Is cryptocurrency the biggest scam in history? A ten-year history of love and hate between enthusiasts and critics.

Author: Ignas, DeFi Research; Translation: BZE Research Institute

“After in-depth research on cryptocurrencies, anyone with the ability to understand can come to a conclusion – it needs to be completely destroyed because it’s a huge scam.”

– Stephen Diel, cryptocurrency commentator with 60,000 Twitter followers

As cryptocurrency enthusiasts, we often only see the positive side of cryptocurrency on Twitter, and to be honest, most cryptocurrencies currently are financial tokens, which also attract scammers.

• Wall Street: SEC, I want Bitcoin now
• Discussion on Cryptocurrency Governance by a16z
• Viewpoint: The “NFT Retrogression” caused by Ordinals is not a return to idealism

Therefore, the sad fact is that many people do not like cryptocurrencies like we do. On the contrary, they think “cryptocurrencies are a scam.”

There are many reasons for this, and in this article, I decided to explore different critical viewpoints and try to understand why some people call cryptocurrencies (and DeFi) the biggest scam in history.

Cryptocurrency: Changing the World Currency Order <> The Biggest Scam in the World

As cryptocurrencies develop, criticism also increases. I believe that we, cryptocurrency enthusiasts, are currently in the minority.

Molly White is a well-known cryptocurrency critic who founded a website ironically named “Web3 is going great”, which chronicles catastrophic events in the cryptocurrency, DeFi, and NFT fields.

This proves the growing skepticism about cryptocurrencies.

But what really prompted me to write this article was a video produced by James Jani called “Cryptocurrency: The Biggest Scam in the World,” which covers all the critical points of cryptocurrency.

The video has been viewed 2.9 million times on YouTube and was even named “Best Video of 2023” by my favorite top tech blogger, Marques Brownlee.

However, all of this began with criticism of Bitcoin.

Bitcoin: Revolutionary Digital Currency <> Failed Currency

Bitcoin emerged during the 2008 financial crisis as a digital currency that is not controlled by governments or institutions. At that time, it attracted a small group of early adopters who did not trust the traditional financial system.

However, the value of Bitcoin quickly attracted well-known investors, who turned its use from a global trading currency to speculation. For example, well-known investors the Winklevoss twins have been hoarding Bitcoin since the early days, and by 2013, they owned about 1% of the total circulating supply of Bitcoin.

In fact, 34.4% of BTC’s supply is held by whales (entities that own 1000+ BTC). However, this concentration has been slowly decreasing, and the number of small wallets holding small amounts of BTC is increasing.

Nonetheless, the purpose of this article is not to refute all criticisms but to listen to and understand the opinions of critics.

New York University professor Nouriel Roubini, famous for predicting the 2008 US subprime mortgage crisis and subsequent global financial crisis, has criticized the Bitcoin ecosystem as completely corrupt, consisting of seven Cs: Concealed, Corrupt, Crooks, Criminals, Con men, Carnival barkers, and Cult.

Critics of Bitcoin argue that its design has serious flaws. Its deflationary nature comes from its fixed total supply of 21 million, which encourages hoarding instead of trading, thus weakening its function as a global currency.

In addition, the technical limitations of Bitcoin are becoming more and more apparent. It can only process seven transactions per second, which is very slow compared to traditional payment networks like Visa and Mastercard, which can process thousands of transactions per second.

Bitcoin is also quite expensive to use, especially when the BRC-20 craze clogs the blockchain.

Another problem with Bitcoin is its energy-intensive proof-of-work (PoW) consensus model. Critics argue that this model has sparked a race to build more powerful mining equipment to mine more Bitcoin, resulting in a significant amount of energy consumption but no increase in the transaction rate.

Ultimately, Bitcoin will fail as a global currency. Critics are very consistent about this argument.

Other prominent critics:

• Nobel Economics Prize winner Paul Krugman (Blockingul Krugman) believes that Bitcoin is useless, inefficient, and largely a Ponzi scheme. — “The Bitcoin community attracts investors by combining technology with liberalism and using partial cash flow to drive up prices, bringing in more investors.”

