears stupid enough to get nothing out of the scheme (according to him).

Coffeezilla series on CryptoZoo is at
View: https://www.youtube.com/watch?v=386p68_lDHA&list=PL4qw3AkxFDSNYGZAS84sPlQn20Ezcx8Ks


Anyway, that is a lot of writing to barely scratch the surface of the skip fire that is the crypto world at the moment. A world where everyone involved just seems a bit of a grifting scumbag but still managing to "earn" massive amounts of money.

The grifts themselves are age old. From Enron, Madoff, Ponzi, and Lehman the grift doesn't change much - just the actors and the methods.

I think blockchain and crypto are an interesting technology with utility. The fact they are being used on get rich quick schemes and scams is not a function of the technology but more a lesson on humanity.

So what should happen? Ban Crypto? Extend regulation (didn't help with "real world" scams much)?

My thoughts are that the "influencers" involved are the rocket fuel to the scams. At best they take money to promote questionable schemes. At worst they are running the scams and ripping off their viewership. Without this group these schemes wouldn't have the reach needed. I am not sure how influencers could be held accountable here - a whole media industry has sprung up from a social media that is regulated as if it is used by amateur individuals. Plus, of course, authorities actually investigating and prosecuting criminal behaviour. Maybe influencers would be less ready to take the cash if a prison sentence was possible.

*@winjim

 

[albion]

What do you expect from what is, after all, just a clever pyramid scheme.
And many promoting them will be gaining from the top of that pyramid.

Beware of influencers, they run rife in the digital age.

 

[Fab Foodie]

What the he'll is Bitcoin mining about? Why does it need so much power?
What' Blockchain?
Is there a duffers guide to the basics?

 

[BoldonLad]

I actually know (or knew) someone who committed suicide after “investing” all of his money, plus some he “borrowed” from his mother, in bitcoin.

 

[C R]

What the he'll is Bitcoin mining about? Why does it need so much power?
What' Blockchain?
Is there a duffers guide to the basics?

I'll try and explain how I understand it.

Blockchain is a genera concept that allows to maintain records of transactions in a tamper evident way. There's a high level description of block blockchain in Wikipedia, but requires some basic understanding of some computer science concepts to make sense of it.

The central concept in blockchain is the distributed ledger. Think of it as a file of which there are many copies being kept in sync over the network. The file contains transaction records, with each record having some data that is generated based on the content of the previous record. This chaining of the records is what provides the tamper evident properties, if you want to alter one record, you would also have to alter all subsequent records would also need to be altered to maintain the integrity of the chain. The tamper evident nature of the blockchain makes it useful to record financial transactions and other types of data in a trustable format.

Bitcoin uses a blockchain ledger to store transactions of cryptographic tokens, the bitcoins. The token is a "number" which is calculated as a solution to a mathematical problem. The problem is designed in such a way that as tokens are calculated, the problem gets harder to solve, and you need more and more computational power for each successive token. This increased requirement is meant to simulate the scarcity of natural resources such as gold.

The way I understand it, Bitcoin was meant to be used as currency, with the advantage that there's no necessary connection between a user and a transaction, so very attractive to libertarians, but also to not so nice people like drug dealers. The problem is that it takes a long time to update the ledger, so it isn't practical for every day use. Then it moved on to a store of value, that is converted to currency for actual use, or to use for larger payments where a time lag in the transaction is acceptable. The store of value bit is where it got silly as speculation began and the general public started buying as a means of saving, which lead to the value bubble.

 

[stowie]

@Fab Foodie - @C R has given a good explanation of it, but here is my 2p.

Blockchain : Think of a database you use (at work for example). Likely that it is a large centralised database with data stored centrally on servers in the company, or the cloud or wherever. The data resides centrally and you will access this data locally with any changes managed by the central system. Blockchain is different. A record of the data (transactions, whatever) is stored on a network of computers. Therefore it is decentralised. One of the core challenges of this type of system is how do you keep the data synchronised? And that is where the clever bit happens which confuses me everytime I try to explain it. Essentially, there will be a request to add to the database made which then has to be verified by other computers on the network. If this happens successfully, the new data is added to all the distributed databases.

On bitcoin this adding and checking new data entries is done as part of the "mining" operation and whoever does the verification earns a small commission for the work done. C R explains that a big problem with Bitcoin is the transaction speeds and this is sort of inherent in this system. As a guide, we know credit card transactions are seconds - Bitcoin transactions can be 30 minutes or more. So not great when paying for a cup of coffee....


Mining : Bitcoin mining has generally meant generating new Bitcoins on the network, although it also involves verifying transactions on existing Bitcoin.

Imagine creating a new currency. If you don't want some mad inflation spiral then it is unlikely you want to introduce all the currency all at once. You would like the currency to scale as the network grows. In a decentralised system how do you manage this? There isn't a centralised bank overseeing the money supply. The shadowy inventor(s) of Bitcoin came up with a genius solution. He/She/They wanted a bitcoin generated once every 10 minutes until the total supply of 21 million bitcoins are introduced into circulation. They essentially did this by using an algorithm puzzle where the difficulty level is automatically adjusted to keep the introduction of the coins regular. The algorithm isn't particularly important to an overview, but they used the "hashing algorithms" that can also verify and secure transactions. As the amount of compute power being used to mine the bitcoins increases, the difficulty increases. As the number of bitcoins increase in circulation, the reward for mining / generating new coins decreases. It is a superb system, proven by the fact that it has been operating for years and securely keeping records of transactions.

But this is where one of the major flaws comes in. Bitcoin mining is a winner takes all game. You are more likely to win if you have more compute power solving the algorithm. So a compute arms race has ensued culminating in warehousing full of computing equipment drawing huge amounts of power, trying to solve a problem which essentially has no outside utility. There are other ways of "mining" which has been used with other coins that doesn't require stupendous amounts of compute - for example a lottery type system where the coin holders can "win" coins etc.

