Posted on 11/13/2022 11:25:45 AM PST by catnipman
The “crypto winter” that hit earlier this year walloped digital asset prices and served as a healthy reminder that cryptocurrencies are highly risky, volatile investments.
But now, in the wake of crypto exchange FTX’s implosion, crypto investors were reminded of another risk they face: Crypto accounts lack guaranteed protections when the exchange or platform provider goes belly up.
Traditional savings and investment accounts can never be 100% safe in the event an institution becomes insolvent, either. But most banks and brokerages, as well as 401(k) plans, do provide federally guaranteed protections and other insurance.
Crypto custodial accounts, however, do not enjoy those same safeguards
What’s more, customers may unwittingly agree to let the company running an exchange or platform use their digital assets. “There are some platforms that have agreements which essentially say that ‘by depositing your crypto with us, you are granting us the authority to use, transfer, invest, do whatever we want with your crypto,’”
(Excerpt) Read more at cnn.com ...
btw, i've been studying crypto for weeks now, reading hundreds of articles ... and wrote this essay in october:
Crypto Ponzi Scams, Zero-Yield Assets, Inflation Bubbles, and Other Thoughts
Crypto “Deposits” vs. FDIC Deposits
When you, as a customer/client/(mark) “deposit” your crypto in an “account” at a crypto “exchange” that claims to pay you interest for your “deposit”, you’re not really “depositing” your crypto at all, instead you’re loaning your crypto to the exchange.
Worse, your crypto is generally commingled with other customer “deposits” in a few common accounts owned by the exchange itself, rather than credited and segregated into account owned only by you, even though the crypto exchange may format a sham webpage to display for your “account” that LOOKS like a bank account webpage.
US Dollar (USD) deposits to an actual FDIC bank account are actually loans to the bank as well, but unlike a crypto exchange, your loaned funds are credited into a segregated bank account owned by you and NOT commingled with other funds owned by the bank or other customers, and should the bank fail or steal the USD credited to YOUR segregated account, you’re guaranteed to eventually get it back [up to a maximum insurance amount] via FDIC insurance.
Nonetheless, in both of the above cases, though, you as a customer/client/”depositor” are really a creditor.
Crypto Inherently Offers Zero Future Yield
However, unlike US dollars (USD) and other actual yield-bearing assets such as CDs, bonds, dividend stocks or real estate, crypto is an “asset” that inherently offers ZERO future yield in terms of dividends, interest, or future earnings. Crypto’s ONLY future value is solely a function of whatever a buyer may wish to pay for it in the future.
The Crypto Ponzi Scam
Since crypto has no inherent yield, any scheme that offers you a yield for borrowing your crypto is automatically a scam, and specifically a Ponzi scam of one sort or another.
In fact, a crypto Ponzi scam pays a pseudo-yield for the crypto that you “deposit” from only three possible sources, namely:
1.) Pseudo-yield that an exchange pays from “deposits” of new or current customers/creditors/clients and/or other funds borrowed from “investors” (classic Ponzi scam).
2.) Pseudo-yield paid from profits an exchange earns by selling depositors’ crypto at prices higher than the price at the time customer deposits were made (essentially, fraud).
3.) Pseudo-yield paid with OTHER pseudo-yield obtained by your exchange by loaning YOUR crypto to ANOTHER exchange that pays your exchange an even larger pseudo-yield than what your exchange offers you and its own depositors, in other words, pseudo-yield obtained by your exchange from another, even more egregious Ponzi scam exchange.
Crypto Ponzi Scams Flourish (until they don’t)
The above crypto Ponzi scams can flourish for a while, propelled by a constant influx of NEWLY “deposited” crypto from NEW greater fools enticed by greed, ignorance, social media buzz, promotional ads presented by paid “celeb influencers”, and FOMO (fear of missing out), all of which will be enhanced by the availability of large amounts of nearly-interest-free USD sloshing around in a grossly inflationary economy.
The Crypto Ponzi Scam Implosion
Crypto Ponzi scams inevitably collapse when one or more (usually more) of the previously mentioned three pseudo-yield sources cease providing a pseudo-yield, and/or large numbers of depositors/creditors attempt to withdraw their “deposits” at the same time when the system runs out of greater fools, resulting in panic that causes exchanges AND crypto prices to collapse. Such crashes are often triggered or exacerbated by an end to the nearly-interest-free USD money train, resulting in increased borrowing costs as well as increased yields on legitimate yield-bearing assets, making pseudo-yield-bearing Ponzi scams less attractive.
