The Dark Underbelly of Cryptocurrency Markets

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Photo by Good Free Photos on Unsplash
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‘Value’ denotes financial flows or simple utility. Eg, investors gain value in the form of information from rankings sites

Exchanges

You have two broad sorts of exchanges in this industry: the fiat onramps, and the altcoin casinos (I’ll leave aside p2p exchanges or DEXes for now). The fiat onramps tend to be regulated, comply with KYC/AML, may even surveil trading, and generally behave like full-reserve banks. Coinbase and Gemini are the archetypes. This piece is not about those exchanges — they generally play by the rules and are in the midst of a pivot towards regulator friendliness.

Altcoin developers and team members

Exchanges have a mutualistic relationship with altcoin developers and marketers (“issuers”). Generally speaking, creating an altcoin is not technically challenging. Many, many altcoins over the years were created with forkgen or any of the numerous ERC20 generators (1 2 3). The main challenge for the folks on the altcoin team is not technical, but social. This is euphemistically called community building. This of course refers to broadening the set of buyers for the token or coin, and getting existing buyers to become more fanatical in support of their chosen coin.

Coin Rankings Sites

This is where the rankings sites come in. They occupy a fêted position in the industry. Ostensibly, they perform a useful service to investors and receive little in return aside from ad revenue. But the under-reported reality is more sinister. Rankings sites are squarely at the center of the extractive game that siphons money from retail investors and deposits it into the pockets of altcoin creators and exchange operators.

(open the thread. I present evidence for all of those being “guaranteed return” scams)

The con

So what’s the issue here? The chief problem has to do with the interplay between rankings sites, exchanges, and issuers, especially as it relates to exchange volume. It goes like this:

  1. Exchanges want to advertise themselves as liquid, so issuers will be more amenable to paying listing fees
  2. The “altcoin casino” exchanges are mostly unregulated and unmonitored, and can thus get away with virtually anything
  3. Many exchanges thus engage in wash trading to make their volumes appear greater and improve their perceived liquidity profile
  4. Rankings sites monetize through reflinks and ads, and lack the resources to monitor each exchange, and hence uncritically publish exchange data
  5. Wash trading exchanges gain in the rankings on the rankings sites, successfully marketing themselves
  6. Exchanges profit, rankings sites profit, issuers profit, all at the expense of investors (who may win in the short term)

The future of this market

The problem with the [altcoin casino | altcoin issuer | rankings site] troika is how neatly intertwined all their incentives are, and how poorly-educated users are about each. In many cases, “exchanges” is a misnomer. These things are more akin to the bucket shops of the 20s, the boiler rooms of the 80s, or the unregulated poker sites of the early 2000s, which ran fractional reserves or granted insiders special access to the hole cards of unwitting players.

Partner, Castle Island Ventures. Cofounder, Coinmetrics.io

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