Why crypto and NFTs are massive scams

I’m just going to say it out loud, at the top, and wait for all the abuse to come in – Crypto-currency and NFTs are massive scams.

Now – in fairness to their creators, that was not the intention. The idea behind them was solid. Once we properly work out what the hell to do with it, the blockchain will be excellent in terms of transparency and security.

However, cryptocurrency and the associated developments seem to be designed to take money from foolish people — and put it in the pockets of smart people. The number of times I hear about people losing significant sums by having their accounts hacked into, or their crypto-wallets stolen, or not picking the market correctly, is simply astounding.

What is cryptocurrency?

I used Investopedia to find this definition.

A cryptocurrency is a digital or virtual currency that is secured by cryptography, which makes it nearly impossible to counterfeit or double-spend. Many cryptocurrencies are decentralized networks based on blockchain technology—a distributed ledger enforced by a disparate network of computers. A defining feature of cryptocurrencies is that they are generally not issued by any central authority, rendering them theoretically immune to government interference or manipulation.

Cryptocurrency, JAKE FRANKENFIELD, Updated December 20, 2021

Note the use of the word, currency. It was intended to be used to exchange goods and services. It was not intended as an investment product. I’m not suggesting that currency can not be traded – the foreign exchange market exists for a reason.

Despite the best efforts of the foreign exchange traders that keep following me on Instagram for some godforsaken reason (they seem to be the new crypto traders), foreign exchange trading as an income is not simple. I’ve not dabbled in it, but I know enough from my economics and finance classes to know that there are few if any, arbitrage opportunities in the short term. You need to take a medium to long-term positions to make any money.

What positive opportunities could arise from cryptocurrencies?

One thing that people argue about when it comes to cryptocurrency is its decentralized nature. Initially, I thought its decentralized nature was a problem because no central bank manages the volume of currency, remittances, or following the trail of funds. I still believe in the importance of following the trail of funds for security purposes, but there should be some limits on that.

However, given that I regularly send money to my accounts in Australia, I am often paying close to 4% in transaction fees for that “pleasure.” It might not seem like much, but it could be hundreds, if not thousands, of dollars over a year. I’ve had a few people recommend cryptocurrency for that purpose. While I am still wary of such a thing, I have certainly heard good things about Cardano (ADA) and Algorand (ALGO) from friends.

The other thing that I think that cryptocurrencies could do really well is focusing on the security and transparency side of things. For example, if political parties had to spend all their money through a specific coin and receive donations through a different coin, then levels of electoral transparency could theoretically increase dramatically. In November, Business Insider reported on how political parties in the US accept bitcoins and altcoins. However, this seems to be more of a benefit of the blockchain rather than cryptocurrency.

What is a non-fungible token (NFT)?

I found this definition to be excellent.

Unlike in selling physical assets, ownership rights of digital works acquired in an NFT sale are not outright. Buying an NFT does not mean you own the digital or physical assets it represents unless specified. Remember, NFT is a blockchain representation showing the existence of an asset and not the actual asset.

It can be explained better as a certificate of authenticity that a digital record of an asset belongs to you.

This is similar to owning a limited edition print of a famous image with copyright permission reserved for the owner.

In the photography world, you can also buy the rights to use photography from a famous photographer or buy the right to use images/photography from websites such as Adobe Stock or Shutterstock.

I bought an NFT. What exactly do I own? Henrique Centieiro, September 20, 2021

The second sentence of that definition was critical for me.

… a certificate of authenticity that a digital record of an asset belongs to you.

So, when someone says that they own an NFT… they do not own the image. At best, they own the receipt that says that this specific version of this specific image (I’m using an image as an example here) belongs to them.

So when people created a nearly 20 terabyte torrent of every NFT available through the Ethereum and Solana blockchains, they were proving a point. Digital art does not work in the same way. While I accept the argument that original art still has value, the digital ecosystem has changed that.

In researching this piece, I was astounded to find that one company, Particle, will fractionalize traditional art by digitizing it and selling it in fragments. They start with Banksy‘s “Love Is In The Air” and fractionalize it into ten thousand individual NFTs.

Now, I don’t know about anyone else, but I’d be pretty pissed off if I wound up with an NFT of just white or black — particularly if I’d spent about US$1500 on it. Sure, you can go and look at the original at the Particle Foundation with your collector card and say, “Look, I own that digital fragment right there!”

Besides, what is to stop someone from breaking into your digital wallet and stealing it from you? Just like the OpenSea community had problems with late in 2020? Nothing, of course. Naturally, there is nothing to stop someone from breaking into your house to take art off your walls or take your wallet out of your pockets in the street, but the chances are you will spot that a bit faster.

Further to that, I put that picture from the New York Post up without needing any tokens or the like. It was just there. It’s the same for all the NFTs – they can still be shared.

The fact that this had led to NFT racehorses is genuinely scary, along with the fact that people are investing in them.

Where to from here?

The bottle is now open, and it’s tough to put it back.

Ultimately, it’s all about how to move forward in a way that protects people. In my view, the more people remember that cryptocurrencies are for spending and not for investing, the sooner this Tulip Mania-esque bubble will burst, and there will be some sort of normality as a result. Hopefully, research into the blockchain will continue, and positive uses for government and industry will be found.

Until then – stay safe and stay smart.

What do you think? Leave your thoughts in the comments below!