Trust Is For Suckers
Hacks, scams and scandals in the crypto and NFT universe.
People love scandals. If you need any more proof than what happened during the Oscars, in what is now colloquially referred to as ‘the slap,’ here is a small, but very interesting selection of the craziest crypto and financial scams and scandals of the last year or so. These stories fall roughly into a few categories used by the YouTube channel Useful Idiots. Their categories are - Democrats Suck, Republicans Suck, Isn’t That Terrible, and Isn’t That Weird. The crypto stories outlined here can be placed within some or all of these categories, but instead of Democrats and Republicans Suck, that category might have to read Crypto People Suck, which will be the first category. But I digress
When the Bitfinex Hack story broke in February, Netflix was immediately on the ball, throwing money around to buy the rights to the story of the two unlikely people that pulled it off. They did this even before the details emerged, because ‘the scam’ is today’s most popular genre of true crime and Netflix knows how to cash in on a story. In addition to its rolling roster of shows and documentaries about scammers, like the trashy Inventing Anna, hilariously insipid Fyre, or the head and eye roll-inducing Tinder Swindler, Netflix recently posted Trust No One, a documentary about the CEO and founder of Quadriga CX, Gerald Cotten, a Canadian crypto ‘entrepreneur’ who went missing and later turned up dead in Jaipur, India, at the end of the 2018. Quadriga was one of the earliest crypto exchanges in the world and it operated as the only crypto exchange based in Canada. The doc summons the usual suspects of insiders and paints a picture of the crypto world as filled with unimaginable horrors, leading one to the only possible interpretation, that the world of crypto is one to best stay away from, forever. Now, Cotten was a real-life swindler, who under the screen name Scepter, organized and ran one of the early exit scams on the internet. When Cotten supposedly turned up dead in 2018, the keys to the cold storage wallets, where all the crypto was locked and the roughly $250 million the crypto was worth, went with him, never to be unlocked again. This put a lot of stress on the people that have put their money and in some cases, life savings, into the Quadriga exchange. No sooner than when the news dropped about Cotten and his private keys, speculation about Gerald faking his death as part of an elaborate exit scam, started to surface. Signs that this was the case were all there. Cotten ran Quadriga in partnership with Mike Patryn, a shady character with a history of running internet scams under various pseudonyms and operating a crypto exchange that he used to rug pull and run away with $100 million of investor’s money as late as 2019, Cotten’ s name was misspelled on his death certificate, his will was made only a few days prior to his death and his wife was the sole beneficiary. India is also known as the country where a lot of people go to change their identities and where one can literally buy a new purchase on life. At Gerald’s funeral people thought it strange that the casket remained closed and that the only person who saw Cotten’s dead body was his widow Jennifer, who later threw Gerald’s parents out of the funeral. And of course there is Cotten’s previous experience with running scams when he was just 15 years old. The doc ends with the summation that we won’t know the truth behind Cotten’s death until his body is disinterred and an autopsy of his body produced. Meanwhile, all those who lost money in the Quadriga scam are tough out of luck.
The Bitfinex scam is a little less determined and that is because all we have to go on right now is the story of the mastermind couple behind it. In 2016, the crypto exchange Bitfinex was hacked and the hackers walked away with 119,756 Bitcoins worth about $72 million at that time. What really kicked off the frenzy over the Bitfinex scam, in addition to the massive sum of money in play (close to $5 billion in today’s money) was the fact that the couple were very public figures, especially Heather Morgan who seemed to have been very keen on having an online crypto-inspired hip-hop career as Razzlekhan, despite having next to zero talent for either rapping or producing quality video. What makes the Bitfinex story so strange is that neither person involved in the scam actually seems like they could pull off something of this scale and magnitude. It must be said that at the time of the Bitfinex scam Bitcoin and crypto in general were much cheaper than they are today, but that does not diminish the theory that many people have, that Morgan and her boyfriend Ilya Lichtenstein, are nothing more than patsies in a much more complex story of manipulation and intrigue. But it is also not out of question that they in fact pulled off one of the largest crypto heists in history.