Even worse though, pseudo-yield source three above exploded out of control into a multitude of interlocked Ponzi scams linked together like a fragile pile of Ponzi Pick-Up Sticks that would rapidly collapse in a heap should a single Ponzi Pick-Up Stick tremble.
In the second quarter of 2022 such a collapse did in fact occur when a gaggle of crypto Ponzi scam exchanges imploded, including Celsius, Voyager Digital, Three Arrows Capital, Deribit, BitMex, Vauld, Genesis, Babel Finance, CoinFLEX, 2gether, Invictus Capital, and AEX plus others.
The imploded Ponzi scam exchanges halted client withdrawals, and shortly thereafter, the Ponzi scam exchanges declared bankruptcy, resulting in the vaporization of tens of billions of USD “deposited” by hundreds of thousands of the last batch of greater fools who were left holding the bag when the crypto Ponzi scams imploded.
Why Inflation Engenders Fraudulent Investment Bubbles
Nearly-interest-free USD always seeks yields greater than the very same nearly-zero interest that enabled the nearly-interest-free USD to be available in the first place. However, the great paradox of nearly-interest-free USD is that cheap money drives down the future yield of all other legitimate yield-bearing assets, leaving only extremely risky and/or fraudulent assets yielding returns greater than the cost to borrow the nearly-interest-free USD in the first place.
Thus, massive inflation always engenders fraudulent investment bubbles that ultimately burst and destroy the excess liquidity. In fact, one could even say that such bubbles and their bursting are necessary to stabilize a grossly inflationary economy.
The burst-bubble losers are always the last batch of greater fools to buy into the bubbles, and unfortunately these losers are always those who least understand investment values and are the ones who can least afford to lose their small amounts of hard earned dollars.
In the case of crypto, one survey found that 98% of crypto “investors” don’t actually understand what crypto is, which isn’t terribly surprising because in reality, crypto is literally nothing more than a gigantic mass of complex computer software. Perhaps it isn’t even surprising that 98% of those who buy crypto don’t know what they’re buying. After all, a fool and his (or her} money are soon parted, and no doubt almost no crypto “investor” has ever even heard of Peter Lynch or his admonition to invest only in something you understand.
An old Wall Street cliché says that when the shoeshine guy is telling his customers what great stocks he bought, it’s time to get out of the market. A contemporary version of this statement might be: When Kim Kardashian and Matt Damon are telling you how fabulous crypto is, it’s time to sell crypto, not buy it.
Lessons Regarding Assets That Have Zero Future Yield
One lesson that wise investors should learn from the above Ponzi scam meltdown and crypto crash is that they should be wary about investing in anything with zero future yield because the future values of zero-yield assets are solely dependent upon what someone is willing to pay for them in the future.
It’s also vital that wise investors understand that crypto in particular is EXTREMELY rife with out-of-control, no-holds-barred price manipulation schemes, including pump and dumps, wash trading, spoofing, stop hunting, buy and sell walls created by “whales,” whale wall spoofing, rug pulls and the simple spread of false rumors via a myriad of social media outlets. And that’s not even counting hundreds of instances of actual theft, hacks, and fraud that have stolen tens of billions of dollars from the naive and unwary.
The average crypto punter putting a few thousand USD or even a few tens of thousands of USD into crypto has little chance to beat the above price manipulation schemes in the long run. SO, in effect, the average crypto punters ARE the greater fools!
But Industrial Commodities Have Zero Future Yield Too
There ARE exceptions to the above non-zero-yield rule, primarily commodities such as foodstuffs, lumber, industrial minerals and metals, petroleum products, industrial diamonds, and other natural resources that must be produced AND continuously consumed to sustain contemporary society, and therefore have a vital and inherent utility value that potentially can increase in the future should scarcity and/or increased demand occur.
Precious Metals Have Zero Future Yield As Well
Precious metals such as silver and gold are still prized because of their historical value, though both gold and silver also have SOME industrial value. Nonetheless, precious metals have zero-yield, and their future value depends solely upon what someone else is willing to pay for them in the future.
And Collectables Have Zero Future Yield
Finally, there are other assets that also have zero-yield too, but are prized for their collector value such as gem-quality diamonds, other precious gems, jewelry, fine art, antiques, coin collections, tulips, and Beanie Babies.
Nonetheless, the value of such collectables depends solely upon what someone else is willing to pay for them in the future, though many but not all, collectibles possess an esthetic value that can make life more pleasurable.
So What Zero-Yield Asset Category Does Crypto Belong To?
