In 2014, Joseph Poon and Thaddeus Dryja were bitcoin-obsessed engineers hanging out at pizza-fueled meetups in San Francisco. Their conversation often turned to the central problem of bitcoin: How to make it more useful? The bitcoin network’s design effectively limits it to handling three to seven transactions per second, compared with tens of thousands per second for Visa. Poon and Dryja recognized that for bitcoin to reach its full potential, it needed a major fix.
The pair had an idea, one whose elements were already in the air at the time. On the weekends they met in unofficial coworking spaces to hammer out a paper describing their vision. Six months later, they revealed their work at a San Francisco bitcoin meetup. They called it the Lightning Network, a system that can be grafted onto a cryptocurrency’s blockchain. With this extra layer of code in place, they believed, bitcoin could support far more transactions and make them almost-instant, reliable and cheap, while remaining free of banks and other institutions. In other words, it promised to fulfill the cryptocurrency dream originally set out by Satoshi Nakamoto in 2008.
As word of their paper spread, blockchain enthusiasts started hashing out its technical details in blogs and on social media. Around the world, engineers began trying to turn the ideas in Poon and Dryja’s paper into working code. “It was the second most exciting paper I had read in the blockchain era,” says Rusty Russell, a developer at Blockstream, a blockchain technology company. “The first was Satoshi’s.”
Now, almost three years after Poon and Dryja shared their idea, the Lightning Network is coming to life. Last month the isolated groups developing the network, including Russell, banded together and released a “1.0” version. It has hosted its first successful payments, with developers spending bitcoin to purchase articles on Y'alls, a micropayment blogging site built for demonstration purposes by programmer Alex Bosworth. In a live but isolated test last month, Bosworth separately used the network to pay a phone bill with his own bitcoin. As he tweeted in late December, “Speed: Instant. Fee: Zero. Future: Almost Here.” And this week Blockstream launched an ecommerce site selling t-shirts and stickers that only accepts Lightning payments.
“When you first heard about bitcoin, you probably heard about ‘instant payments around the world for free,’” says Russell. “But if you dug into it, it wasn’t really that cheap, and it was never instant. Lightning actually does those things.”
The Crypto Conundrum
Fixing bitcoin has become an obsession among the developers, miners and investors who wish to see the cryptocurrency become the future of finance. The problem lies at the heart of its design. When a person buys or sells something using bitcoin, that transaction is broadcast to the entire bitcoin network. No matter how small or big, every payment is stored on the approximately 200,000 computers participating in the network. With bitcoin’s popularity soaring, that arrangement leaves the system straining to handle the load.
The blockchain is composed of literal blocks: collections of transactions organized into sequential chunks. For a transaction to become official, other actors on the network, called miners, must perform computationally intensive procedures to place it in a new block, a process that takes on average 10 minutes. About 2,000 transactions can fit into a block, so backlogs of unconfirmed transactions are common. That’s problem #1: the process is inherently slow.
Because space in a block is limited, spenders attach a fee to incentivize miners to include their transaction before others. As the backlog of payments grows, spenders offer increasingly lofty fees to attract miners to their transactions. On Thursday, for example, the fee to process an average payment in the next block (with confirmation in roughly 10 minutes) was $14. Those fees are the same for a payment of $5 or $50,000. That’s problem #2: the fees make small transactions impractical.
Developers have proposed and debated various ways of fixing bitcoin, but few solutions have the momentum of the Lightning Network. Its core idea is that most payments need not be recorded in bitcoin’s ledger. Instead, they can take place in private channels between users. The Lightning Network’s builders seek to move the bulk of everyday payments to private channels and use the blockchain as a secure fallback, to ensure honest commerce.
In this system, two parties open a channel and commit funds to it. The opening of a channel gets broadcast to the blockchain and incurs the normal bitcoin transaction fee. The channel can stay open for however long—say, a month—during which time the two users can exchange as many payments as they like for free. When the time expires, the channel closes and broadcasts the final state of the pair’s transactions to the blockchain, incurring another transaction fee. If one party believes at some point that he or she was cheated, the aggrieved individual can broadcast the contested transaction to the blockchain, where other users can verify it and miners can update the ledger, forcing the offender to forfeit funds.
