2021 crypto ponzi schemes
A few years ago there was a development with Ethereum that allowed people to make smart contracts to create tokens. There was a lot of potential value from these smart contracts in a bunch of settings, unfortunately a lot of people jumped on this technology to create a multitude of financial frauds and shitcoins. As it turns out it's exceedingly easy to make a token using Ethereum so a lot of people did this, including a lot of unscrupulous people.
Around the peak of the last crypto hype cycle I clearly remember a huge number of scammers and fraudsters popping up in the crypto space. One of my memories of the time was going to an cryptocurrency event that had a number of speakers, I remember being at the event and most of the speakers were pushing complete garbage, I was talking to some other people at the event and I found out that the speakers had to pay the organizers to speak. This was just a window into the broader state of the sector whenever there's a bull market in cryptocurrencies. Each bull market cycle we get a number of new shitcoins and tokens created only for the purposes of the creators enriching themselves from the hype. Unfortunately many of these tokens never had any intrinsic value and now have no financial value either, which perhaps is unsurprising considering that many were nothing more than shameless Ponzi Schemes. It's always been a wild space, I remember back in 2013 when Dogecoin popped up, a coin that was literally created as a joke came along but that was nothing compared to the tokens that came up later, but more about that in a moment. This is young space, 2013 is close to the beginnings of the cryptocurrency era.
There's a number of reasons I'm disturbed by commercial banks starting to offer cryptocurrency products but in this particular case its because this will allow a far greater pool of uninformed people to move money into an entirely fraudulent space more easily.
The most egregious scams I've seen lately
I took a great interest in the Bernie Madoff scam, which at the time was the largest longest running financial scam the world had ever seen. I think what caught my attention about this was just how brazen and ruthless this scam was, there was no intention of ever running an honest business going on there. The other thing I found interesting about this is that Madoff was held in rather high regard by the general financial media when he was at the height of running his fraudulent investment company. When times are good many people don't ask questions and in the worst cases you get people like Harry Markopolos entirely sidelined despite presenting solid evidence of fraud. Recently returns in the financial markets have been good and an atmosphere of particularly extreme greed has emerged despite rather low confidence in the actual real economy. Much like in other times when the crowd is enthralled by greed there can be visceral negative reactions against people who aren't caught up in the hype. So I've found it disturbing lately to see other scams that seem to have this same intensity of criminality to them and there's a distinct uptick in the number of outright frauds happening in a number of places at the moment. The Madoffs of the current market cycle aren't being called out and worse some people are directly supporting them and shilling their scams. I think this uptick in fraud is a consequence of the deep monetary corruption we have seen in recent years. Because we have such unsound money and monetary policy combined with negative interest rates in real terms we have seen people be forced to move their money into increasingly risky "investments" in order to have any chance to preserve their purchasing power. This has led people to put their money into all sorts of dubious high risk things and has normalized an atmosphere of high risk taking. While most people look at crazy YOLO positions (and other degeneracy) as exemplified on places like WallStreetBets as being risky and entirely imprudent all these sorts of things starts to shift the Overton Window and general sentiment towards greater risk taking being acceptable. And greater risks are overwhelmingly being taken to try to secure the same yields. This has led to things like the stock market being overpriced to historically high levels when viewed from the lens of traditional metrics (ratios like price to earnings and price to sales have been unprecedentedly high in many publicly listed companies). And I'm not talking about the absurd cases like Tesla which was trading at over a 360 price to earnings ratio just this week, price to earnings are elevated across a huge number of companies.
Many people don't understand the intricacies of the markets1 but they know or at least have a gut feeling that their savings just aren't going so far anymore. The high levels of inflation combined with very low interest rates make people start considering much more risky options. Because of this direct attack on savers we have seen a lot of people who aren't particularly financially literate who otherwise would have just left their money in a savings account in their bank starting to withdraw it to place that money elsewhere. A fraction of this money makes it into things like the cryptocurrency space and that alone makes fertile ground for scammers to shill various pump-and-dump schemes and fraudulent schemes. We see this very clearly in the cryptocurrency space at the moment with the vast proliferation of shitcoin offerings that have popped up to defraud people. A stream of freshly entering money creates an especially fertile ground for Ponzi schemes. Many other related coins going up significant amounts creates the hype that makes this extremely lucrative for the scammers.
What is a shitcoin?
A shitcoin I would define as a cryptocurrency offering that solves no real world problem, generates no value, has no sound economics and exists exclusively to enrich the creators.
Recently when I came across the Squid Game Token I thought this would likely be the winner of the most ludicrous crypto scam in 2021. What happened there was that someone made a coin that used the branding of a popular TV series then did a rug pull and just stole everyone's money, yes everything, the tokens sold at the peak for over $2800 before dropping to under 1 cent within minutes. There's some interesting things to learn from this episode, like how people have some misconceptions about market caps, how stop losses only work if there's liquidity and how monetary incentives can cause such corruption. Another telling thing is it shows the way in which cryptocurrency values can plummet to zero in exceedingly short amounts of time.
