Why are there so many cryptocurrencies? Are they scams? Should I buy some? Can I start my own?
You’ve got questions — the Business Journal did the research to bring you (cautious, qualified) answers.
How many cryptocurrencies are there? CoinLore pegs the number at 2,172, with a total market cap of $243,615,458,640. But that was May 21, and it changes by the minute — a new cryptocurrency can be created any time.
Unregulated: The ugly side
Cryptocurrencies appeal to libertarians, critics of the monetary system, and others who like the idea of currency being decentralized and financial transactions being anonymous.
At the same time, cryptocurrency initial coin offerings have been billed as an easy way for entrepreneurs to fund their startups and launch their ideas — a streamlined alternative to venture capital models. But the flip side of low regulation is high risk. More than 1,000 coins failed in the first eight months of 2018. The ICO market is rife with dead startups, and it’s a magnet for fraudsters.
“Pump and dump scams remain a clear and present danger,” according to Ethereum World News. “Many fraudulent players in the market create business models that have no viable economic merit. Then they attach a worthless token with little or no utility, pumping the value and enticing investors. Once the artificial demand is created, and the price is inflated to the desired level, the operators cash out leaving investors with worthless coins.”
Many ICO-funded startups rely on multi-level marketing tactics, and burn eager investors along the way. According to the Satis Group, 81 percent of ICOs with $50 million of investment end up being scams, and just 8 percent of coins offered via ICO go on to be listed on an exchange.
Why are there so many?
Because creating a cryptocurrency is easy: Anyone who understands the underlying blockchain technology can do it. And because for a long time, no one was shutting down sketchy ICOs; programmers were having a field day while regulation played catch-up.
“They were just easy to do and — early on — a way for people to raise money,” said Vance Brown, CEO of the National Cybersecurity Center. “And some people raised money on basically a white paper — a lot of money on a white paper.
“Some clearly were security offerings, which makes them illegal without the proper exceptions to them,” he added. “And it causes a lot of confusion, and certainly a lot of friction, with so many tokens out there. It really is something to be very wary of.”
Are they all scams?
No. But the industry attracts unscrupulous characters ready to take advantage of excitement, greed, inexperience and lack of regulation.
The Dead Coins register currently lists 1,647 failed coins — including 943 deceased, 28 hacks, 86 parodies and 590 scams. Economist Nouriel Roubini told the Senate Committee on Banking, Housing and Urban Affairs that four out of five ICOs are scams from the start.
“Just history will tell you that it’s very risky,” Brown said. “Where are we … [about] 2,000 cryptocurrencies. So it’s buyer beware. There are a lot of risky cryptocurrency investments out there, and some that have proven fairly fraudulent. So you have to be very, very careful.
“I personally don’t even go beyond the ‘gold standard,’ if you will, of Bitcoin and Ethereum, which are the most well-used and the top two market-cap wise. … For me, I’m comfortable there. But I never want to give financial advice when it comes to cryptocurrencies — other than ‘Be very careful.’”
Can I make my own cryptocurrency?
CoinSwitch offers a guide: coinswitch.co/news/how-to-create-your-own-cryptocurrency-in-15-minutes-learn-step-by-step.
Hacker Noon offers a guide: hackernoon.com/how-to-create-your-own-cryptocurrency-tips-to-get-started-947ba92f79f9.
Companies like Blockchain App Factory offer cryptocurrency development services: blockchainappfactory.com.
And it can be done pretty quickly. But CoinSwitch will tell you: “The tough part actually begins after the initial 15-minute creation part. It does take some time and active pursuit on the part of the maker to get a cryptocurrency to perform better and return good profits.”
Last year saw a record number of hacks, and $1.7 billion in losses from cryptocurrency-related crimes. Coindesk offers a list of precautions for anyone buying cryptocurrency:
• Don’t use a cryptocurrency exchange for long-term storage (they’re hackable).
• If you do, use two-factor authentication, preferably one that is not limited to devices connected to the internet.
• For your hardware wallet, choose a PIN that you can remember, but is secure and hard to guess.
• Keep your 24-word recovery sheet well secured and never enter the phrase on an app or any device connected to the internet.
• Only trust what you can see on your hardware wallet screen. Verify your reception address and payment information on your device.
• Always treat with caution information shown on your computer or smartphone screen.
• Assume software can get compromised at any time.
Is cryptocurrency investing for me?
Brown is a blockchain believer and a cryptocurrency investor, but he urges caution.
“Be very careful. Know what you’re doing. You’ve seen Ethereum went from like $1,400 down to under $100 — and so it’s not for the faint of heart,” he said. “It’s got to be one of those things that if people invest in, they do it with their highest-risk investment money. It is still very, very volatile, and you’ve got to have the temperament to ride the volatility. … It’s certainly not for everyone.”
Despite the roller coasters, Brown says cryptocurrencies are here to stay.
“They’re the first and one of the classic applications of blockchain, and they’re still here,” he said. “It’s a good way and a very secure way — if you’re familiar with it — to do financial transactions. So I don’t think cryptocurrencies are going away. … I guess as people get more comfortable with them, as the user interfaces get easier, it’ll gain ground — but it’s just hard to predict. I think it’s a little intimidating, and rightfully so, for doing it today. But I think it’ll only get easier and then there’ll be more use … .”
For now, TechCrunch gives a blunt bottom line: “Invest only what you can afford to lose and expect any token you invest in to fail. Ultimately, the best you can hope for is to be pleasantly surprised when it doesn’t. Otherwise, you’re in for a world of disappointment.”