A Crypto Wild West – The Good, the Bad and the Fudly
As I sit listening to Ennio Morricone’s epic theme tune, The Good, The Bad and The Ugly, written for Sergio Leone’s eponymous classic Western, it’s hard not to think about how far we’ve come. Only nine years ago, explorers left the Old World in the middle of a financial and economic meltdown. Modern civilization was brought to its knees by all too powerful banks. The abrupt end to a prolonged period of a “debt supercycle”, which began in the 1960s with a cycle of fiat credit and was followed by a move away from the Bretton Woods System to free-floating fiat currencies, had finally happened.
Although banks suffered quite a bit at the time, they were eventually bailed out by the public purse, while the wreckage of recession and austerity weighed heavily on global consumers. Nonetheless, amongst all of this uncertainty and angst, something shiny and wonderful emerged: Bitcoin. Following the work of Satoshi Nakamoto, its secretive inventor, these intrepid prospectors of the time grabbed their spare processors, went panning with source code, and expected the rest would fall nicely into place. Akin to the gold miners of the 19th and early 20th centuries, progress was slow, but it would be worth it.
A New Frontier
Like any fledgling gold rush, their original equipment was relatively low-powered. Blocks were easy to mine. The cryptographic puzzle at Bitcoin’s heart was really a cinch to crack, compared to today’s mind-boggling hash difficulty. Yet it also spoke of novel processes, founded on similarly romanticised values to the American Frontier; those of equality and self-reliance. A dream, not just for the privileged few, but for everyone. No banks. Trustless safeguards. Complete freedom of access to a system of value, for all. Everyone could now live in a peer-to-peer way; a blockchain-powered future, where the same market mistakes could be avoided. Indeed, they could never happen. A utopian, distributed world was open for business, and we could all get involved. But of course, it wasn’t like that. Far from it…
Things were very quiet for some time. A few coyotes. A lot of tumbleweeds. These crypto-crazies living in the prairies and deserts were searching for gold, but no-one wanted it. Then in 2017, something strange and remarkable happened. As if from nowhere, the global market cap of cryptocurrencies rose 1600%. Investors were in an Ecstacy of Gold, scrabbling around For a Few Dollars More to throw at “blockchain”. OK, I’ll stop with the Morricone references. But seriously, check out those songs. They’re all great.
And all of this was unprecedented unless you include the Dot-com bubble of the early millennium. Everyone was optimistic. Solutions were being found for problems people didn’t even know existed. Yet, like that famous bubble things have, well, burst. At least a little. And as we all know when this happens on a personal level, it can be hard to pull yourself out of a slump. Collectively, it’s even harder.
In 2018, especially if you entered the crypto space just before January 7th, you’ll probably feel the promise of prosperity has been replaced by the Wild West’s darker tenets; fear, banditry, lawlessness, and a prevailing sense that you might be eating beans around a dying campfire for the foreseeable future. BitConnect certainly will, as they prepare for one of many class-action lawsuits filed against them in the US last month. Or maybe it’s the SEC’s crackdown on ICOs, specifically Munchee Inc. and AriseBank, that’s caused the kerfuffle and has everyone running for the hills.
To this point, much of the drama right now is around the notion of Ponzi schemes, where different layers of reward from a scheme are granted to individuals who get in early, at the expense of those who get in later. It’s not like a normal market, where there’s push and pull based on interest in an equal asset, oh no! These companies are set up like pyramids, whereby those at the top profit, and those at the bottom can lose everything. But worry not, the sheriffs are coming to town partners, and as you can imagine there are no carrots for those cowboys, just very large sticks.
So, what happened to all the trust in these supposedly trustless systems? Why is the bullish sentiment momentarily being replaced by a downturn? Well, the answer is not entirely simple, but keep reading and maybe there’ll be some food for thought to go with those beans of yours. Plus, it will give you a few minutes away from your Mammon app. Or Blockfolio. Or CoinStats. Whatever it is you don’t find yourself checking every five minutes of every day.
Let’s start with The Good, a statement questionable to some of this audience, but to many something we’re trying to get our heads around, and that’s tax. And it’s tax season. Yay! Predominantly in the US and the UK, taxes are declared around the beginning of Q2, so investors are drawing down for the year and getting their houses in order. You can be sure that the regulators are coming, and that with them the respective tax offices are figuring out how to manage income and capital gains taxes from crypto. Cue lawyers lining up for the first cases.
