Friday, May 25, 2018

25/5/18: The Wondrous World of Cryptos Fraud: Profitable and Growing


One of the key promises of cryptocurrencies to their 'users'/'investors'/'gamblers' has been that of security of data stored on cryptos-backed blockchains and crypto 'assets' held by their owners. Yet, scandal after scandal, the myth has been deflated by the news flows, with security breaches, theft and fraud hitting the cryptos markets with frequency and impact not seen in traditional investment venues and asset classes.

Research by the Anti-Phishing Working Group released on Thursday shows that criminal activities have resulted in a theft of some $1.2 billion in cryptocurrencies since the beginning of 2017  (https://www.reuters.com/article/us-crypto-currency-crime/about-1-2-billion-in-cryptocurrency-stolen-since-2017-cybercrime-group-idUSKCN1IP2LU). Which is a significant number, but most likely an under-estimate to the true extent of theft and excludes fraud, especially fraud relating to the notorious ICOs.

In January-April 2018, ICOs raised some $6.6 billion, marking a 65% increase on 4Q 2017 ($3.9 billion in ICOs funding). Based on WSJ report that surveyed 1,450 ICOs, roughly 20 percent of the new offers raise major red flags for scams, including “plagiarized investor documents, promises of guaranteed returns and missing or fake executive teams”. Again, this is just a part of an iceberg. Ca half of all ICOs projects had no actual service or product offer behind them. In other words, investors in more than half of all ICOs were backing nothing more than a technological white paper, absent even a rudimentary business plan.

While there have been a lot of discussion in recent months about the potential Ponzi-game nature of the cryptos markets, irrespective of where you stand on the issue, there are two questions every investor must ask before dipping into the cryptos waters:
  1. Do I, as an investor, really comprehend the risks, uncertainties, complexities, and ambiguities imbedded in product offers I am considering investing in? and
  2. Do I, as an investor, have meaningful avenues for monitoring, hedging and/or ameliorating the above risks, uncertainties, complexities, and ambiguities imbedded in product offers I am considering investing in?
Now, without any sense of irony, when it comes to cryptos and ICOs, for any, even the most-informed and seasoned investor, the answers to (1) and (2) are 'No'. Which means that cryptos and ICOs are not a form of investment, but a form of speculative gambling. Nothing wrong with playing some chips at an unregulated casino, of course. Feel free to do so at own risk.

Update: A new research report (https://cointelegraph.com/news/ethereum-classic-51-attack-would-cost-just-55-mln-result-in-1-bln-profit-research) estimates that "it could take just $55 mln to hack a major cryptocurrency network for $1bln profit", providing yet more evidence that a "successful 51% attacks to control hashpower" previously deemed "too expensive and would result in making the attacked currency worthless" is no longer 'too expensive' and can deliver signifcantly higher profit margins than mining. So much for 'secure decentralized un-hackable' assets, thus.

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