Crypto-crash: An optimistic post-mortem
Crypto-crash: An optimistic post-mortem by Claudio Grass
Blatant security deficits and rampant fraud
Over the last year, news of crypto hacks and heists became so prevalent that the new breaches were hardly worthy of reporting anymore. Among the headliners, however, was the Coincheck case, the Japanese exchange that lost over $530 million worth of the NEM cryptocurrency, as was Zaif, another exchange also from Japan, that saw $60 million worth of digital currencies vanish. Bancor, an Israeli-Swiss decentralized exchange lost $23 million to a hack this past summer, while BitGrail, a small Italian cryptocurrency exchange lost $170-195 million worth of its customers’ digital assets. All in all, nearly $1 billion was lost to hackers from exchanges and other platforms in just the first nine months of 2018, according to research by blockchain security firm CipherTrace.
An increasing number of ICOs also has come under the spotlight and attracted the attention of government agencies throughout the world. By July 2018, around $1.3 billion had already been invested in fraudulent ICOs, according to a report by Satis Group. The list of ICOs that turned out to be scams is long and it keeps growing. Among the most high-profile cases was OneCoin, an Indian operation that scammed investors for around $350 million, as was the Centra Tech, a heavily promoted and celebrity-endorsed swindle that raised a $32 million through its ICO, only to be indicted for securities fraud. Overall, even when looking at the projects that were not blatantly fraudulent or had their founders vanish with investors’ money, more than 55% of ICO-funded endeavors failed within 4 months, according to a study Boston College.
Source: Satis Groups LLC
All in all, some of the blame can be assigned to the extraordinary levels of greed that prevailed in the market, along with irrational optimism and a serious lack of attention to detail. Many of the investors who fell victim to the fraudsters didn’t even bother to read the corresponding white papers or do any kind of research before climbing on the bandwagon. It is also important to bear in mind that, much like in any other bubble, a considerable number of people who entered the market after the rally made headline news did not even have a basic understanding of the principles behind Bitcoin or any other coin they were investing in. Key concepts and mechanisms critical to the function of most crypto-related projects were and still remain largely elusive. For example, in the general public, 80% of people who have heard about the blockchain, have no idea what it actually is, as an HSBC poll showed.
“Doesn’t do what it says on the tin”
Beyond regulation and security issues, one of the main obstacles that many projects in the sector faced is that their products simply didn’t work as they were supposed to. Functionality is the bare minimum any investor and ordinary user would reasonably expect for their money and that expectation in many cases was not met.
A prime example is Bitcoin, originally promoted as a new, better, decentralized currency. While it performed exceedingly well (for some) as a speculation vehicle, it was a dismal failure as a currency. It was so badly designed and so unfit for this purpose, that the more users it attracted, the less usable it became. It goes far beyond Bitcoin too. According to an analysis by “Invest in Blockchain”, out of the top 100 cryptocurrencies in terms of market cap, less than half serve any useful function or actually have a working product.