It’s likely those wishing to buy larger ticket items like Lambos or divest into more traditional assets like property, will have to pay their taxes if they want to keep said Lambo or property further down the line. Therefore, the market has stalled as a result. Remember that tax, particularly at this early stage, isn’t a bad thing. What tax means is legitimacy. And legitimacy means investment. So, if you’re in this for the long run, based on where the market could well be headed in the next five years, you should probably welcome it. 20% creamed off a lot is way better than 0% taken from not much. That’s Economics 101, yo!
Incidentally, I hear that Ethos will be integrating Taxfyle functionality into their Universal Wallet, in addition to being on point with regulators, which should make the whole damn thing a lot easier. Plus, it’s worth accounting for the fact that, combined with the massive bull run at the end of Q4 / beginning of Q1 just asking for a major correction, people are generally broke at the start of the year. Christmas was expensive. It’s usually when we start new jobs or take stock of where we’re headed. We’re making all sorts of plans, and plans cost money.
So ultimately, if you’re a HODLR now, you’re likely to remain so until the next tax cycle, which in the UK starts in April. In the US, April is slap bang in the middle of the fiscal year. No biggie, unless you’re in debt and need to draw down on your crypto investment to cover it. Undoubtedly, many late investors to the recent spike will be in debt to some extent, so that’s more than likely exacerbating the volatility and downturn too. But fear not, as soon as everyone’s settled what needs to be settled in the real world, interest will gradually return to the market. We’ve seen what it can do now, and it’s all just too exciting.
Plus, the whales of the world won’t leave things where they are. With much of the tech promised in 2017 coming to fruition in 2018, there’s just too much amazing stuff on offer, and when you compare the current market cap to the Dot-com bubble of 2002, we’re not even a tenth of the way there. The big institutional players know that, so they’re just waiting until the dust clears, busy moving fat stacks out of the traditional stock market in preparation, as illustrated by the simultaneous crash of the Dow Jones Industrial Index last month; its worst week in 6 years. It’s not just us guys, everyone’s pulling out right now. It’s the order of things.
And so on to The Bad, and what a bad bunch they are. Rhymes with tax, it’s hacks. And the criminals making bank are coming up with more ingenious high and low-profile ways of rustling your cattle. From last month’s 500m ($370m) NEM theft from Japan’s CoinCheck, December 2017’s 4,700 BTC ($80m) hack at NiceHash in Slovenia, to the ETH Parity Wallet situation in November 2017 ($150m), it seems like every other week there’s another story to keep you on your toes. Do you know where your crypto is right now? Yeah, better go check, huh?
And that’s not to mention the smaller stuff like hacked display ads, colloquially known as Cryptojacking, keylogging software and even using Starbucks WiFi in Argentina last month, where covert mining occurred on coffee drinkers’ laptops. In that instance, it was the privacy coin Monero that was being sought.
Oh, and then there’s the big hacks on the mainstream, centralized world, that end up demanding payment in guess what? That’s right, Bitcoin. Remember WannaCry in May of 2017? It was a Ransomware attack that impacted private firms like Hitachi, Honda, FedEx, and Telefonica to civil, security and public services like Russia’s Ministry of Internal Affairs, China’s Public Security Bureau and the UK’s National Health Service.
OK, relatively the hackers didn’t get away with much, maybe 70 BTC maximum, but it gives crypto a bad reputation. That added to the fact that the majority still think it’s only used on the Dark Web, for all sorts of nefarious purposes, and it makes people nervous. Crypto’s core community may be strong, but its brand is brittle, so it doesn’t take a snowstorm to whitewash public opinion. Like a game of cards in a dusty saloon, one cheat can spoil it so that no-one wants to play, and occasionally someone gets hurt…
All of which segues nicely into the media. Let’s refer to them as The Fudly. Over the (ahem, magnificent) seven or so years since I’ve been interested in cryptocurrency, I’ve worked in various digital and creative sectors of the media industry, and in that time, I’ve built a clear insight into how the system works. Essentially, it’s all about money and data. Specifically, the money from centralized systems such a politics, banking and of course, advertising. And the data, well that’s from you, the consumer of all that juicy media wanting to spend, erm, money on stuff from advertisers.