This arrangement works well for parties that frequently do business together, such as a patron who buys coffee at the same diner everyday or a company paying its employees’ salaries. As long as a channel stays open, payments within it are free. Because they don’t rely on the blockchain, they can be completed at internet speeds. But the real innovation occurs when those channels stay open indefinitely, potentially even for decades, and when they connect into vast networks. The system’s design includes extra cryptographic features that allow a user to safely send payments not only through their direct connections but across their extended networks.
This aspect is vital, because it means a user only needs to open, and pay the transaction fees for, a small number of private channels in order to do commerce across the whole network. The code underlying the Lightning Network can find a path between a user’s immediate connections to more distant parties in the network, in a design akin to internet routing. For example, to make a first-time payment for an article posted on the blogging site Y’alls, you wouldn’t necessarily open a channel directly to the site or its writers. You’d instruct the network to route your money through your existing connections. Doing so would incur a small fee proportionate to the size of the payment—perhaps a fraction of a cent for a payment of a few dollars.
If the system proves successful, over time the flavor of bitcoin could change dramatically. Miners would only confirm transactions when a bitcoin user signaled the need. Most payments would occur in private. And microtransactions would finally become possible—you could, if you really wanted to, use bitcoin to buy a decently priced cup of coffee.
“When I first looked into bitcoin in 2011, I thought it made no sense and can’t possibly scale to all the payments one would want to make, so I walked away,” recalls John Newbery, now an engineer at the bitcoin research outfit Chaincode. “But in 2015, when I learned about payment channels and Lightning, my outlook changed. I thought, now this is a system that can scale.”
But first, someone had to build it. In Australia, Blockstream’s Russell was the first to try implementing it in the summer of 2015. Also around that time, a French bitcoin startup called Acinq began shifting from building a hardware wallet to devoting itself to Lightning. That fall Poon and Dryja partnered with a fellow enthusiast, Elizabeth Stark, to launch Lightning Labs. A quarrel splintered the founding team and Poon and Dryja went their separate ways, but Lightning Labs is now leading the overall network development effort with a rebuilt engineering team.
In December, interest in the project surged after the three teams announced that their separate implementations worked together as one larger network. Acinq CEO Pierre-Marie Padiou reports that downloads of his startup’s Lightning mobile wallet (the software that stores the private keys needed to spend one’s bitcoin) shot over 4,000. Lightning Labs, meanwhile, has attracted more than 1,000 participants to its public Slack room, where they ask questions of the developers, contribute code or flag bugs.
There are indeed bugs. Dryja highlights one alarming glitch: If you make a backup of your bitcoin wallet—on another computer or a USB drive, say—and decide to restore from the backup, you can accidentally claim money you’ve already spent. When that happens, the Lightning Network protocol allows your counterparty to take over all the funds in your channel. Dryja says the problem highlights the work to be done before the Lightning Network is ready for wide adoption.
Some entrepreneurs are willing to gamble on Lightning today. Last week a VPN provider called TorGuard may have become the first company to announce it will accept payments made through the Lightning Network. But it cautioned in a tweet that the network “is not production ready” and that the company would cover any lost payments. For now, Lightning’s users are hardcore bitcoin enthusiasts willing to risk some satoshi to bask in the glory of being first.
“There’s a great deal of hope pinned to Lightning,” says Chaincode’s Newbery. But as with any network, it success depends both on the quality of its engineering and its ability to kick off network effects. People have to use it, like it, and entice more users to join. That won’t happen in a flash.
Decoding the Crypto Craze
Sometime in the last week Bitcoin investors started noticing additional fees on their bank statements. It turns out that VISA and Mastercard both decided (how convenient!) to reclassify the way Bitcoin and other cryptocurrency purchases are processed on their networks. Incidents like this pose several challenges for the cryptocurrency industry short-term, but also show just how scared the incumbents really are.
Currently, if you want to buy bitcoin, ethereum or any other alt-coin instantly, the only option is to use your debit or credit card. Transferring funds from your bank has lower fees, but takes several days. Coinbase has long accepted debit and credit cards for instant buys, however, passing on to the buyer the standard 4 percent credit card transaction fee.
Now, it seems VISA and Mastercard have quietly reclassified the way Coinbase credit card purchases are processed on their networks. Coinbase transactions (and presumably all other exchanges, as well) are now being labeled as a “cash advance” rather than a “purchase.” Fees will vary by institution, but what this means is that using a credit card will result in an additional 5 percent fee tacked on by your credit card merchant, in addition to the 4 percent credit card transaction fee already passed on by Coinbase.