As an aside, the puzzle they are trying to solve is to get to a cryptographic "hash" (essentially a number) with a certain number of zeros at the front (or end, cannot remember). The magic number miners are trying to reach is termed the "nonce". Which made me realise the inventors of this system certainly weren't British......

Bitcoin is a use case and certain implementation of blockchain. Blockchain is interesting because of its potential utility in managing data securely and can / is finding applications in all sorts of areas both inside and outside finance.

 

[C R]

Bitcoin is a use case and certain implementation of blockchain. Blockchain is interesting because of its potential utility in managing data securely and can / is finding applications in all sorts of areas both inside and outside finance.

A use of blockhain outside of finance that @Fab Foodie may find interesting is securing electronic lab books against tampering. Being able to show that a certain set of tests were recorded at a given time and the record has not been altered is a requirement in regulated settings such as pharmaceutical R&D.

 

[stowie]

I actually know (or knew) someone who committed suicide after “investing” all of his money, plus some he “borrowed” from his mother, in bitcoin.

This is terrible. It is the fallout of the hyping of things like Bitcoin. Bitcoin is not a scam, but it is a highly volatile market which should be treated with huge caution.

The images of "crypto-millionares" on social media isn't countered by other videos of those that have lost everything, since it isn't generally something that people wish to share. Besides the whole Crypto millionaire thing is often a scam. Private Jet leasing companies do a decent business renting out their jet on the ground for an hour or so to influencers whilst the jet is under maintenance etc. Cue pictures of influencers sitting in a private jet - looking like they are living the millionaire lifestyle.

I suppose quick rich schemes and scams have always existed, but the audience these people can address has increased hugely. With the economy difficulties and wages dropping in real terms, I fear it isn't going to get better.

 

[Fab Foodie]

@C R @stowie thanks for that!
Improved my understanding no end, Cheers :-)

 

[Deleted member 49]

Anyone see this story on the news ? The mastermind was local to me,quite a character and I'm happy he lived the life for a time....sad that he died but at least he got to enjoy himself a while 😁
https://www.bbc.com/news/uk-england...6739960471642&referrer=https://www.google.com

 

[albion]

This is terrible. It is the fallout of the hyping of things like Bitcoin. Bitcoin is not a scam, but it is a highly volatile market which should be treated with huge caution.

The images of "crypto-millionares" on social media isn't countered by other videos of those that have lost everything, since it isn't generally something that people wish to share. Besides the whole Crypto millionaire thing is often a scam. Private Jet leasing companies do a decent business renting out their jet on the ground for an hour or so to influencers whilst the jet is under maintenance etc. Cue pictures of influencers sitting in a private jet - looking like they are living the millionaire lifestyle.

I suppose quick rich schemes and scams have always existed, but the audience these people can address has increased hugely. With the economy difficulties and wages dropping in real terms, I fear it isn't going to get better.

It still has its pyramid nature. Without state backing sentiment means its value can vanish overnight, even without the administrators filling their boots.

 

[dutchguylivingintheuk]

I haven been following, at times mining and sometimes buying cryptocurrencies for years now, but always from the same perspective as buying a lottery ticket. Never use borrowed money, never you money you might be needing for other things and moderate, think the most i have spend is £50 or something.
Scammers often come and often go, now we have FTX but we have had many scam before, both in crypto currency exchange as so called cloud mining platforms. Gawminers and related companies was a big scam back in the days. (there are still a few cloud mining companies left, they are not all scams it's just hard to make money with it considering their prices)
As well as the stories/experiences with people losing all their savings.


One of the strengths of cryptocurrency's rapid growths is also the reason behind ''so many'' scams, i put that into quotation marks because any crypto currency hack is highlighted and big news, but similar successful attacks/scams on ''classic'' financial institutions and or taking place in the ''classic'' economy are much smaller news or have an other emphasis on it. An good example is the Chinese real estate giant that went bust a year or 2 ago.(forgot it's name) Or the cyber attack on Royal mail that is now primary blamed on the Russians.(don't get me wrong no doubt that they would be behind it at first opportunity, but that they have the opportunity is the issue not that there looking for it.)

But unless we want to change our system of law and order we can't really do much other then warm poeple, and educate them on how to understand risks you can't shutdown a potential scam until you known it is an scam. But on the other side of the coin, it also an incentive for other big players to make sure you do your due diligence about where you stall your digital money. Ironcally that's how FTX fall started in the first place, poeple began questioning all the ''little'' companies closely attached.

Think the main take also to take away for it is that crypto currency grew exceptionally, 20k or more for 1 bitcoin is to much, think the real balance should be close to 1 bitcoin is 1 pound or similar that would make it far less interesting for scammers and could normalize it's value. but as long as that has not happened any crypto transaction should be handled with extreme caution and it's certainly not a good place to invest savings.

 

[dutchguylivingintheuk]

It still has its pyramid nature. Without state backing sentiment means its value can vanish overnight, even without the administrators filling their boots.

The basic principle behind mining is more about creating an sustainable coin with all participating(miners) getting an reward for that efforts and with an small deduction for ''network mainternance'' etc. the rapid growth has led to this principle being thrpown overboard due to greed in some cases but there are few quite a few crypto currencies around honoring this principle. you don't hear to much about them in the media because they don't hire influencers and such.

 

[albion]

The number of crypto currencies is near infinite. Success is obtained by bailing out at the right moment and getting in there first for the next hyped pyramid. Those in the know close to the top of each cult will usually gain by this.

 

[albion]

https://arstechnica.com/information...ounder-arrested-for-allegedly-serving-crooks/

Flocking like flies ..