Technology

The second part of our series on cryptocurrency examines how the market’s explosion opened new vistas for grifters and scammers, and sinkholes for investor cash and developer expertise. By Richard Cooke.

The dark side of the crypto market

Molly White, one of crypto’s most perceptive critics.
Molly White, one of crypto’s most perceptive critics.
Credit: Tristan Spinski for The Washington Post via Getty Images

In the late 2010s as cryptocurrency’s worth climbed and climbed, the claims made on its behalf became inflated as well. Its evangelical fan base believed it could turn the finance industry upside-down while also acting as inflation-proof, recession-proof “digital gold”. Its applications were boundless, and could reform everything from politics to real estate. Even world peace was not off the table. The defence analyst Jason Lowery – also an officer in the United States Space Force – was not alone in claiming that bitcoin could end war, calling it an “ultimate ‘peacekeeper’ missile” that might substitute for state-initiated “kinetic violence”. Back on Earth, cryptocurrency instead created a very different paradigm shift. It revolutionised fraud. 

Its immediate legacy was a golden age of grift, where enterprising hucksters refreshed some of the oldest forms of the scam – Ponzi schemes, pump and dumps, identity thefts and even art heists – and made them new again. They also invented fresh methods of fleecing the unwitting. “Rug pulls”, where coin creators would simply disappear with investors’ money, occupied a category of crime so new they were not always against the law. Stings netting hundreds of millions of dollars were frequent, and sometimes a team of hackers might haul in a billion or more. The gap between the utopian visions of crypto boosters and its increasingly unethical reality became a gulf, until several critics, Bill Gates among them, were ready to declare cryptocurrency itself a scam.

To late June of this year, the Australian Competition and Consumer Commission’s website for recognising, avoiding and reporting scams, called Scamwatch, has received almost 5800 reports mentioning cryptocurrencies, relating to more than $138 million in losses.

“We are now seeing cryptocurrency being used as a payment method across almost every scam category, from remote-access scams, threat-based scams, even to online shopping scams in rare instances,” says ACCC deputy chair Delia Rickard. 

“We have seen the rise of ‘romance baiting’ scams, where a scammer builds trust with an online love interest to lure them into an investment scam.”

Trouble was there almost from the beginning. In 2014, the world’s largest bitcoin exchange, the Tokyo-based Mt. Gox, filed for bankruptcy after hackers successfully stole $US460 million of its customers’ coins. The company’s owner, Mark Karpelès – who loved being called “the king of bitcoin” – had neglected his security duties, and instead become obsessed with the construction of a French bistro-styled bitcoin cafe. Despite apologising for “the trouble and inconvenience” he had caused, Karpelès was found guilty of deception, and the bitcoin cafe never opened. The coins stolen would now be worth some $US15 billion.

Yet for early investors, the reward still towered over the risk. In its early years crypto could still act as a get-rich-quick scheme that was genuine. At the end of 2019, the financial publication Bloomberg declared bitcoin the best performing asset of a decade, boasting a 9 million per cent return in 10 years. It had made “a fortune for speculators and some thieves”. Its volatility was experienced as excitement, and the lack of an underlying asset meant the commodity – if it was a commodity – seemed to reflect pure investor exuberance. It helped that crypto markets never closed. They attracted the most inveterate speculators.

This was especially true of cryptocurrencies other than bitcoin. Anyone with rudimentary coding skills could found a cryptocurrency and literally make money, and these fly-by-night operations launched in their thousands. Initially called altcoins – alternatives to bitcoin – they soon attracted a more colloquial name: shitcoins. The pejorative spoke to their value, and cryptocurrency exchanges filled up with endless variations of these penny-stock-style investments – moonbeam, balancer, enzyme and aergo – each backed by not much more than a noun. Some had a stated purpose, such as the Juventus fan token, which was supposedly a way for fans of the Italian soccer team to influence club decisions. Others, collectively known as memecoins, made their own worthlessness into a joke.