Even worse is that cash advances do not fall under the standard interest-free grace period that consumers expect for other credit card purchases. The moment the Coinbase purchase goes through, the transaction accrues and compounds daily. If that isn’t bad enough, the interest rate is also higher for cash advances — an astonishing 25.99 percent in one case. Lastly, but equally as important for some consumers, these purchases will no longer qualify for earning credit card points.
For example, a $5,000 instant bitcoin purchase made on Coinbase using a VISA or Mastercard credit card will now result in roughly $500 in fees + interest too. For most people, losing 10 percent of your investment in fees means that the practice of using a credit card to buy cryptocurrency is effectively over. It will become more difficult for investors to purchase bitcoin and other cryptocurrency on their terms. Transferring funds via ACH takes three to five business days. In a world where cryptocurrency prices can swing wildly in either direction, a week feels like a nail-biting eternity.
In an email to all customers last night Coinbase confirmed the change, claiming “the MCC code for digital currency purchases was changed by a number of the major credit card networks” and will now allow banks and card issuers to charge “additional cash advance fees.” When asked for comment a spokesperson for Mastercard had this to say: “Over the past few weeks, we have clarified to acquirers — or the merchant’s bank — the right transaction or merchant category code to use for these type of transactions (cryptocurrency purchases). This provides a consistent view of such purchases for both merchants and issuers.”
If anything, this change makes things more complicated in the short term. Authorities are already divided on what bitcoin “is”: the IRS has already said bitcoin is not “currency” and treats it as taxable property, however, credit card companies are now telling us that buying bitcoin is the same thing as pulling cash out of an ATM.
Both things can’t be true. By reclassifying Coinbase (and presumably all other exchanges, as well), VISA and Mastercard are doing their best to make it harder, slower and more expensive for people to invest in cryptocurrency. Credit card companies believe it’s in their best interest to turn away millions in additional revenue in exchange for slowing the rush of investment into bitcoin. In many ways, that’s true. The rise of bitcoin and future cryptocurrency is tied to the eventual fall of financial middlemen like VISA and Mastercard. Maybe they just woke up to it.
James Altucher would like to remind us of the math behind cryptocurrency: Two hundred billion dollars in supply. Two hundred trillion dollars of potential demand, even more if you throw in contract law. There’s 10,000 man-years of science behind it. The investment opportunity is bigger than you think, and trust him, he knows. “More than trading, more than charts, more than, like, investing—I run a hedge fund, I’ve been a day trader, I run a bunch of hedge funds, I’ve seen every trade in the book, I’ve written the book! It’s called Trade Like a Hedge Fund. Don’t buy it, I wrote it in 2004 … I worked with Jim Rogers a long time, he hates it—but, but, what you have to ask is, not these little trading things, but what is going on? Why does bitcoin even exist? Why do cryptocurrencies even exist?” he tells a crowd of around 60 people crammed into a comedy club on New York's Upper West Side1.
I’m in the crowd to watch Altucher, a self-help guru, author, and podcaster, participate in a debate. His pale face, framed by crooked, rimless glasses and topped by a fluffy mop of curls, is instantly recognizable from the banner ads that have stalked me around the web for the last couple of months. Altucher, according to the ads, is the “crypto-genius” who will unveil the next bitcoin. Never mind criticisms that he directs his followers to invest in risky small-cap stocks and cryptocurrencies, leading to a temporary bump in their prices followed by a sell-off. Never mind the complaints from some customers that the newsletters and research papers he hawks via publishing company Agora Financial offer obvious information that’s otherwise freely available online. (Altucher and Agora Financial CEO Doug Hill have disputed these complaints.) Tonight he’s introduced as “the bitcoin baron,” “Mr. Bitcoin,” and even “the bitcoin babe.”
The debate topic—Which is a better investment, gold or bitcoin?—is mostly a farce, since both present opportunities for people eager to make a quick buck. (Tonight, it’s just a room full of New Yorkers, but online the supply of suckers is infinite.) Anything in the world can be twisted into a get-rich-quick scheme with the right buzzwords, charisma, and $2,000 newsletter subscriptions. And no one knows this better than James Altucher.
The crypto-genius enters the stage wearing a shiny blue boxing robe over a baggy cardigan over a baggy button-up over a white T-shirt that says “i’m fine.” He just turned 50 and bought a stake in this very comedy club. He relishes in celebrating his failures and counterintuitive rejections of things like college and 401(k)s. Lately, he’s been all-in on digital currency, an area that’s blazing with hype, greed, breathless speculation, and fear of missing out but is poorly understood by most people. Digital currencies are worth something because people value them as worth something, and Altucher’s endorsement can boost the price of the tiny crypto tokens. In that way, his predictions become self-fulfilling—his saying a token is valuable could actually make it so. For a couple of days, at least.
