Why cryptocurrency as an investment is destined for oblivion
Crypto project teams must share the spoils with token holders, or the sector is destined to go the way of the dodo
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Warren Buffet once said that you don’t find out who’s been swimming naked until the tide goes out.
The tide has definitely gone out at Crypto Beach. When crypto asset prices crumbled losing $2 trillion in value, a massive 70% from their peak, it quickly became apparent that much of this value had in fact been fugazi. The new age snake oil salesman dressed in black hoodie with a laptop under his arm had managed to pull the wool over our eyes by justifying the huge APRs paid by DeFi (decentralized finance) platforms as both legitimate and sustainable.
In fact, that sales pitch turned out to be smoke and mirrors. Sustained by a mixture of pump, cheap loans, collusion, and the age-old habit of turning a blind eye when the money is rolling in and returns are being paid on time. Some have described what has gone on in the DeFi space as a massive carousel fraud, where money circulated among a few operators to keep the game alive. Such schemes however are dependent on investor confidence. Once that disappeared it was game over.
Heads are sure to roll, and hands are destined to be forced into the type of jewelry only a dominatrix is likely to buy for pleasure.
Unsustainable returns based on zero fundamentals led to the collapse of the stablecoin UST, more worryingly this lack of anything tangible is endemic throughout the entire cryptocurrency ecosystem. We have been turning a blind eye to it. It is time to wake the fuck up!
A recent development proved a catalyst to write this article. A few days ago, a young crypto project which had been around for just over a year decided to shut down with the aim of relaunching at some future date.
This is a regular occurrence in the cryptocurrency space with projects, especially younger ones, failing to make the progress founders had hoped for and as a result shutting up shop or starting again with a new token, same team, same website, same community.
This quick to throw the towel in mentality reveals why investing in cryptocurrenciesis a total crap shoot. It also raises the crucial question, can investing in cryptocurrency be classified as an investment at all or is it something totally different?
Setting the scene
When you buy stock in a listed company you are purchasing a share in the company which provides you with ownership rights. If the board of directors of a public company decides to throw in the towel, there are processes that must be followed. It isn’t as simple as sending a quick Telegram message and bidding bon voyage. The bottom line is, the assets of the company whether it be cash, intellectual property or a parking lot of Lamborghinis must be sold, liabilities paid off and the remaining funds, if any, distributed to shareholders.
Say for example a publicly listed startup has run out of money but has managed to build valuable IP this IP is the property of shareholders, assuming of course assets exceed liabilities, otherwise it is the property of creditors.
This situation is very different in the world of cryptocurrency. Let me provide you with a few examples to make the position clear.
Let’s use the recent example I started this article with.
The project in question, Catchy, a cryptocurrency wallet tracker, had seen its price languish below $50,000 market cap for months. It had once reached the lofty heights of $9m but lack of interest and slow adoption of its technology meant its token price was on a declining path to oblivion.
The team behind Catchy instructed its token holders to sell their tokens in the market or send them to a Catchy controlled wallet so that they would be issued new tokens in the relaunched platform, at some point. This is a common practice.
My immediate reaction when this happens is to exclaim oh shit! and proceed to sell my entire holding as quickly as humanly possible. Another one bites the dust is my next reaction.
You own nothing
The problem is by buying tokens in a cryptocurrency project you do not have a claim on the assets of the project.
Usually there is a corporation behind the project which owns the assets and receives most of the income generated from the platform.
That means as with the example above, the team running the crypto project can decide at any point and on a whim to shutter operations, sell the assets and the token holders are left with nothing but a few worthless tokens. There is no need to consult lawyers or appoint liquidators. There are no fiduciary duties owed to token holders. Token holders are worse than second class citizens more like steerage. As an investor are you happy to be investing where there are no protections? Are these new breed of crypto entrepreneurs reliable custodians of your money?
It is not only the lack of ownership of the platform’s assets which is a problem. It is also the fact that token holders rarely see any of the fees generated from the platform. You must ask yourself yet another question, is this fair when in many cases token holders provided the seed capital to build the platform in the first place?
A few examples here are virtual land sales where token holders of metaverse projects rarely see any of the massive profits generated from these platforms with most of the hundreds of millions flowing back to the small team behind the projects. ApeCoin is a prime example. Another example is CertiK, the leading blockchain security auditor. VCs invested millions of dollars in the holding company which owns the IP and receives fees from its consultancy business. This is clearly where the value is, or the VCs would be buying the native tokens. Token holders own nothing.
A further example is Ripple. Their native currency XRP has limited use and any applications that have been created are owned by Ripple itself, a company separate from its native token. Of course, most of the initial money that helped start and fund Ripple came from the sale of the XRP token of which the token holders receive zero benefit from the applications under the Ripple umbrella which they helped to fund. These are just three examples among thousands, but it gives you an idea of the inequality prevalent in the crypto ecosystem.
Investors are buying tokens as an investment when in fact their ownership entitles them to nothing and in many cases tokens also have minimal utility, a further blow to the investment proposition.
We must all be aware of the money flow and asset ownership of each cryptocurrency we invest in. We should check to see how money is being earned on platforms and who is getting what, just like you would if you were buying shares in a company.
I encourage you to watch an episode of Shark Tank. One of the first questions a Shark asks is, what am I investing in exactly? If a founder says they are keeping the best parts of the business for themselves, and the lucky Shark gets to invest in the unproven business with no sales the Shark usually insults the entrepreneur and kicks him or her out of the Tank. Investors in cryptocurrency should be doing thesame. It is a buyers’ market for god sake!
Are cryptocurrencies really securities?
If a platform is going gangbusters, it is obviously unlikely the team behind it will close it down, but you must ask yourself, do you feel comfortable that as a token holder who took the lion’s share of the risk investing near the beginning that you are not receiving any of the financial rewards?
I hear some of you saying, well that doesn’t matter if there is demand for the token and the price increases. And that is the argument which has been keeping cryptocurrency alive as an investment from the beginning. It isn’t looking a very solid argument right now and is definitely not an argument any investor should base investment decisions on.
I would argue that it is very difficult to say that cryptocurrencies represent securities on the basis that token holders own nothing and are not entitled to earnings generated by the platform.
Rewards are skewed in favor of the founders, not investors. And don’t even get me started on DAOs. This must change if cryptocurrencies wish to be taken seriously as an investment.
I for one will be taking a back seat until investors get a fair share of the pie. Regulation may in fact be cryptocurrency’s savior as an investment, finally making cryptocurrency an investment worth considering for the mainstream investor, but this is some way off.
The one question we fail to ask ourselves in the crypto community is, did Satoshi envisage Bitcoin becoming an investment? Or, was he more concerned with establishing a peer 2 peer electronic cash system as set out in his famous white paper? Perhaps that is what cryptocurrency is destined to be, a technology acting as a facilitator and to reward participation. It has certainly established a solid utility in applications such as file storage, social networks and as an alternative to VPNs for example. But token holders won’t be walking away with the spoils, the companies behind them will.
The bottom line is, avoid investing in cryptocurrency with your life savings. Also, take a skeptical approach to all cryptocurrencies before investing. Remember it is a buyers’ market. If project teams have been keeping all the upside for themselves, you must vote with your money and sell.
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Not Financial Advice
This article does not constitute financial advice or a recommendation to buy in any way. Always do your own research and never invest more than you can afford to lose. Investing in cryptocurrencies is high risk, and you could lose 100% of your investment. The article should be treated as supplementary information to add to your existing knowledge.