If you want to learn more about it, just Google “programmatic advertising”. Don’t worry, you won’t break the internet if you do, despite Google being some of the best at it. Their DoubleClick tech is weapons-grade advanced, and the industry at large is truly vast. According to the Internet Advertising Bureau, in 2017 an estimated $40bn dollars was generated in half a year in the US, from the display ads you see on websites, search advertising, paid content and social media magic. Then bring in the rest of the world, and you get an idea of how big a deal it really is. If it can sway elections, it’s worth something. It doesn’t matter how good blockchain is, the current system makes serious bank, and companies aren’t just going to give it up. Would you?
Without this revenue, companies like Facebook wouldn’t exist. Therefore, if the modern mainstream press and gigantic content channels base their entire existences on other centralized systems, such as themselves, why would they promote anything that could jeopardize the established order? At least until they have their own versions of blockchain, and you can bet your bottom satoshi that every global tech CEO has at least a few researchers tinkering away…
It, therefore, stands to reason that headlines such as “Digital cash hack hits government websites”, “Criminals hide ‘billions’ in crypto-cash” and “Facebook bans all crypto-currency ads” should feature on the UK’s BBC website (which incidentally, I love). The people should be informed. But what about a balance of opinion? In that, there seems to be a palpable lack, and it’s enough, because of the scale of it, to fuel the FUD which in turn prevents new investors entering the market. They’re even bringing ET into it, with “Crypto-craze ‘hinders search for alien life’”. In fairness, that’s a great read. But the point is, it’s powerful stuff and it’s here to stay, at least for a while. Nowadays, a single tweet can move markets. This probably belongs with The Bad, and of course, there’s crossover between the two, but it’s worth noting one incident:
At 13:07 on Tuesday, April 23rd, 2013, the Associated Press sent a tweet to nearly 2 million followers. It read “Breaking: Two Explosions in the White House and Barack Obama is injured”. By 13:08, 150 points had dropped off the Dow, which according to Bloomberg News represented $136bn in equity market value at the time, a third of crypto’s current market cap. By 13:13, it was back to normal. Jokes.
Turns out the Syrian Electronic Army claimed responsibility for the hack. Old news, sure, but it just goes to show how even conventional markets can be easily spooked. Crypto is the same. It is not a beautiful or unique snowflake, at least from an emotional perspective. The Fudly are professionals, but sometimes even they lose control, and we put so much stock in what they say, every day, that there’s a direct correlation when it comes to the rises and the falls. So, fear not, it’s all relative. Excellent tech will eventually prevail. At least, that’s what we all hope, right?
So here we are, moseying gently into The Sundown (sorry, not sorry) of this market crash. As with so many beautiful things, it’s tinged with danger, yet inevitably a sunrise follows. 2018 is set to be a landmark year. The railroads are being built. Constitutions are being written. That dusty saloon is being refurbished, and when it is, normal people are going to want to hang out there. The Crypto Wild West is becoming less wild by the day, and for some that removes the appeal. But if you’re prepared to wait for the many, who only want the Starbucks (Starbuckses?) of this world, it has real value.
Wallets are being made easier to use while gaining sophisticated functionality and security; no prizes for guessing who’ll win that race. Development of the Internet of Things is picking up the pace, and blockchain will undoubtedly be a core component of that industry. Medical blockchains are allowing us to protect our personal data. Counterfeit goods blockchains are protecting brands and consumers. E-Commerce itself is becoming peer-to-peer, as too is sustainable electricity trading. Prediction markets are creating the search engines of the future. Social media users are monetizing their own content, without the need for advertisers. Charity, logistics, and transport safety systems are all being revolutionized. We’re entering a future where it’s about more than CryptoKitties. It’s becoming useful. Even the porn industry is getting involved, and if we know anything, it’s that sex sells…
So, relax partner. Polish your pistol. Give your horse a well-earned rest. The Wild West still exists, but it is getting less dangerous. And if you were smart enough to survive this standoff, then one day you’ll tell stories around a not so smoldering campfire, with a lot more than a mess can of old beans. Sure, there are no perfect investments. Nothing’s guaranteed, and you need to think very carefully before you get into any of this stuff. But if you get it right, you might just end up with more than a Fistful of Dollars.