Agora Financial has used Altucher’s messy hair (geniuses don’t primp!), crooked glasses (geniuses don’t care!), and distant stare (geniuses think complex thoughts!) to market his financial advice via ubiquitous banner ads. Despite looking like a stereotypical geek genius, Altucher possesses something most of them don’t—charm, wit, the ability to entertain, and the ability to sell. Just buy this newsletter subscription, and then this research report, and then this video.
Debate opponent James Rickards, who is also a member of Agora Financial’s network of financial forecasters, dons an appropriately gold boxing robe. He is an equally cartoonish physical embodiment of his investment philosophy with a combover and navy sport coat that screams “your grandfather’s safe investment tip.”
Altucher predicts the price of bitcoin will reach $1 million by 2020. Rickards predicts the price of an ounce of gold will go to $10,000 in the same time frame. “So, who’s right?” the opening speaker asks as a rhetorical lead-in.
“JAMES!” someone yells from the audience, though it’s not clear which James he means. Perhaps he means both—neither prediction necessarily negates the other. Early in the debate the Jameses agree on one point: They hate banks and paper money. Altucher notes that paper money requires working with banks, which have endless fees and potential for human error every step of the way. He adds, “Probably most people in here don’t like banks. That’s why you’re here.”
I notice most audience members are sporting an off-duty banker look: Blue-checked button-downs, fleece vests, expensive haircuts, and shiny dress shoes. There are a few shady-looking characters in the back (ahem, neck-tattoo guy). But I see no hoodies, no signs of stereotypical bitcoin bros. Are these (likely) bankers here because they hate the institutions that they (likely) work for? Perhaps they’re just hoping for a hot crypto investment tip. One of them begins taking notes after Altucher name-checks Zcash and Monero, two cryptocurrencies that are well-known among enthusiasts.
The few attendees I meet are either curious lookie-loos trying to learn about bitcoin or fans of one or both Jameses. The fans consider themselves technophiles, even if they don’t work in tech. They’re also investment geeks, even if they don’t work in finance. They’re libertarians, even if they don’t use Reddit. And they’ve bought into bitcoin, even if they don’t actually own that much of it. Bitcoin is now a lifestyle brand and personal identity choice in the same way a Prius signifies environmental awareness or a New Yorker tote shows you’re an aspiring member of the intelligentsia. Getting into crypto shows you support a set of ideals: decentralization, anti-institution, revolution. The social movement is so strong that true believers don’t mind the influx of greed-driven mercenaries in the sector. They don’t even care about the silly stuff like CryptoKitties or Dogecoin, or the ridiculousness of two stock-tip newsletter writers pimping investment ideas in boxing robes. Anything that gets more people involved is a net positive.
Altucher keeps things loose in his opening arguments. We’re in a comedy club, after all. His comedy club. Why not start with a little crowd work? Who here owns bitcoin? Hands fly up, but not every hand, and Altucher zooms in on a woman named Beverly. “So, you’re the only woman in this place who owns a bitcoin. Bitcoin is usually owned by men,” he says, which isn’t true of the bitcoin community, much less of the hands in the air in front of him. He does not seem concerned about the tech industry’s gender disparity or how such comments may perpetuate it.
He puts us at ease by ensuring he won’t get too technical. He’s not here to talk about economics or technology, he says, because “economics is boring, and technology is even more boring.” Buzzwords connect to pat narrative arcs, which connect to punch lines, which connect to applause lines. Everything he says feels Tweetable, except when I go to do so, I realize I’m not exactly sure what it means. Did I miss a word? It certainly sounded good. Altucher delivers a flip explanation of the history of gold as a currency, stating that around 5,000 BC, humans turned gold into coins, which meant gold was no longer a necessary form of currency. By the following year, he says, “it was a rock.”
“It’s a metal, actually,” Rickards quips. Details, details.
