GENERICO.ruEconomicsThe expert explained the dangers of investing in cryptocurrency

The expert explained the dangers of investing in cryptocurrency

Why Bitcoin is a financial pyramid

The news about the problems of the Russian crypto exchange Berebit, which aired just before the May holidays, clearly did not get lost in the general flow of events. A “revolt” of investors who came personally to claim their hard-earned money after an unexpected stop in the company’s activities, crypto-investors spending the night in the Moscow City, an assault on an office with a blockade of entrances and exits from the building and a chase of employees along the floors of super-skyscrapers, stopped only by the arrival of the police – all this is quite exotic for incidents in today's Russia that did not go unnoticed even by the inexperienced public.

Why Bitcoin is a financial pyramid

Berebit's problems began at the end of March, when security forces seized some computer equipment and documents from the company's offices, but did not stop the company's activities. Investigative actions, according to unconfirmed reports, were related to the transfer of money to finance terrorism. Following the actions of the security forces, the exchange changed its management, which, according to rumors, immediately identified inconsistencies in the balance sheet (a likely euphemism for the lack of money in the accounts) and stopped operations for an audit. As if in total there wasn’t that much money stuck in the clients’ accounts, about half a billion rubles, but among the investors there are supposedly important people with great connections, and the exchange itself seems to belong to a former Ukrainian oligarch from Donbass, where he “ questions have accumulated.” According to the latest reports, the exchange still promises to pay money to its clients, of whom the exchange has about a thousand.

Although for us all these events seem to be news from other times and other places, reminiscent of either the collapse of banks during the Wild West, or the not so long ago story with MMM deposits, for the world of crypto this is a common thing. And the problems associated with Berebit seem simply microscopic against the backdrop of virtually serial global crypto exchange crashes. For example, the collapse of the FTX exchange affected more than a million people, and the total losses of investors, according to various estimates, ranged from 6 to 11 billion dollars. Oligarchs, billionaires, show business and sports stars, mafia, cartels, terrorists are also constant companions of all crypto-related scandals. As well as unexpected deaths, disappearances, detective stories with fake documents, cyber attacks and hacks, kidnappings and ransoms are indispensable companions of crypto trading. At the same time, the crypto process is accompanied by a large-scale and probably the most expensive advertising campaign in history. Thus, on US television, advertising of crypto assets is carried out during the Super Bowl prime time – this is the most expensive advertising time in the world.

It’s time to ask the question: what’s wrong with crypto? Are Bitcoin and Ethereum a pyramid scheme, a stock market bubble, or a deliberate financial scam? Definitely not in the classic sense of financial pyramids and bubbles. When creating the first cryptocurrency, Bitcoin, the creators obviously did not have the idea of ​​​​creating a fraudulent scheme. This is an attempt to create a payment system without an intermediary, which for ordinary money is the state, more for ideological purposes than for practical ones. The idea of ​​a transfer system without an intermediary is this: so that everyone can check the status of accounts, they need to be made public, something like a note on the wall of a city square. To protect privacy, each customer account record is recorded under a pseudonym assigned to each participant. To transfer, respectively, participants can verify each other’s balances and make a transfer. Unfortunately, an open public ledger requires an anti-tamper mechanism when adding data. And here, as a protection, the “mining” mechanism was invented. Miners literally spend enough electricity to power an entire European nation to prove that the ledger entry can be trusted, because anyone who wanted to tamper with it would have to spend the same amount of electricity, which is supposed to be uneconomical. This approach, unfortunately, makes the entire crypto payment system inefficient, allowing it to process no more than 10 transactions per second, which is meaningless for the “world payment system.”

Crypto tokens themselves, like Bitcoin, are not provided with intrinsic value. The creators of Bitcoin assumed that value would be provided by a finite number of tokens, based on the assumption that if something is rare, it must have value. The problem is that a token is essentially just some virtual number. And if just “rare numbers” that are difficult to calculate had value, then one could make money on large prime numbers, or Mersenne numbers, despite the fact that large prime numbers are still valuable because modern cryptographic algorithms are based on them. Of course, a mathematician can receive a bonus for finding the next Mersenne number, but stock trading is not based on these numbers. The second factor in creating the value of a token could be the provision of an effective international payment system, but in fact, only cybercriminals use Bitcoin as a means of payment, for example, to obtain a ransom from ransomware. Thus, according to Canadian researchers, at least seven percent of crypto wallet owners opened them only to pay a ransom to scammers.

The inefficiency of the system and the lack of intrinsic value of the token makes any investment in crypto tokens a so-called negative-sum game. When you play poker with friends, your winnings are equal to the losses of other participants, this is called a zero-sum game. A negative-sum game means that the losing participants lose more than the successful participants gain. Someone has to pay for wasted electricity and pay commissions to exchanges and legal funds investing in cryptocurrency? This doesn't mean there aren't crypto investors who have made billions; Of course, they exist, it’s just that maintaining the crypto trading system requires new participants all the time, most of whom will inevitably lose their investments. And in this sense, crypto itself becomes similar to a financial pyramid or multi-level marketing, where in order to ensure the profit of old participants, more and more new participants are required, who, even theoretically, will never turn out to be a plus in their financial investments.

The fact that crypto is a negative-sum game is generally quite obvious to anyone who cares to understand it. This is probably why the same creator of the classic financial pyramid MMM Mavrodi, a mathematician by training, after leaving prison, actively became involved and until his death promoted the crypt, creating both his Mavro tokens and the international project “Republic of Bitcoin”, again deceiving thousands of people , fortunately, no longer Russians, but residents of South Africa and China.

What allows you to attract new people to crypto investments? Many factors. Among them there are both new and eternal. Among the new factors is sufficient availability. You don’t need to be a member of an elite club of investors and have multimillion-dollar bank accounts; it’s enough to have access to the Internet. Mass advertising through new media – social networks, email newsletters. No scheme before had such a marketing network. The complex technical component of the crypt fogs and confuses the uninitiated, including regulatory authorities. The system is not similar to any of the fraudulent schemes of the past and does not itself contain anything illegal. Of course, the most ancient vices of humanity are also at work: passion, greed, the belief of the majority that they are smarter than others and will “jump off in time.” All these factors came together at one time in one place, giving rise to the phenomenon of “cryptocurrency investments.” And perhaps it is time to admit that cryptocurrencies, whatever the original intentions of the people who created them, are now a “post-modern” pyramid scheme and, in general, the collapse of any investment associated with them is ultimately inevitable.


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