That’s an interesting question that is best answered by a process of elimination. We already know crypto is not a yield-bearing asset such as a bond, a mortgage or a CD. Crypto is also not essential to sustaining contemporary society, so does not belong to the industrial commodity category. In fact, crypto could disappear tomorrow and pretty much the only parts of society that might miss it are criminals, terrorists, and Ponzi hucksters.
So, does crypto then belong to the collectible category as a collectible that has little if any aesthetic value such as Beanie Babies or Franklin Mint figurines? Possibly.
On the other hand, there may be a fourth asset category for crypto, namely a category for assets that have zero value of any kind whatsoever other than that a greater fool might pay more for them in the future than what was paid by someone who bought them today.
Oh Yeah, What About Non-Fungible Tokens [NFTs ]: They Have Zero-Yield Too
NFTs [non-fungible tokens] likely belong to the worthless category as well, though unlike crypto, at least with NFTs you might “own” a ridiculously expensive virtual image of some fatuous cartoon ape that you can enjoy comparing with other ridiculously expensive virtual fatuous cartoon ape images “owned” by your rich and fatuous friends at their cocktail parties.
But What About So-Called “StableCoins” And What Good Are They?
Good question! So-Called “stablecoins” are crypto units of account that are putatively tied to an actual unit of account such as the USD and SUPPOSEDLY never vary in price. Thus, say, one USD “stablecoin” is SUPPOSED to always be equal to one USD.
The random entities that issue so-called “stablecoins” CLAIM that they are “backed” one-for-one with assets equal to the total “value” of “issued” “stable” coins. Thus an entity issuing ten billion USD stable coins would hold ten billion of actual USD (or equivalent) in reserve. Of course, no entity that “issues” “stablecoins” is ever actually legitimately audited with public results to prove their reserve claims.
So what good are “stablecoins”? So-called “stablecoins” are actually the casino chips used for the majority of transaction volume in the crypto casino world. But why not just use an equivalent amount of USD instead? Two reasons.
One reason is to avoid taxable events. As long as no actual USD are involved when buying or selling crypto, no taxable event occurs.
The second reason is that “stablecoin” casino chips are also the roach hotel of the crypto casino world: USD can check in, but USD can’t check out. The largest issuer of so-called “stablecoins” is Tether (whose “stablecoins” are called USDT), and Tether only allows the conversion of USDT back to USD in amounts greater than $100,000. Thus, while the punters can BUY lesser amounts of USDT with USD, only whales can convert USDT back to USD! Neat trick, huh?
The Future Value Equation When Future Yield Is Zero
It’s interesting to look at the equation for the future value of an asset when the yield is set to zero and inflation is ignored, because the equation reduces to the situation in which an asset’s future value always equals its present value, thus any future value depends solely on what some other sucker is willing to pay for it in the future. AND, if such an asset has zero present value, it also has zero future value!
FV = PV * ( 1 * r) ** n
FV = Future Value
PV = Present Value
r = rate of return
n = number of periods of return
A Note Regarding Crypto Regulation
If world-wide regulators really wanted to clean up the crypto world, they should start by prohibiting pseudo-yield from being offered for crypto “loans”, or at least imposing the same controls that conventional lenders are required to meet regarding loan reserves, transaction transparency, segregated accounting, risk warnings and auditing, and even legitimate third party insurance, all of which would pretty much have the same effect as explicit prohibition.
BTW, the reason financial regulating authorities are in such a quandary regarding how to regulate crypto is fundamentally because crypt is a worthless asset, and regulation would lend legitimacy to said worthless asset as well as providing “investors” with a false since of value and security. Besides, how do you regulate an “asset” that is nothing more than computer code that generates some numbers?
Regulators don’t regulate “investments” in Beanie Babies or Franklin Mint figurines, so why should they regulate crypto? Just because lots of fools insist on gambling their money away by “investing” in crypto?
Really, the best “regulatory” approach for authorities is to simply continuously issue STRONG warnings about the EXTREME risks in crypto “assets” and their unsuitability for almost any legitimate purpose, and eventually after enough people lose enough money, crypto will go the way of tulip “investment”.
A Note On the Utility of Blockchain Mediated Peer-to-Peer Transactions
One of the most touted aspects of blockchain technology is that it supposedly revolutionizes commercial transactions by providing for peer-to-peer financial transactions. However, so far, the only thing that blockchain peer-to-peer transactions have revolutionized is the ease of financial transfers for criminals, terrorists, and money launderers.
Still, for pretty much everyone else, peer-to-peer financial transactions are no more useful than the barter transactions that humanity utilized prior to the revolutionary invention of currencies that allowed commerce to be conducted WITHOUT the inefficient constraints of peer-to-peer transactions.