The audience laughs when Altucher tells a story about the time he used bitcoin to pay for lap dances at his bachelor party. (At current prices, the bitcoin he used to pay for lap dances would be worth $17 million, so the point is: Don’t worry about volatility.) He gets some laughs noting that the only use for lawyers in the future will be to deal with DUIs. He says his two teenage daughters are “somewhat below average,” adding, “on a scale of zero to 10, [they’re] maybe a three or four in intelligence. And yes, they use digital currencies, but they don’t have the slightest clue about bitcoin. I can explain to them whatever which way, they’re like, ‘Dad, just, we’re too stupid to listen to you.’”
Altucher and Rickards banter over the history of bartering, whether the US government can use cryptocurrency to pay off Afghan warlords, and whether bitcoin mining is a form of the rich stealing from the poor. Rickards jokes that he “needs a net to scoop up all the red herrings” that Altucher released, before declaring bitcoin is a “fraud, a Ponzi, and a bubble all at the same time” and touting 2 billion views on a related Facebook video of his. (Rickards hinted that he is a fan of other cryptocurrencies. Indeed, last week he hawked “the $0.70 crypto that could make you rich in 2018” in a members-only online group called Rickards’ Crypto Profits.)
After the debate, the comedy club’s cofounder shows me a photo of himself with Tracy Morgan, taken at the bar minutes earlier. He tells me that while the rest of us were hitting our two-drink minimums listening to a couple of middle-aged internet personalities promote themselves and their investment tips, Morgan stopped by, saw it wasn’t a normal standup night, and held court at the tiny bar for 30 minutes. Suddenly all the attraction and revulsion and fascination I’ve felt toward the world of cryptocurrencies in recent months makes me dizzy. There’s only one conclusion to draw, and it’s that life is a series of sexist jokes and fake boxing matches, then you die. HODL on for dear life.
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1 CORRECTION: This story originally stated that the comedy club that hosted the debate was on New York City's Upper East Side. It is on the Upper West Side.
A collective insanity has sprouted around the new field of cryptocurrencies, causing an irrational gold rush. I know youre tempted, but dont be a fool
Bitcoin has been on a run. Despite its recent dip, the cryptocurrency has impressed skeptics and believers alike in its monumental rise in value since its creation nine years ago. But all that could be on the verge of change.
Because while the argument rages on as to whether Bitcoin is in fact a currency or a store of value, one question looms large over all: Just what, exactly, is driving its price growth? Well, a consensus answer is slowly forming among critics, and it doesn’t look good for the world of cryptocurrency.
In fact, it looks so bad that those same critics are predicting Bitcoin could take as much as an 80 percent hit in value. That would mean BTC, which at the time of this writing is worth around $11,085, would drop down to near $2,200.
To understand why Bitcoin could be due for an imminent reckoning, one must first look to so-called stablecoins. The idea behind them is simple enough: peg a cryptocurrency coin, or a token, to something like the U.S. dollar. This would allow for many of the benefits of digital currency without the wild price swings rendering it less than ideal for real-world transactions.
One purported stablecoin in particular has dominated the space: Tether.
“Tether Platform currencies are 100% backed by actual fiat currency assets in our reserve account,” the company claims on its website. “Tethers are redeemable and exchangeable pursuant to Tether Limited’s terms of service. The conversion rate is 1 tether USD₮ equals 1 USD.”
According to Tether, as of Jan. 29 the company has $2,278,090,823.52 and €14,487,093.99 in liabilities.
“If there is questionable activity, the author believes a 30-80% reduction in BTC price could be forecast.”
Founded in 2015, Tether is connected to the online exchange Bitfinex. While the founders of that exchange had long insisted Tether was a separate entity, The New York Times reported in November that the Paradise Papers suggested otherwise.
Those leaked documents showed that Bitfinex’s Chief Strategy officer, Philip Potter, along with its Chief Executive Officer, JL van der Velde, had worked with the law firm Appleby to established Tether in the British Virgin Islands sometime in 2014.
What does any of this have to do with Bitcoin’s price? A pseudonymous report released on Jan. 24 alleges that Tethers “may not be minted independently of Bitcoin price and may be created when Bitcoin is falling,” and that it’s possible the company is “printing in response to market conditions.”
The author of the self-titled Tether Report is not alone in his or her suspicions. Tony Arcieri, an independent cybersecurity expert who formerly worked at Square, released a detailed look at Tether on Jan. 19 which came to similar conclusions and took it a step further.
“I, and many others,” wrote Arcieri, “suspect Tether is being used to effectively counterfeit hundreds of millions of dollars of perceived value, which are being immediately reinvested into Bitcoin to keep it from collapsing.”
