ASU, Financial Experts Explain the Crypto-Currency Crash, What to Expect Next
by Bill Williams, investigative reporter
Recent enormous losses by sellers of bitcoin and cryptocurrencies should have its investors on edge. Most Americans cannot define crypto and many get in trouble, financially, when they think they can “dabble” in it.
FTX went from one of the world’s largest cryptocurrency exchanges, with a valuation of roughly $32 billion, to a bankrupt firm with an $8 billion hole in its balance sheet as of the second week in November, according to industry source CoinTelegraph.com. Bloomberg reported FTX owner Sam Bankman-Fried’s net worth plunged from $16 billion to zero after FTX’s collapse, but the reason this is important to those thinking about swimming in the coin pool is that he promised no return of losses incurred by investors; FTX’s Major League Baseball sponsorship and naming rights for a sports arena have been withdrawn or are slipping away. And then there’s the report of Bankman-Fried fleeing to Argentina in his Gulfstream.
This type of “loss” is happening frequently, and each time, investors are left holding an empty crypto wallet, which bears further explanation.
What is the real story and what do consumers and investors need to know? Fans of cryptocurrencies would say the benefits are transactional freedom, security, ease of transaction, and sometimes a little profit. Many cryptos are designed to have unique advantages over “fiat” currencies—or the “traditional banking system,” even if they don’t have widespread use or adoption yet.
A graph of bitcoin prices over the last couple of months looks like a jagged sideways Z pattern going up and a jagged sideways Z pattern coming back down, and then up again. It’s hardly a stable investment. It may have been successful in Covid Year 1 when everyone was sitting around in bathrobes making speculative investments on our iPads, but since Covid 1, there have been incredible reports of losses.
Fluctuations are hurting the “miners” of cryptocurrency more than the average coin trader. A bitcoin “miner” searches for the best deal on quantities of bitcoin and invests. An average person can “mine” but it takes a lot of work and special computer programs if you really want a profit. Huge companies are “mining.” The process involves powering data centers, packed with highly specialized computers that crunch math equations in order to make transactions and create new tokens. The process requires expensive equipment, some technical know-how and a lot of electricity.
Even large miners are reeling in this volatile industry. Core Scientific, one of the largest publicly traded crypto mining companies in the U.S. has sent a letter to the Securities and Exchange Commission (SEC) stating that it will not make its debt payments coming due in the next 30 days. Its stock plunged 77 percent on the announcement; its market value fell from $4.3 billion to $90 million, according to CNBC. This is one of many sad tales of crypto. We wish we could tell happy stories of a teacher or a nurse making windfall retirement profits with crypto, but those stories may not exist and those types of workers are finding their nest eggs to be empty.
Bitcoin was created by a person or group that remains unidentified to this day as a way to conduct transactions without intervention by a third party such as a bank, or heaven forbid, a regulator like the SEC. Bitcoin’s arrival in 2009 during a global financial crisis was well-timed. It began transactions with digital identities, granting anonymity, but also made bitcoin a currency for illicit activities.
Buying Crypto can be a cumbersome, slow and expensive process. Some transactions take 10 minutes to validate and usually involve a fee. But it’s no longer anonymous because government investigators are now tracking and retrieving funds, especially after ransomware attacks are made, according to a warning published by Eswar Prasad of Brookings Institution. A good example of that would be when the FBI recovered $2.3 million in bitcoins from a $5 million ransomware attack, by crooks named DarkSide, on Colonial Pipeline this year. The pipeline was forced to shut down five thousand miles of their American fuel pipeline. The FBI won’t reveal its recovery tactics.
Cryptocurrencies are easily hackable, subject to theft, and they’re not backed by anything like the U.S. dollar. The Consumer Trade Commission (CTC) has issued several warnings about cryptocurrency and scams. They can start with an unexpected text, email or phone call. Some crooks are even trolling the unsuspecting on dating sites with catfish investments too good to be true. And much of the action in crypto is happening on the Dark Web.
Are Monetary Systems Ready to Be Replaced?
There is a lot of talk about cryptocurrencies or Bitcoin replacing our currencies, but that could be lethal to monetary systems, said Moh Hon Meng, co-founder of iFast Group.
“I am not confident that this future is bright for the following reasons,” Meng said. “Cryptocurrency and bitcoin are not a synonym because there are thousands of cryptocurrencies and Bitcoin is just one of them and it is the most well-known but there are serious problems with Bitcoin that could cause it to fail, such as there is no real value. That’s right, bitcoins have no intrinsic value.”
“Fiat money,” or a country’s currency (like the dollar), has the value of the guarantee of the government that issues it. In the U.S. you have a phrase about the U.S. dollar “legal tender,” but the only value that Bitcoin has is in somebody else willing to pay a price for it; in that sense, it’s like a piece of artwork, says Meng.
The total worldwide market value of all Crypto is about $2 trillion and is expected to go much higher… a staggering amount for a virtual thing that is nothing more than computer code, according to a warning from Brookings Institution.
Asia, Europe and Africa lead the way in crypto use over North and South America, and the average cryptocurrency owner is a white 38-year-old male with a $111,000 annual salary.