• Warren Buffett believes that Bitcoin is “rat poison squared” and says it won’t produce anything.

• U.S. Securities and Exchange Commission Chairman Gary Gensler says that cryptocurrencies are all “vendors, fraudsters, and crooks.”

Nevertheless, Bitcoin has survived for 14 years and has become the major investment asset that can be traded on centralized exchanges.

However, critics believe that this is one of the reasons why Bitcoin’s creator, Satoshi Nakamoto, suddenly disappeared – leaving behind an invention that is far from its original purpose.

Ethereum: The Blockchain 2.0 Revolution <> Leading to a Wave of Scams

The debate about Ethereum continues. Ethereum is a blockchain that allows for programmable smart contracts, leading me (and quite possibly you) to believe that it would provide revolutionary use cases in the crypto world.

However, ironically, the first major use case for Ethereum was to create more crypto tokens, which led to the era of the first token issuance (1C0) craze.

Companies began creating their own tokens, publishing whitepapers explaining their project goals, and then selling these tokens to the public. Some tokens were imitations, some were outright scams, but this didn’t stop people from investing, hoping to sell them for a profit after the token’s value increased.

For example, “Jesus Coin,” which aims to decentralize the power of Jesus and become the currency adopted by all Christians.

The 1C0 frenzy also led to the “alliance” between the crypto world and real-world celebrities. Influential celebrities such as Floyd Mayweather and DJ Khaled promoted Centra Tech’s tokens for rewards, but the project was later found to be a scam.

Even though the CEO wasn’t a real person, they still raised $32 million.

Despite the increase in fraudulent activities, cryptocurrency enthusiasts are still constantly looking for potential new use cases to prove that the value of cryptocurrency will continue to increase.

This is where NFTs come in.

NFT: The New Era of Digital Art <> The New Era of Fraud

NFTs are generally considered a new way for digital artists to monetize their work on the blockchain. In theory, ownership of artwork can be verified through the blockchain.

The most famous example is digital artist Michael Winkelmann (aka Beeple), who sold his collage NFT of his first 5,000 daily works, entitled “Everydays: The First 5000 Days,” for $69.3 million. This auction was one of the largest in the history of digital art.

However, you may not have heard about this part:

The buyer of the artwork NFT was Vignesh Sundaresan, a cryptocurrency entrepreneur who previously co-founded a cryptocurrency investment company called Metapurse with Beeple.

Before spending $69.3 million to purchase the NFT, Metapurse had already spent over $2.2 million to purchase more of Beeple’s NFTs. Then, Metapurse bundled Beeple’s NFTs together, placed them in a virtual museum, and issued a token called B20, which represents partial ownership of the virtual museum if you hold the token.

Critics argue that the $69.3 million price tag was primarily a marketing gimmick to boost the value of the B20 token and manipulate the market.

Indeed, the price of B20 has since dropped by 99.66%, and Metapurse’s Twitter account has been silent.

The NFT market has also been criticized for being highly speculative, with most NFTs essentially just a set of data on the blockchain containing image links that anyone can access. Critics argue that this is not true ownership and that NFTs are primarily used for speculation, driving more funds into the cryptocurrency market. David Gerard summarized the fraud of NFTs in his book “Why Cryptocurrencies Are a Bad Idea” :

• Telling artists they can make a lot of money

• Telling artists they need to hold cryptocurrency as a fee to make money

• Some artists have indeed made money through NFTs

• But you may not be the one who makes money

DeFi: Revolutionizing Traditional Finance or Decentralized Mirage?

In 2020, DeFi Summer arrived and the DeFi sector saw significant growth, but it has been criticized by many for its lack of true decentralization and vulnerabilities. Critics include Charlie Lee, founder of Litecoin (LTC), and the Bank for International Settlements (BIS), among others.

The DeFi Paradox

I remember in 2020, Lee tweeted that he didn’t believe in DeFi. Lee pointed out that DeFi lacks true decentralization, which is a fundamental principle of blockchain, and that more centralization is needed to address the frequent hacks in the DeFi sector.