Isn’t that terrible?
Most crypto scams fall in the category called ‘rug pulls’ in which the underlying crypto is quickly sold off or pulled off exchanges, as the price reaches a certain high target, making tons of money for those that created the coin and sold it and leaving everyone that bought with nothing. In many cases, rug pulls involve price manipulation by ‘whales’ (individuals with lots of money), ‘wash sales’ (selling of crypto or securities for tax benefits), and various ‘pump-and-dump’ schemes, often involving paying influencers and celebrities to pump the price of a coin to induce retail traders to buy the tokens, while insiders, including the celebrities and influencers, actively sell theirs.
During the Fall of 2021 Squid Game was the top streaming show on Netflix (are we seeing a pattern?). Then in November, it was revealed that investors who have piled into a crypto coin called SQUID, based on the popular Korean show, were unable to sell their tokens. In a now familiar ‘shit coin’ story, SQUID shot up from nothing to a head-spinning $2 million market cap in a matter of hours. But as is most often the case with rug pulls, when people, who have bought SQUID, tried to cash out, they found they were unable to do so. Promises of vast riches and a gaming experience vanished in an instant. The investors could only watch as the token became worthless in just as short a time as it took the token to go to the moon.
While SQUID was a classic rug pull in which the token creators cashed in and ran with the money, the token they created belongs to a class of coins called ‘shit coins.’ And while ‘shit coins’ are indeed terrible, it is the ‘meme coins’ that get most of the attention, because of their proximity to, often blatant, pump-and-dump schemes. Arguably, the first meme coin ever created is Dogecoin. Created in 2013 by Jackson Palmer and Billy Markus as a joke, Dogecoin has made lots of Doge believers into accidental millionaires during the 2020 and 2021 crypto bull run, that saw Doge rise hundreds of percent on hype alone, peaking during the appearance of Elon Musk, who the believers call the ‘Dogefather,’ on Saturday Night Live. Dozens of other dog-inspired, scammy cryptos like Shiba Inu and DogelonMars tried to summon the hype around Musk to various success and failure.
Enter SCAM coin. Inspired by the joke started by Doge, SCAM coin, short for Simple Cool Automatic Money, was created by a TikToker called Dre. Within an hour of launching SCAM coin, Dre saw the market cap rise to $70 million before correcting back to $2million, leaving lots of retail investors holding the bag. Other tokens with similar price action followed, significant among them the joke coin PUMP and the metaverse coin MarkMeta. In January of this year NASCAR was sued over its promotion of the LGB (Let’s Go Brandon) coin. The plaintiffs, alleging a pump-and-dump, implicated driver Brandon Brown and political analyst Candace Owens in the scheme.
While cryptos like Bitcoin and Ethereum run on protocols called ‘proof of work’ (POW) and other cryptos run on ‘proof of stake’ (POS) protocols, meaning they have utility and security built into their networks, meme and shit coins often have joke protocols backing them. Meme coins run on what’s known as ‘proof of meme’ protocols. If a meme exists, so does the coin. The idea that protocols are just as interchangeable as the coins themselves exists within the crypto community, because what is at stake is the notion of innovation. Thus ‘proof of meme’ or ‘proof of connectivity’ or ‘proof of stake’ are as good as anything else, as long as one can induce enough people to buy into the idea. Again, I digress.
It is often difficult to distinguish a rug pull from a pump-and-dump. One way to tell is whether or not the cryptos in question are reacting to some sort of news or pop event taking place. A day after Will Smith slapped actor and comedian Chris Rock at the Oscars, The Will Smith Slap DAO sold NFTs worth $45,000. Over 2000 non-fungible slaps have been minted in just a few hours after the slap and a Will Smith inspired token, called Will Smith Inu (named after Shiba Inu), was created to cash in on the hype. Will Smith Inu sadly crashed by 80% since. And the hype train doesn’t seem to be slowing down. Gas Pump Inu is the latest in the meme coin mania. GPI was created to - ‘help ease the burden (of high gas prices) through our token, the power of memes, community and free gas donation to those who deserve it most!’ - and its creators are apparently using free gas giveaways to drive attention to their token.
