How NOT to Run a Business w/ Crypto (Part 2)

If you’ve read our article about the Silicon Valley Bank crisis that took place a while back, or how to invest using a blockchain wallet, you’d understand that the surface layer of all major risks to investing personal finances towards cryptocurrency goes by spread of word. With the general infrastructure and economy behind social media, the influential people tend to drive the cause and effect of the system, leading to all kinds of misunderstandings as well as misinformation that may affect millions of peoples lives.

Generally speaking, the level of profit promised by cryptocurrency firms to these influencers, who fall victim to only knowing the subtle yet limited definition of cryptocurrency, agree to promote a certain kind of currency of the firm by performing something called a rug-pull. As it’s imagined, when users are sitting on their personal finances ready to make an investment, their favorite influencers are subject to convince their fanbase to make the deposit for the currency as they believe it will create a promising portfolio. In full circle, the influencer and the personal investor are both given little information about the currency, yet they’re both convinced by each other and of a greater influence of the firm controlling the cryptocurrency, to call purchase of coins and enforce a short-term response to the increase of the value of the token.

When it comes to investment, as we’ve covered before, it is important to invest an asset such as cash into a coin that is supported by it (known in short words by what is called “stablecoin”), as liquid is the major key to security especially in a volatile market. Returning to the subject of celebrities, a rug pull takes place when shortly after the spread of demand towards the cryptocurrency fluctuates, the value instantly falls down which in turn created significant losses in finances of investors, returning the profits to the owners and influencers of the currency. This instance has occurred on various occasions, especially since the start of the pandemic, with the practice of transparency and verifiability towards information getting bypassed since the era we currently live in tends to include a downturn in major economic elements (housing affordability crisis, healthcare, etc.). Examples of celebrities, who claimed to have been unaware of the repercussions of their investments, can range anywhere from notable investor such as Shark Tank celebrity Kevin O’Leary, to reality TV star Kim Kardashian, former basketball player Shaqueill O’Neal, and finally the YouTuber who has fallen most for the controversy Logan Paul.

It is important to compare the two kinds of celebrities in this case, since a rug pull doesn’t necessarily have to mean promoting something in the short-term for long-term financial effect that benefits only the influencer instead of the audience. Those who have built a fanbase outside of social media, have participated in commercials on TV which tends to reach an audience of millennials, whereas newer generations exposed to the constant speed of information released through social media are prone to seeing promotions every now and then not just through short posts but major projects. Key examples of these projects are not just limited to hedge funds promising to manage finances for you through the currency such as FTX, which we’ve covered in a previous article in full is relatable for the observer.

For example, without naming too many of them as there’s enough already, I will give the real-life scenario of a cryptocurrency investment campaign that had connected well with a large audience, and that is Save the Kids. Initially operated by popular gaming community FaZe Clan, the campaign intended to take people’s cryptocurrency investments, and divert it towards providing resources to children in need. Promoted through platforms such as Twitter and YouTube, various investors both personal and corporate, put their finances into a pool at which right after the value of the currency declined, making various of these key investments by the users rapidly decrease to the point at which the organization responsible for the scheme was confronted. The key thing to realize and understand here, is that all of these campaigns are not necessarily run by built applications on the blockchain networks, or even cryptocurrencies that serve as stablecoins, but is simply driven by the negative downside of stablecoins called ‘altcoins’. As the word suggests, they are alternative coins which aren’t Bitcoin or Ethereum, and can be randomly generated at any point by one person or a group of people without having to get permission by others for the needs of regulation. As we’ve covered this concept in our workshops, especially one regarding the use of investing with blockchain wallets, it is a major strategy for those who tend to use their influence to not only spread of mouth, but also be paid to create false predictions of how much the value will skyrocket for the short-term, since there are content creators on these platforms claiming to be expert analysts and insiders of the market that can understand if something is promised without correct information to back it up.