Folklore and legend say it was Satoshi Nakamoto who invented Bitcoin in 2009 and recently a man came forward claiming he was the real Satoshi. Fractions of bitcoin can be bought for $5, and they are called Satoshis or Sats, and now there are crypto vending machines next to your scratcher tickets in 38,804 “cryptocurrency ATMs” worldwide. But the folklore and legendry surrounding Nakamoto have served to add to the mystique and encourage the bitcoin rage. We really don’t know if it was Nakamoto who started bitcoin or even if there is a Nakamoto. A man who came forward saying he is Satoshi is embroiled in lawsuits.
On top of all this, a company has recently begun to copyright the term bitcoin as a way to keep anyone else from using it commercially.
If Bitcoin is cryptocurrency version 1.0, Ethereum is crypto 2.0. Ethereum came later, to create payment systems and other decentralized applications to benefit from the “new architecture of trust,” which may be misguided. Ethereum is a decentralized, open-source blockchain. Ether is the currency of the platform. Among cryptocurrencies, Ether is second only to bitcoin in market capitalization.
As Dragon Boscovic, Director of the Blockchain Lab at Arizona State University explains:
“Blockchain is a platform to store and transfer information in a way that is virtually impossible to change without other users knowing. Users record information to a public ledger that is managed and verified by a network of computers without a third party such as a government, bank, or other institutional intermediary getting involved.”
Numerous industries can benefit from blockchain including healthcare, government, insurance, transportation and banking, to name some.
A skeptical reporter has to wonder how many of us would want our passcodes known by numerous people who are part of the same blockchain, based on some sort of trust philosophy.
In an unscrupulous industry, the players like to throw around phrases like “peer-to-peer trust,” which typically comes about when individuals learn to trust each other based on morals and reputational systems. In your blockchain, you know what all other traders are doing in your block, so you, theoretically, trust them.
This reporter has been tracking crypto companies who have lost $200 million, $300 million and $500 million in just the last few years. The Modus Operandi is always the same. A company rep emails all the investors and apologizes and blames it on a hacker, or some glitch, and then tells customers they will “try to” return as much of the funds as possible. One of the victims of the $200 million loss by the Quadriga company claims a loss of $300,000 which was supposed to be a retirement nest egg.
But Boscovic seemed more charitable in his outlook than a skeptical reporter like this writer, when he told me, “Similar to all other technologies, cryptocurrency can be used by criminals. The easy cross-border and almost instantaneous transfer of cryptocurrency assets are the key attributes liked and exploited by criminal groups. Nevertheless, all the transactions are digitally recorded and criminal groups are mistaken to think that the use of cryptocurrency protects their illegal activities.”
Tell that to JBS, the world’s largest meat processor. It paid $11 million in Bitcoin after a cyber-attack forced the shutdown of its plants in the U.S., Canada and Australia. In the past few years, ransomware hackers have found an almost perfect solution —cryptocurrencies like Bitcoin. It’s fast. It’s easy. Best of all, it’s largely anonymous and hard to trace, says National Public Radio.
But Boscovic of ASU has a different take.
“If anything, criminal use of cryptocurrency will only help law enforcement agencies get more accurate visibility into their activities. Forensic tools for blockchain and cryptocurrency analysis are based on the fact that it is relatively easy to track and interpret the flow of digital assets/money on blockchains. Court records reveal that investigators can trace cryptocurrency transaction records to a particular ‘digital wallet,’ which links digital identity to a physical person who is the wallet owner. By establishing the linkage between the two identities, officials can access that wallet using a ‘private key’ or ‘password.’ And law enforcement is deploying advanced data analytics and artificial intelligence techniques to track crooked cryptos.”
Ethereum went through a widely publicized overhaul known as the Merge that moved its digital machinery to a more energy-efficient system. If you can believe it, consuming energy by massive servers that look like computers out of a James Bond or Tom Cruise movie, caught the attention of environmentalists and law enforcement who look for electricity footprints. In September 2022 Ethereum made its move in a major update called “the Merge.” It was such a big deal to insiders that they set up watch parties for the midnight countdown to when Ethereum threw the switch. There were live-streaming cameras, dance parties and open bars at worldwide locations.
Law enforcement had been able to track cryptocurrency exchanges by tracking their energy footprints, and enviro-friendly countries wanted less energy usage. With “The Merge,” blocks of new transactions stopped being verified by computers solving massively difficult math problems.
This change could reduce a network’s power consumption by more than 99 percent, according to one of the numerous crypto publications that seem to crop up as often as a new crypto coin, such as N, Nerd Wallet, Coin Desk and Coin Telegraph. But while The Merge was touted by some, Ethereum lost $38 billion in the process, which was 19 percent of its original worth of $195 billion. It’s important to emphasize how many bitcoin companies are operating globally in what some estimate as a $2 trillion industry.
Ripe for Fraud in a Dangerous World
An interesting picture is emerging regarding where the greatest usage of crypto is occurring.
- Ukraine – Approximately 13% of the population use crypto
- Russia – Approximately 12% of the population use crypto
- Venezuela – Approximately 10% use crypto
- Singapore – Approximately 9% use crypto
- Kenya – 8.5% of the population uses it
Currently, 20,268 cryptocurrencies are in circulation, sold mostly by 498 crypto exchanges. Bitcoin and Ethereum have a market cap of almost three times the size of the rest of the top 20 cryptocurrencies combined, according to ExplodingTopics.com. Cryptocurrency, in general, is a buyer-beware market, and lately, it appears to be an arena that’s not advisable for the risk-averse.
Bill Williams has authored a copyrighted screenplay titled “Crypto,” about cryptocurrency greed. Williams earned a master’s in communications and journalism degree from Iowa State University.