The most famous of these was dogecoin. Co-founded as a prank by the Australian programmer Jackson Palmer in 2013, dogecoin leveraged an internet meme dog (a shiba inu) to poke fun at crypto’s inflated value. “It absolutely was a joke,” Palmer says. “Absolutely stupid.” The joke took off. In a few years, dogecoin’s value inflated too, until at its peak it was worth hundreds of billions of dollars. Palmer was appalled. “What’s happening is a net loss for society,” he says. “Now anybody can start their own scam. If you look at MLMs [multilevel marketing schemes], if you look at the self-improvement hucksters, even pyramid schemes – they’ve all kind of switched to crypto.” While other online payment forms such as PayPal will eject scammers, crypto has no such mechanism.

Ironically, the volatility and even fraud may have attracted more investors than they repelled. If, as Slovenian philosopher Slavoj Žižek put it, the promise of populism was “corruption for everyone”, the promise of memecoins was “insider trading for everyone”. So what if the speculation was frantic and the social dividend dubious? Crypto advocates heard the criticisms – it was under-regulated, it took advantage of mom-and-pop suckers, it was ethically corrupt – and thought, How was any of this different from the finance industry? Hadn’t every frontier market in history fostered crime? That was the price of exploring unknown territory. 

One of crypto’s most perceptive critics had attacked exactly this excuse. “I don’t think crypto has enough potential to earn the moniker ‘frontier market’,” Molly White says. “I admit that’s a cop-out,” she writes on her site – she believes crypto “is not all a scam” but “in the same way that gambling isn’t a scam”. 

“I also don’t see it as the ‘future of finance’ or the ‘future of the web’ or anything like that,” she says. Mainly, in her view, cryptocurrency is poorly explained.  

Trying to explain it drew her into commentary, and then criticism. White is a software engineer and long-time Wikipedia editor, who has become renowned for her bracing analysis of crypto’s shortcomings. Her scepticism started with curiosity. Intrigued by the concept of “Web 3.0”, the new generation of internet culture that blockchain technology is supposed to usher in, she began researching it. Instead of decentralisation and “smart contracts”, she found predatory financial practices and digital snake oil. 

As a result, she founded a website named Web3 is going just great, a clearing house for crypto scepticism. It operates a Grift Counter™, which tallies the wreckage of Web3’s “clown car parade” in stark financial terms. In June the counter passed the $US10 billion mark for the first time, with the theft of $US100 million from something named Horizon Bridge. Despite their scale, these acts of banditry are somehow unromantic. Back in 1963, the Great Train Robbery’s haul of cash, worth the equivalent of $US73 million today, was enough to make Ronnie Biggs a celebrity for life. Crypto’s much larger robberies, executed with cunning rather than daring, leave little cultural impression. The MonkeyPoxInu scam made legends of no one, though it netted $US400 million in three days.

White’s work examines not only this sticker price, but also the lack of benefit, the huge waste that accompanies so much money lost and stolen. Jackson Palmer agrees that the biggest crime is the opportunity cost. “So many good developers left their jobs in the last couple of years working on maybe important things that could actually help us save the environment, could help save lives and healthcare,” he says. 

“They might have actually helped make the payment system for everybody in the real world. And now they’re working on, you know, shitty ape monkey token.”

Web3 is going just great uses the motto “an enormous grift that’s pouring lighter fluid on our already smoldering planet”. And it’s that environmental damage, especially the vast fossil fuel energies consumed by mining bitcoin, that has made the debate around cryptocurrency not only more bitter but also more urgent. 

This story was modified on August 5, 2022, to accurately reflect Molly White's stance on crypto.

This is part two of a four-part series.

Read part one: How the crypto market started.

Read part three: The environmental impact of crypto.

Read part four: The future of cryptocurrencies.

This article was first published in the print edition of The Saturday Paper on July 30, 2022 as "The golden age of grift".

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Richard Cooke is a contributing editor to The Monthly, and the 2018 Mumbrella Publish Award Columnist of the Year.

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