An interesting question that one may want to ask in this case is, after a large amount of media turmoil takes place over these ‘pump-and-dump’ schemes (a separate term for rug pulls), what is the most government authorities could do to make sure this does not happen again. With what we’ve covered in our previous article, regarding how decentralized platforms run applications that are closely linked with governmental laws in the field of cybersecurity, there is no precisely direct way a government can enforce greater regulations especially when they’re a singular office, apart from following the mostly visible solution which is creating a lawsuit. This is the situation that the cryptocurrency organization Ripple was approached by, after the SEC (Securities and Exchange Commission) filed a lawsuit towards the company after having allegedly sold a large supply of cryptocurrency by the name of XRP, a token we’ve mentioned in our previous article that is used most importantly in applications sourcing user identity protection. Of course, Ripple claimed to have done this under the belief that general coins should not be held as a security, which is a notion that may apply to altcoins, but strictly limits the potential of applications on the blockchain network.

Lawsuits, or claims to be specific involved in the security behind cryptocurrency is not just limited to the government, but between organizations involved in opposite sides of the spectrum of financial investing and security. For example, the key company that drives promotion of stablecoins in the trading market, Binance, runs a charity that acts as receiver of donations towards groups involved in benefitting those in need, at which Save The Kids claimed to have donated 80,000$ of the benefits to from their liquidity pool, though like a transaction taking place in a “race attack”, was not confirmed by Binance themselves. At a grand scale, the miscommunication between cryptocurrency token promoters and organizations running on security for individuals finances, as well as how that will be combatted by way global powers in the near future may combat the problem by creating solutions, will require patience due to the pace at which it’s difficult to penalize developers who are simultaneously running these pump-and-dump schemes while they’re overlapping with social media promotions on a consistent basis, especially when they can also take different forms on these platforms overtime.

Although this barrier applies internationally, states especially in the US have already taken a role in combatting against fraudulent behaviors driven by these altcoins, with the major example being the state of New York which released a fourth bill that will enforce strict rules on developers seeking to sell over 10% of their ‘altcoin’ supply, especially within a five-year period following a scheme that they could potentially be involved in. Roles in restricting the buying and selling of these ‘altcoins’ nationally are likely to expand and diversify upon various activities that will come up for the future with states elaborating on the idea of better combatting solutions, but for now the responsibility will be largely dependant on how the investor comprehends this speed of information in the traffic of crypto markets.

Emphasizing on the basic rules that should be followed when ensuring yourself that you aren’t deceived into a ‘pump-and-dump’ scheme disguised as any form of social media campaigning, another real-world example will be used to highlight the common behaviors to take a note of and avoid. In 2021, a scheme was developed by an unofficial company by the name of AnubisDAO run by anonymous developers, seeking to make use of the method in easing the conversion of tokens to cash, by promoting the ability to combine the concept with the already controversial culture of Shiba Inu (SHIB) coins. As mentioned in our video workshop discussing non-fungible tokens, Shiba Inu is largely reliant on spread of mouth and has notably been controlled under this aspect by various influences such as Tesla stock owner and CEO Elon Musk. On the surface level, this may seem like another social media campaign, but the special deception was received by investors under the circsumtances at which no official website appeared to promote the idea or even a potential product behind it. Generally speaking, cryptocurrencies promoting portfolio packages next to websites, also use something a “white paper” which to put it simply, acts as a guide and blueprint of the project at hand. In a matter of 20 hours (less than a day or even a week it usually takes for these pump-and-dump schemes to take effect), 60 million USD in the liquidity pool was immediately depleted from the accounts, creating a major dent in the finances of these investors. Altogether, the main lesson to gain from this event in addition to everything else we’ve discussed thus far, is that as an average user who does not hold the significant level of finances some of the investors involved have suffered the loss of, one must maintain skepticism over certain token-based campaigns that promise to help you build a portfolio, as a lot of these organizations assume that the users do not act as a safeguard over their own assets, hence only following what the company says without making the right observations.