Keeping Up With The Cryptos

Here’s part 1 of 3 articles taken from a fantastic write-up on emerging challenges with Cryptocurrencies, blockchain and distributed ledger technologies from a Federal Receiver’s perspective.

  • Download the full article here.
  • Get the full NAFER Newsletter where this article appeared here.

Keeping Up With The Cryptos, Cryptocurrencies Likely The Best Fraud Show in 2018 (part 1)

by S. Gregory Hays1

Charles Ponzi, the notorious fraudster, was always the showman and loved the spotlight. In his last interview before his death in 1949, he told a reporter:

Even if they never got anything for it, it was cheap at that price. Without malice aforethought, I had given them the best show that was ever staged in their territory since the landing of the Pilgrims! It was easily worth fifteen million bucks to watch me put the thing over.

With last year’s dramatic price increases and this year’s decline coupled with rampant fraud, the cryptocurrency market may be the “best fraud show” to watch in 2018. When I started drafting this article in early January, the price of Bitcoin was around $16,000 and the price at the time of publication on 2/12/18 is approximately $9,000, a 50% decline this year. The total market cap of all cryptocurrencies fluctuated by almost $560 billion between January 1st and February 12th. The cryptocurrency story changes every day with new developments and rumors from around the world. Given the fraud and speculation, it is important for receivers to understand cryptocurrencies as regulators introduce new regulations and pursue the fraudsters and tax cheaters.

A few interesting and alarming cryptocurrency data points as of February 12, 2018 are summarized below. These figures, which change daily, are based on currently available sources referenced herein to provide a point of reference to provide an overview of the market:


  • 1,526 cryptocurrencies (coins & tokens)
  • 170 new initial coin offerings this year
  • $434 billion market cap for all cryptocurrencies
  • $500 billion increase in market cap in 2017
  • 5,000 cryptocurrency investment frauds3
  • 1 SEC receiver appointed


  • $150 billion market cap
  • 40% of Bitcoins are owned by 1,000 people4
  • 17% to 23% estimate of all Bitcoins mined that have been lost5
  • 70% of Bitcoin trading is in China
  • 30% of Koreans own Bitcoins6
  • 98% of trading addresses have less than $100 invested7
  • 58% of purchasers are under age 348
  • 20% of Bitcoin purchases are with debt9
  • 802 total investors in the US have reported Bitcoin income to the IRS
  • $172 million in hacks at prices at the time of theft10
  • 1 hour to process a Bitcoin transaction11
  • $28 transaction fee when most accounts have less than $10012

The Speculative Cryptocurrency Market Is a Sideshow

Many industry experts and speculators asserted at the beginning of the year that Bitcoin would continue its dramatic climb and would double or triple in price this year. Other investors saw the bubble and shorted Bitcoin in anticipation of a crash and profited with the 43% YTD decline. Many retail investors are fascinated by Bitcoin but it appears to others as merely wild gambling. On January 10, Warren Buffett said: “I can say almost with certainty that they will come to a bad ending.”13 According to an early January analysis of the transactions on the CBOE Exchange, most retail investors were long, while hedge fund money was short.14

A comparison to gold prices helps put this speculation into perspective. In mid-December when Bitcoin was at $20,000, one Bitcoin had almost the same value as a pound of real gold. At the February 12th price of $9,000, a Bitcoin is worth about 6.8 ounces of real gold. A recent article suggested there is a potential negative correlation between investors’ interest toward gold and cryptocurrencies.15 Other articles suggest investors are leaving gold for Bitcoins.16 At the first of the year, the market cap of cryptocurrencies approached $800 billion and there is only approximately $200 billion in real gold at Fort Knox.17 The speculative market is being driven by investor factors that have been described in various articles as including:

  1. Fear of Missing Out (“FOMO”), which occurs when new investors hear stories of spectacular gains and new millionaires and rush to be part of the story to avoid being left behind.
  2. Hold on for Dear Life (“HODL”), which is how many articles explain the investment strategy of just hoping for the best during volatile price swings. There is a great deal of HODL discussion with the currently declining market.
  3. Fear, Uncertainty and Doubt (“FUD”), which refers to the spread- ing of false or misleading information to foes of cryptocurrency.18