As in, Tether may be creating value out of thin air. And that value, legitimate or not, is being pushed into the cryptocurrency world — allegedly artificially driving up Bitcoin prices in the process.
Every crypto-currency is being priced against Bitcoin which is inflated by counterfeit money, or counterfeit money (USDT pairs), once Tether implodes, nobody knows what prices will be.
It’s been infected by Tether cancer. The only safe place is out until Tether is resolved.
— Bitfinex’ed 🔥 (@Bitfinexed) January 28, 2018
What’s more, the aforementioned Tether Report alleges that “48.8% of BTC’s price rise in the period studied occurred in the two-hour periods following the arrival of 91 different Tether grants to the Bitfinex wallet.” Meaning, again, that according to the pseudonymous author, Tether looks to be driving increases in the value of Bitcoin. “If there is questionable activity, the author believes a 30-80% reduction in BTC price could be forecast.”
It’s not just random critics and cybersecurity experts making this claim. Nouriel Roubini, an economist and professor at New York University’s Stern School of Business, is right there with them.
“Indeed Tether/USDT used to manipulate Bitcoin prices,” he tweeted on Jan. 25. “Without this scam Bitcoin price would collapse by 80%. Regulators asleep at the wheel while $2 billion of fake $ created via this scam, half of it since December.”
That Tether may not in fact have the billions in cash reserves to back the billions of Tether tokens issued could be easily disproved by an auditing of the company’s books suggests a simple solution: release an audit. And yet, while long promising such an audit was forthcoming, the latest hope for such an accounting was dashed Saturday when CoinDesk reported that Tether and its supposed auditor were parting ways.
In conversation with Mashable on Friday, Rafael Cosman, CTO and cofounder of the San Francisco-based TrustToken, put the problem succinctly. “Tether claims that they do regular audits, but there hasn’t really been evidence of that.”
Tether did release a document in September which was supposed to prove it held cash reserves equal to its Tethers, but that didn’t convince skeptics. In a conversation with The New York Times, Lewis Cohen — a lawyer who works with virtual currency in his role at the law firm Hogan Lovells — noted that due to its wording the Tether document failed to prove Tethers are backed by dollars.
Meanwhile, hundreds of millions more Tethers — known as USDT — continue to be issued. Specifically, over 850 million worth have been “minted” since the beginning of 2018.
To make things even murkier, the ability to withdraw your Tether to your bank account in the form of USD has not always been guaranteed. As recently as December, Bloomberg reported that Tether’s Terms of Service read as follows: “There is no contractual right or other right or legal claim against us to redeem or exchange your tethers for money. We do not guarantee any right of redemption or exchange of tethers by us for money.”
Importantly, a search of the company’s current TOS page shows that language has been removed. Now, the company states that “Absent a reasonable legal justification not to redeem Tether Tokens, and provided that you are a fully verified customer of Tether, your Tether Tokens are freely redeemable.”
The Terms of Service go on to note, however, that “residents of certain U.S. states are not permitted to be customers of Tether; are not permitted to cause Tethers to be issued or redeemed; and, are not permitted to hold Tether Tokens.”
A recent Reddit post highlighted the confusion surrounding this. Titled “Has anybody here actually had USDT deposited to their bank accounts as tether.to claims is possible on their website,” the thread seeks to find someone that has successfully withdrawn their tokens for cash to their bank account. The silence in response is deafening.
“Without this scam Bitcoin price would collapse by 80%.”
Mashable reached out to Tether for comment on these claims, and will update this story when and if we hear back.
In the meantime, what does all this mean for Tether, Bitcoin, and cryptocurrency in general? Well, if the critics are correct, likely nothing good.
“If one were to assume the worst case scenario,” the aforementioned pseudonymous author of the Tether Report writes, “that Bitcoin’s price has been artificially pumped up by Tether issuance, one would expect the market price of Bitcoin to be closer to $2,000 based on the trendline before April 2017 and the marked growth in Tether issuance.”
In other words, if this alleged house of cards ever comes crashing down, it may bring down Bitcoin’s price with it with such force that the January crash will look like a walk in the park. And when and if that time comes, Tether’s critics will be there to remind you that you were warned.
As cryptocurrency surges in popularity and new blockchain technology emerges, online investment transactions of Bitcoin and others are becoming easier and faster. But as legitimate pursuits backing the promise of decentralized banking and nanosecond transactions have grown, shady opportunists are increasingly looking to cash in on first-time investors and cryptomania. To make matters worse, blockchain technology seems scammy at the outset: It’s difficult to understand, it’s new and unregulated, and it has already resulted in massive gains. Fraudsters, hackers, and identity thieves realize this, and they’ve already crafted elaborate schemes to fool even experienced buyers.