Now, it would appear that crypto scams tend to target only the retail investor, or in colloquial parlance ‘dumb money,’ so called by the institutions, hedge funds and banks, or ‘smart money,’ in order to distinguish the level of ‘sophistication’ they perceive to have and the amount of access they truly do have within the markets. So it came as a shock last year when the coin Titan, created by Iron.Finance, and backed by billionaire Mark Cuban, owner of Dallas Mavericks, crashed to zero and its stable coin Iron lost its peg. All this created ‘the world’s first large-scale crypto bank run.’ The world of Decentralized Finance is a lot more stable and safe than the worlds of meme and shit coins, but it is not a world without problems. Recently the Terra LUNA coin crashed by more than 50% when it was revealed that none other than Michael Patryn of Quadriga fame, was involved in one of the projects, called Wonderland, tied to the Terra ecosystem. The Terra project has since shaken off this negative association and its coin has recently risen to its all-time-high.
Projects in the Decentralized Finance crypto space, or DeFi, have one goal set in their sights, the elimination of third parties, like banks, from the world of crypto finance. The companies in the DeFi space are building trustless, peer-to-peer protocols, based around the blockchain and smart contracts, effectively bypassing third parties that exist to custody all transactions that are channeled through them, for which they charge hefty fees. What this means is that the world of DeFi, while in its infancy, counts among the most interesting and exciting of all of crypto projects, with dApps (Decentralized Apps) like Celsius, GuildFi and Anchor Protocol, and swaps like Pancakeswap, Sushiswap, Sundaeswap and Trader Joe, offering users high percentage yields on their investments in return for staking on their protocols. Anchor Protocol, for example, offers almost 20% APY to users for the staking of the Terra LUNA stablecoin UST. But because DeFi is so new, it is unpredictable, volatile and subject to scams if one isn’t careful.
Isn’t that weird?
Almost everyone has heard by now of the metaverse. A few months ago Mark Zuckerberg announced that Facebook will be heretofore known as Meta, apparently in an effort to rebrand the aging Facebook that’s been bleeding users due to its policies and internal politics. Zuckerberg, positively realizing which way the wind is blowing, corrected course for Facebook/Meta in order to grab as much metaverse market share as possible. It remains to be seen how successful Meta will be.
If you have heard of the metaverse, then you’ve also heard of Snoop Dogg buying NFTs and digital property in the metaverse of The Sandbox. So hyped was this story that when Snoop Dogg Tweeted that the plot of digital land in The Sandbox next to his was available for purchase, another user swooped in and bought it for $450,000. And if digital real estate here on Earth isn’t crazy enough, there exists a crypto team in Romania that want to sell digital, and perhaps real, real estate on the moon.
It would be wrong to think that the world of crypto is nothing but a giant scam or Ponzi scheme. Though there are many examples of these types of scams happening almost daily, crypto, like cash, is banking on the idea of privacy and anonymity applied to the digital realm. After all, there are much greater, much more costly and much more dangerous manipulations and schemes in the traditional markets also happening almost daily, the recent financial scandal over nickel and last year’s GameStop fiasco are a case in point. The difference between traditional markets and crypto markets is in regulation. While traditional markets are regulated by institutions like the SEC, the crypto markets remain virtually unregulated, for better or worse. While crypto remains unregulated, it is up to each individual to decide whether or not to get involved. Crypto is not for everyone. That much is clear. But, if you’d like to learn more about crypto and many of the crypto rug pulls and pump-and-dump schemes, then check out the YouTube channel Crypto Exposed. I am personally in no way affiliated with any of the projects in this article. I just find the world of crypto fascinating.