Currencies not only provided a way to establish standardized values amongst a plethora of goods and services, but promoted one-to-many and many-to-one financial transactions AND acted as a store of “surplus” value. Thus a single family could go to the bazaar and buy goods and services from many different stalls, while the King could collect taxes from many different subjects. And folks who ended up with more currency than they needed to spend in the bazaar that day, could utilize it to busy stuff some other time.
Re-invention of peer-to-peer financial transactions is nothing more than a return to archaic trade practices superceded by the invention of the Shekel 5,000 years ago in Mesopotamia.
References
“Bitcoin, Currencies, and Fragility” by Nassim Nicholas Taleb
https://www.fooledbyrandomness.com/BTC-QF.pdf
“In Crypto, Market Manipulation Remains a Problem”:
https://www.pymnts.com/cryptocurrency/2022/in-crypto-market-manipulation-remains-a-problem/
“Crypto Turns Out To Be Nothing But A Massive Pump And Dump Scheme Fueled By Widespread Manipulation” by Jay Atkinson at Forbes:
https://archive.ph/lLr9S
“98% of Survey Respondents Can’t Pass a Basic Crypto Literacy Assessment”
https://www.globenewswire.com/news-release/2021/11/01/2324362/0/en/98-of-Survey-Respondents-Can-t-Pass-a-Basic-Crypto-Literacy-Assessment.html
“Is Crypto a Big Scam?”
https://theintercept.com/2022/09/23/deconstructed-crypto-ben-mckenzie/
/sarcasm on/Now they tell us./sarcasm off/ To call crypto even an “investment” is wrong. It is 100% gambling. At least gold and silver have real world uses besides being a store of wealth. I hope the SEC keep this Wild West going. It does serve as a lesson.
So much for the crypto-anarcho utopia the proponents of crypto were pushing.
At least the FTX folk didn’t roll out the lie used by a lot of Crypto scammers - “someone hacked in and stole your money but not our money”. Here, it looks like everything disappeared and they just blew up the companies.
Anonymity plus Counterparty Risk = Perfect conditions for fraud
Like gambling at an Indian casino that refuses to pay off a big jackpot because the machine is broken. How do you know it's broken? Because it's programmed to never actually pay off the big jackpot.
No, Crypto is like Dutch tulips.
I would feel more comfortable investing in crypto if I could secure it myself on a device like a thumb drive, out of reach of hackers, bankers, Feds, and other crooks
Don't banks do the same thing? Isn't that why they never have everyone's money and why the phrase Bank Run exists?
Yup, it’s called a crypto wallet.
Oh I am hearing rumors that this might bring down a few banks too. This might be bigger than most people realize. Let’s wait and see what the next 2 week brings
And if the Great Reset can be fully established under the Biden regime, the US Dollar is on schedule to be replaced by a form of home-grown crypto currency, with roots in the ESG scoring system.
Environmental, social, and governance (ESG) policy means that the currency used may only be used for specific purposes, and trying to use the currency for unauthorized purchases ends with forfeiture of whatever that currency may be. The RICO laws taken to an extreme.
In order for this scheme to work, all other forms of currency have to be forbidden. The whole economy is reduced to a huge black market in the “forbidden” commerce.
The top banks investing in crypto and blockchain companies
https://www.cbinsights.com/research/top-banks-crypto-blockchain-investments/
As of May 2022, a total of 61 banks (55 in previous update + 6 new investors in the current cycle) now have invested at least once in this space.
1000’s of fools and their money...
Careful. This is not true. Exchanging one crypto for another and buying something with crypto are taxable events.
I will never give any “crypto” “currency” one cent of my money. I want to know what “crypto” “currency” IS!, not what the creators want us to think it is.
It IS nothing but some fancy manipulations of my computer screen that seem to be saying that I have money in some kind of an account. Bottom line, it IS nothing.
When I deposit money in my local bank, I have a very reasonable expectation that I can retrieve what I put in as money, electronically, or in folding banknotes that I can spend at the 7/11. It’s possible for that fiat money to go “poof” too, but in that case civilization will have ceased to exist as we know it.
If you use an exchange don’t leave it on the exchange. Exchanges can go bankrupt, they can be ordered to freeze your account, they can be hacked.
I am just hoping the anti-RKBA libs at Pay-Pal takes a big hit on this.
One of the several reasons I dumped them was their pushing me to “Buy” Bitcoin.
Anyone leaving their crypto on an exchange is either day trading or an idiot. They deserve what they get.
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