John McAfee might be one of the most polarizing individuals in crypto. He’s known for his outlandish antics, an ongoing feud with the SEC, crypto-of-the-day tweets which sent waves through markets and extremely ballsy bitcoin price predictions. Oh, and he created that anti-virus thing, too.
Love him or hate him, McAfee’s tale is a wild one. From yoga retreats to Belizean cartels and everything in between, he’s definitely made a name for himself.
And he knows how to use it, but he’s not the only one.
Pump and dump
Leveraging his fortune, fame and crypto-influencer status, McAfee began his ‘coin of the day’ campaign at the height of the ICO boom, charging companies up to $105,000 for a single tweet. And it actually worked. Some cryptocurrencies saw their price soar by up to 350 percent shortly following McAfee’s Twitter posts.
This sort of promotion is a new trick out of the old book of penny stock pump and dumps. One can’t help but be at least slightly impressed of the ability to single handedly move markets with 140 characters, and many other celebrities are guilty, as well.
These pumps, whether planned or in some cases an innocent mistake, leave a lot of investors holding an otherwise worthless asset, or at least an extremely overpriced one.
Though he’s adamantly against cryptocurrencies, Jordan Belfort, “the Wolf of Wall Street” made his fortune from these very schemes.
Outrageous promotions, boiler room cold calling and sheer hype sold investors a pipe dream, moved markets and made Belfort rich in the process. But it eventually caught up with him.
But what about McAfee?
Recently, the Wolf of the Cryptosphere tweeted that he would be discontinuing his “coin of the day” promotions, citing growing SEC threats.
The rules are fairly straightforward for securities promoters - simply disclose that it is a paid promotion, how much is being paid and never say “buy” or “sell”. Sure, maybe it’s slightly more complicated than that, but interested parties can read more about that here.
Down, but not out, McAfee went on to say that he would be embarking on a mission to create guidelines for ICOs to bypass these regulations legally.
As loud as McAfee is, however, he is only one piece of a bigger puzzle.
Just like in the world of stocks, there is a lot happening under the radar. From exchange listings and ICO ratings sites to sponsored content and publications owned by major stakeholders in various cryptos, an entirely new wave of crypto-capitalism is taking hold.
Exchanges are where the real money is made for crypto projects. If you’re not listed, you’re not going anywhere - liquidity is everything - and exchanges are well aware of this fact.
While a company looking to list on Nasdaq might set aside at least $1 million for the opportunity, these fees are usually distributed through compliance experts, accountants and lawyers, with only $80,000 going to the actual exchange. ICOs, on the other hand, can pay up to $3 million directly to the exchange just to access would-be investors.
Michael Jackson, a partner at venture capital firm Mangrove Partners, explains: "What we see on the crypto side is people who have raised $100 million and the exchanges are saying, 'why the hell would I not get $1 million of that?' It's pure capitalism, is probably the best way of expressing it."
But it doesn’t stop there…
ICO listings and rating sites
There are listing and ratings sites that offer fee-free services, but it’s reasonable to say that a significant amount of these organization have realized the sway they hold and charge a pretty penny just to list or review a project.
One of the largest rating sites, ICO Bench, for example, charges a mere 40 BTC for a top tier promotional campaign, review and listing. They also have budget packages for as low as 0.5 BTC, but generally speaking, these reviews aren’t quite as convincing as those of ICOs willing to dish out a few extra coin for a more robust and flattering review.
To make matters worse, becoming an “expert” reviewer here can be as simple as a 2 BTC transfer. A small investment for all the potential deals one can make with that esteemed position (even if it is technically against ICO Bench’s TOS).
This palm greasing isn’t exclusive to ratings sites, either - sometimes these paid services even dip into community efforts.
Some PR companies offer social media packages, creating hundreds of fake accounts on forums such as Bitcointalk in order to promote ICOs.
Even freelance sites like Fivvr are full of eager marketers prepared to take to the forums, rating sites and Twitter to lend a helping hand for a quick buck.
And it’s not as though startups themselves are the victims of this pay-to-play system. Most ‘successful’ ICOs have already budgeted these expenses. Some even set aside enough tokens to offer bounties in order to persuade eager participants to positively review their project.
Nothing really compares to those at the top, however.
The big picture
In the crypto-world, there are likely a few websites we’ve all visited. They’re some of the biggest news sites, exchanges and blockchain projects in the entire space. And a good portion of them have received major investments from a single group, Digital Currency Group.
DCG’s portfolio is a bit sobering, with significant stakes in some of the industry’s biggest organizations, including Ripple, Coinbase, Coindesk, Blockstream, Kraken, Shapeshift and more.
And its growing influence on the markets cannot be ignored.
At the center of one particular controversy was a series of tweets made by the group’s head honcho, Barry Silbert, focusing on ethereum classic (ETC).
Silbert predicted a price hike of the dying cryptocurrency, even giving an investor a special recommendation to close a short position. Within days, the price of ETC rose by over 25 percent.
Though much milder than other pump schemes, the implications are far more significant simply due to Silbert and DCG’s tremendous reach within the space.
Trace Schmeltz, a partner at the Barnes & Thornburg law firm, noted: “If you have a fund that is issuing a security and the value of the security rises and falls with the price of a cryptocurrency and you are telling people to close their shorts in that cryptocurrency, that is a problem.”
Another problem arises in the sheer number of favorable articles published on CoinDesk, a subsidiary of DCG, for cryptos held by the company.
CoinDesk has a well-known voice in the crypto-space, but in many cases, the publication offers only a one-sentence disclosure, or no disclosure at all when running stories about companies or cryptocurrencies in which DCG holds significant stake.
Jeffrey Wilcke of the Ethereum Foundation noted in 2017: "DCG operates funds that can have a market-moving impact on the digital currency industry while simultaneously operating one of the largest media organizations in the industry, which can be used to exploit investors."
To make matters more complicated, CME, the world’s largest futures exchange markets, is an investor in DCG which controls Coinbase and Kraken, two exchanges partially responsible for determining CME’s bitcoin futures pricing.
These organizations, all working under the same umbrella, have tacked on billions to certain coin’s market caps, sealed major deals with some of the largest financial institutions on the planet, and actively blurred the lines between the crypto space and the very industry Nakamoto’s whitepaper spoke out against.
While John McAfee made headlines for his shameless pump and dump schemes, there could potentially be a far bigger problem brewing under the surface of the markets, threatening the very decentralization that is so precious in the space.
Image from PIxabay.
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Texan living in Mexico, new tech enthusiast, decentralization fan, cryptocurrency enthusiast, geopolitical junkie, digi-explorer, and music lover. I believe that we are on the cusp of a new frontier in how we will view the government, money and energy. Let’s be a part of it, together.