In fact, DeFi did face some technical limitations in 2020-2021, which made the gap between vision and reality increasingly apparent:

• DeFi faces the problem of high gas fees, which reduces its appeal to low-capital users

• The decentralization level of DeFi is increasingly questionable, as teams control development and updates in all protocols

• More importantly, DeFi protocols and their governance are dominated by a few wealthy “whales,” most of whom are protocol founders

• Everything is over-collateralized, increasing the opportunity cost of capital

• DeFi lags far behind centralized platforms it wants to replace in terms of trading, leverage, and synthetic assets

• The immutability of the blockchain means that errors in user interactions with DeFi protocols are irreversible and costly.

In the three years since DeFi’s emergence, many new protocols have tried to address these issues.

However, what’s interesting is that DeFi, which was initially founded on the mission of “banking the unbanked,” now seems to prioritize pursuing higher yields rather than its original purpose.

The fantasy of decentralization

The international financial institution BIS, which serves central banks around the world, also questioned the level of decentralization in DeFi in its quarterly report for 2021.

The organization believes that complete decentralization in DeFi is a fantasy:

• Due to the inevitable need for centralized governance and the tendency of blockchain consensus mechanisms to concentrate power, DeFi has a “fantasy of decentralization.”

• DeFi’s inherent governance structure is a natural entry point for public policy (in fact, multiple DAOs have already been sued).

• Due to high leverage, liquidity mismatches, inherent interconnectedness, and lack of risk resistance, DeFi is very fragile.

BIS believes that these three aspects make the DeFi ecosystem particularly vulnerable to the impact of financial instability.

Leverage in DeFi: A Double-Edged Sword

Although most DeFi advocates excess collateralization, the use of leverage by DeFi users has raised concerns. (Funds borrowed in one DeFi transaction can be reused as collateral in other transactions.)

This allows investors to establish increasingly large exposures on a certain amount of collateral, which may lead to significant losses during bear markets or market downturns, although it is advantageous in bull markets.

“Cryptocurrency is a cult”

In addition, the cryptocurrency community culture is often likened to a “cult,” with factions such as Bitcoin maximalists and Ethereum enthusiasts espousing their different visions.

Bloomberg’s “The Story of Crypto’s Winter” describes how the cryptocurrency community maintained its enthusiasm during bear markets.

Cryptocurrency researcher Molly White referred to the cryptocurrency community as “predatory,” and the Fame Lady Squad NFT, touted as a “female-led project,” was actually created by three white men.

Jemima Kelly, a columnist for the Financial Times, has repeatedly referred to cryptocurrencies as a “cult”:

In the cryptocurrency community, everything is full of optimism, keeping you in a frenzy.

You are probably very familiar with popular phrases like “Hodl” and “Wagmi” (encouraging cryptocurrency holders to continue holding tokens regardless of any adversity), which may sound a bit strange to outsiders.

Some holders reassure other holders that they have not missed out on the opportunity to get rich by saying “we are still early”.

Those who continue to hold tokens even though they have reason to sell them are praised for having “diamond hands”.

In the cryptocurrency community, criticism is often dismissed as “FUD” (fear, uncertainty, and doubt), or refuted by comments like “you just don’t understand”.

Critics are often outright rejected and told to “enjoy the poverty”.

Scam or not? Depends on the future

Overall, the “anti-crypto movement” has a large following, with cryptocurrency critics on the rise. For example, the Reddit subforum Buttcoin has 159,000 members who gather for the sole purpose of celebrating the ultimate failure of cryptocurrencies. Their motto: “Buttcoin – It’s a scam, and we’re honest about it!”

Interestingly, both cryptocurrency enthusiasts and critics have reached a consensus on issues such as scams, centralization, and pump-and-dump schemes.

Scam or not? The difference lies in the future.

As a supporter of cryptocurrency, I believe we can shape a healthier ecosystem and convince critics that blockchain can indeed bring unique benefits to improving society.

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