From illegitimate exchanges and currencies to classic fraud scams repurposed for the modern era, it’s important to stay sharp and research everything. To save you a couple of clicks (or worse), here are the most common Bitcoin scams threatening your dream of becoming a cryptonnaire.
The most common Bitcoin scams
1. Pump and dumps
Immortalized by Jordan Belfort in The Wolf of Wall Street, this kind of scam existed long before the internet. Pump and dumps are what they sound like: Investors “pump up” or promote a stock they own so they can sell it once the price goes up thanks to increasing demand. This is typically seen amongst altcoins (alternative coins) with low buy-ins—a penny per coin—and high return. In reality, buying these penny cryptos can be incredibly risky.
Unregulated markets, volatile fluctuations, and quick turnarounds are all part of the pump and dump. Popular exchange, Bittrex, has already issued guidelines for avoiding this scam, which can come in the form of “fake news” or “flash pumps.” Using forums (like Reddit), social media, blogs, and massive advertising pushes, hucksters hype a particular cryptocoin to get buyers to snap up the currency. Sometimes, fake screenshots of successful investment portfolios or mainstream partnerships will find their way onto these boards. Once the price is inflated, early investors GTFO by dumping their holdings. In a flash pump, members of a closed group are all in on the scam in a high-stakes game of chicken. Once the name of the coin to pump is announced, it’s a race to buy in, then dump it on stragglers. I’m getting hives just writing about this one. Don’t do it.
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2. Investment “clubs”
Fake traders have sprung up in the cryptoboom, and they’re here to take your money. These sites look legit and even have customer reviews touting the benefits of entrusting your dollars with “experts” who know the cryptomarkets. Low and behold, most of these groups are filled with bots, paid actors, and fake accounts ready to vouch for the swindlers at the top. One Perth man lost $5,000 when he joined the “Bitcoin Investor Club,” which even had a working phone number. He got wise after the head of his club asked him to take out a loan so he could buy more currency. One redditor detailed how her daughter made the mistake of joining “Crypto Investors Club,” a thousand-member Facebook group run by a woman calling herself a “Crypto Queen.” When it was time for a payout, the Queen kicks members out and blocks their accounts. “NEVER feel safe in crypto, being paranoid is the best way to keep your funds,” the mom wrote. It’s not bad advice.
3. Fake exchanges
In mid-December, several fraudulent cryptocurrency exchanges were exposed by online Bitcoin communities. BitKRX, a fake South Korean market was one of them. Naming itself after KRX (Korean Exchange), charlatans coaxed buyers into trusting BitKRX with branding and language that mimicked the official fiat exchange. Though the South Korean government is cracking down on imposter sites, you can never be too careful. Stick to popular exchanges and read reviews on comparison sites.
4. Fake wallets
One of the classic Bitcoin scams. Storing your private stash of bitcoins or altcoins requires a digital wallet. Of course, internet shysters have their own magical Bitcoin wallets that cause your carefully deposited funds to simply disappear! The recent Bitcoin Gold wallet scam reportedly stole $3 million from crypto hopefuls. In early December, the popular MyEtherWallet warned consumers about a fake MyEtherWallet digital wallet app created by scammers that had risen to no. 3. In the App Store’s finance section.
5. Ponzis, pyramids, and multi-level marketing (MLMs)
If there was ever any evidence that crypto has “gone mainstream,” it’s that these classic scams have popped up just like in the fiat world. The bottom line is, any cryptocurrency business that requires you to “do work” besides literally entering your payment info, buying the coins, and storing them in a private wallet should raise a red flag. One example is OneCoin, which “allowed” members to buy and sell educational trading materials in exchange for “tokens” that would be “mined” into a currency. Except there’s nowhere to exchange Onecoins, so victims essentially traded dollars for dirt. Gladicoin, a scam exposed last May, promised to “double your Bitcoin in 90 days” and operated as a pyramid scheme. MiningMax, a South Korean website with a Nevada phone number, operates as an MLM by requiring members to get commission by referring new members.