The most crazy thing about this to me is that despite all this the price on the token has been climbing again and as of the time of publishing here the token is trading for 40 cents, up from the half a cent it crashed down to just after the rug pull. The whole thing for some reason reminds me of what happened with Hertz where they tried to offer new stock after declaring bankruptcy, if there's enough money coming in then all sorts of bad schemes can continue along for quite some time. Oh and Hertz is now apparently buying a fleet of 100k Tesla's now with a plan of renting many to Uber drivers and is trading at the highest price in a year. My imagination is just not good enough to make this up, but I digress...
But I'm wondering if this isn't even the winner of the title of the most egregious fraud in Crypto in 2021. For that I have to introduce Floki Inu. This is the token that's named after Elon Musk's dog. Seriously.
Here's some backstory: Floki Inu is undoubtedly a shitcoin, so what's different about this compared with other shitcoins? Well firstly I think this is the first shitcoin that's trying to ride off the popularity of another shitcoin, Shib, which was itself a shitcoin that took off in a massive bubble by riding on the reputation of a joke coin, Dogecoin, which in the past had a massive bubble which was famously pumped up by Elon Musk. Everything about this just screams bubble. The developers are anonymous and the goals listed on the official website are dubious. You see quotes like this on the official blog:
Floki Inu is not a meme coin — IT’S A MOVEMENT — and the Floki Inu community is at the heart of it.
The Floki Inu community are called the Floki Vikings. We call ourselves Vikings in honour of our leader — Elon Musk’s Viking dog — Floki Inu. We were forged in the storms of the Floki Inu re-launch when we saved the project and overcame all challenges to make it successful. This Viking spirit is the heart of our community.
While it's highly likely that little value was created by Dogecoin and Shib it seems almost a certainty that value will never be created by Floki Inu. Floki Inu seems to be close to a pure financial fraud scheme and the details of which are sickening because there appears to be no big attempt to hide the Ponzi nature of the scheme. Central to Floki Inu is an obsession over advertising and proselytizing efforts. Another quote from the official blog:
Thanks to contributions from an inner circle of supporters, who were vetted both for their networks and diamond hands, FLOKI was able to raise enough funds to launch on BSC with ample liquidity (over $1 million) as well as make extensive marketing plans and commitments to make the launch a success.
The sheer brazenness of the Ponzi scheme here is what gets me. The manner of the fraud is deeply disturbing too because of the way in which it operates plainly out in the open. Anyone investing either is clueless or is engaging in the greater fool approach and trying to time the bubble. It seems that paying shills is explicitly part of the offering itself and early investors are likely factoring in this dynamic and trying to be first in. This entire token structure should most definitely be illegal though I'm not sure if existing regulations and laws covers this sort of deliberately unethical practice. But the crazier thing is that the atmosphere of extreme market greed combined with rampant speculation required to make this strategy feasible at all is far more telling of the general state of the world than I first considered. In a bear market I just can't see this having much chance of success.
So to all the people shilling up Floki Inu, fuck you you unethical pieces of shit. Not only is this sort of behavior an unethical ponzi scheme its damaging the prestige and reputation of the entire crypto space. I'm entirely disappointed that there has been a number of high profile finance YouTube creators that have jumped in on pumping up this fraud. And this is the part that disturbs me the most, there are YouTube creators who were popular because of their involvement in financial education getting involved with this. Any good reputation they had for good financial advice is now being weaponized against their subscribers. I think this is twisted and deeply fucked. It shows that when these frauds start paying people directly to shill for them, on top of just people talking up their own holdings, we have a whole new level of shitcoin being born right here. What a time to be alive.
I guess this just goes to show that money corrupts and that's another reason why so much financial information is bullshit.
Why I care
I think there's a tremendous amount of value that these distributed ledger and decentralized finance technologies can offer the world. Unfortunately the whole space is tarnished badly by the huge number of bad actors in the space. It is also tarnished by the large number of intolerable people out there who go and shill for these products out of pure greed. I'm sure a lot of people are completely turned away from these technologies by the barrage of bullshit that you encounter in the space. When the most vocal people/broadcast people in an area are shills it's just a bad look for that area. And this I think is a tragedy because decentralized finance could do important things like offer services to the unbanked of the world and distributed ledger systems could solve some very important problems in tracking global supply chains and many other areas. But for us to get there we will have to overcome this issue with fraud tarnishing what could otherwise be an extremely valuable area.
I also care a lot about financial education because it's an area that a lot more people could benefit greatly from knowing more about. As an educator I find the behavior of people involved in some of the crypto spaces, and just more broadly in this current market, downright repulsive as people are to abuse the trust of their followers and students to turn some quick money on schemes. I believe as an educator you have some very strong responsibilities towards your students and to deliberately act against so directly against their interests is downright unethical.
We need to call out these fraudulent products and make sure to not engage with the shills in this space. If there's no consequences to this sort of egregious behavior then it is less likely to change. There's a lot of value in the decentralized finance space to be had for everyone and I think the entire space will only really start to take off in terms of real value generation when people have confidence in people to be doing the right things in this space. If decentralized finance could have more people and more offerings with integrity then I think great things will happen. Until then the space will need more time to mature.
I'm one of these people, the modern financial system and markets are incredibly complex and I as an outside observer only have a limited window into this. Put simply a lot of the dealings that happen in the system aren't observable to outsiders yet have a large bearing on how things really work. Informational asymmetry can be a big deal. ↩