- Why Litecoin is a smart, fast alternative to Bitcoin
- Unlocking blockchain, the tech behind the Bitcoin revolution
- Why Ripple, the Bitcoin alternative, could be huge
Never ever share the private keys that keep your bitcoins and other currencies encrypted. Even if you receive an email or call from an official-seeming source asking you to. Unfortunately, this one is extremely common and can only be prevented by telling potential victims one piece of advice: When it comes to your personal information, shut up.
7. Initial Coin Offering (ICO) fraud
When a newly minted cryptocurrency is launched to investors, it’s called an ICO. But, nothing can stop con artists from creating fake ICOs or spoofing existing ones. Last year, the SEC shut down PlexCoin ICO after founders alleged it would create a 1,354 percent profit in less than a month, resulting in a $15 million fraud. Meanwhile, ICO spoofing conned a combined $225 million from investors in 2017, according to security firm Chainanalysis. Fake ICOs are incredibly difficult to spot; many higher ups working for them have also been tricked into believing their legitimacy. Here, it’s important to do in-depth research before investing in any new coin.
Coin scams have become so prevalent that FINRA (Financial Industry Regulatory Authority) issued warnings in December against dealing with charlatans. “We all need to become Mr. Spock when it comes to investing. We need to be cold and rational and logical.” Gerri Walsh, FINRA senior vice president recommended. FINRA frowns upon penny stocks and those guaranteeing specific amounts of return. It also advises potential investors to use tools like the FINRA Broker Check, the SEC’s list of suspended trades, and the SEC’s search function for finding a company’s filings.
Yet, the functionality of these sites depends on how quickly consumers report issues, or how fast the government can spot fraudsters. 99Bitcoins has created a simple questionnaire for buyers concerned about where they’re putting their money called the Bitcoin Scam Test. If you can’t get to the end of it without facing some serious introspection, chances are you should pull out of whatever mess you’ve just bought into.
Before you get fleeced in the digital currency gold rush, take a bite; that crypto coin may just be chocolate.
The cryptocurrency hype has reached new levels in recent months, following the explosion of Bitcoin, and arrival of new entries like IOTA, Ripple, and Litecoin. Its rise has turned early investors into millionaire and millionaires into billionaires. After years of scrutiny, Bitcoin and its competitors finally seem to be catching on with mainstream audiences, which could provide the footing they need to be taken seriously by large financial institutions. If that happens, the sky’s the limit.
But, as we’ve seen, these digital currencies are still extremely volatile, and many investors are warning of a Bitcoin doomsday. The latest is billionaire investor Warren Buffet, who predicts the cryptocurrency craze will not end well.
“In terms of cryptocurrencies, generally, I can say with almost certainty that they will come to a bad ending,” Buffett told CNBC on Wednesday.
The chairman and CEO of Berkshire Hathaway admitted that he doesn’t have more specific predictions, though he did say he’d never short, or bet against, cryptocurrency.
“When it happens or how or anything else, I don’t know,” he told CNBC. “If I could buy a five-year put on every one of the cryptocurrencies, I’d be glad to do it but I would never short a dime’s worth. But I do think what’s going on will definitely come to a bad ending.”
The legendary investor and one of the richest people in the world conceded that he doesn’t know much about the currency.
“I get into enough trouble with things I think I know something about,” he added. “Why in the world should I take a long or short position in something I don’t know anything about.”
With a net worth of $81 billion, Buffet is one of the most successful investors in history. But he’s not immune to mistakes. Last year, the so-called “Oracle of Omaha” admitted that he made a mistake by not buying Google shares years ago. He also said he was “too dumb” not to invest in Amazon, which he didn’t believe could scale so quickly.
Bitcoin has dipped significantly since reaching a peak value of $20,000 in 2017. The boost it received from exchange operators like CME Group opening their platform to allow futures trading has, at least temporarily, been overshadowed by government regulation. Today, South Korean officials are discussing whether they will ban trading through cryptocurrency exchanges. Bitcoin’s current value is around $14,000.
Q: I want to make money with Bitcoins, but I don’t know where to start. Help me so I can take advantage of this once in a lifetime ride!
A: As I write this, one Bitcoin is worth over $13,000. Like any investment, though, Bitcoin is extremely unpredictable. Will this magic cryptocurrency retain its value for years to come, making investors wealthier than their wildest dreams? Or is it a fad that will eventually fade, leaving acolytes with empty pockets? Nobody can predict the future, not even the most skilled traders. But if you know all the facts about Bitcoin, you might consider taking the risk. Click here to get the skinny on Bitcoin.