Categories of Cryptocurrencies: Altcoins vs Tokens

There are two categories of cryptocurrencies which are commonly called altcoins and tokens. Altcoins are new cryptocurrencies launched after the success of Bitcoin and generally project themselves as better substitutes or have a new twist to Bitcoin. They are often based on Bitcoin’s open-sourced protocol with changes to the original code, but the common characteristic is they have their own independent blockchain. Tokens on the other hand represent a particular asset or utility that resides on top of another blockchain that facilitates a decentralized application. There are currently about 300 more altcoins than tokens, and all are listed on as cryptocurrencies.

The marketing and monetization of altcoins or token is in a public offering like an IPO is known in the industry as an Initial Coin Offering or (“ICO”). Analyses have shown that the lowest priced ICO’s produced the highest returns in 2017, and this demonstrates the pure speculation with investors purchasing the least expensive altcoins and tokens. One recent altcoin that received a lot of media attention is Ripple which trades under symbol XRP. The coin surged from 24 cents in December to a high of $3.86 on January 4thand is trading at $1.00 on 2/12/18. The sudden surge is profiled on and the article summarizes: “Ripple isn’t the first asset to be shilled to the moon and back, and it certainly won’t be the last. When the cryptocurrency history books are written, ripple will go down as a textbook case of mass hysteria.”19

Other examples of altcoins are Bitcoin God that trades under the symbol “GOD”20 and Fantasy Market which is a coin referred to as “Bitcoin for Porn.” The Fantasy Market owner disappeared recently and apparently stole investors’ money.21 GOD was launched on January 12th and initially doubled in price and is now 67% below the offering price. There are many unusual investment options among the 1,526 cryptocurrencies.

The “Blockchain” Is the Real Show

Bitcoins and other cryptocurrencies are created with “blockchain” technology. While much of the cryptocurrency news revolves around currency speculation, most coverage ignores the new technology underlying the offerings. In simplest terms, blockchain is a digital ledger of records that are linked, secured and shared across many computer networks. Many experts claim the blockchain technology has the potential to be a game-changing and disruptive force. Many major companies are exploring how to use the distributed ledger technology and smart contracts in their businesses, but that does not justify the irrational trading in new start-ups.

A real question is why there are 1,526 new companies when major technology companies appear to be on the sidelines. Consider that Facebook, Amazon, Google, or Apple could use the blockchain technology in a private blockchain or even start their own currency. One recent article discussed this and stated: “if blockchain did in fact have the technical merits that people claim it does, it’s unlikely that the technologists at these [major tech] companies would seemingly care so little about it…given that companies like Facebook, Amazon, Google and Apple are not doing much with blockchain, even in the face of ever-increasing frenzy surrounding this technology, one could not be blamed for doubting blockchain’s potential as a game-changing paradigm.”22

Other major tech companies are implementing the use of blockchain technology. One example is IBM which is running 35 blockchains they simply refer to as “active networks” where there are “multiple institutions actively exchanging things of value thorough a distributed ledger.”23 The implementation of blockchain technology by major corporations will be the important story to focus on this year.

How are Bitcoins Mined and Who Is Mining?

While the details of the complicated process of mining Bitcoins is beyond the scope of this article, Bitcoin mining is the computing process that verifies transactions and adds them to the public ledger, called the blockchain, to earn a reward of new bitcoin. Mining involves compiling all recent transactions and then solving a difficult puzzle quickly. The first miner to complete the task gets a reward for the transactions and the new Bitcoin. More than five years ago, mining was a rather simple process that could be done on a laptop computer, but it has grown to be a complicated and expensive process that requires extensive computer power and a tremendous amount of energy. The cost in electricity to mine Bitcoins in the US is estimated to be between $3,000 and $6,000 in energy costs per Bitcoin.24 There are many interesting videos on mining on the web that show the largest miners and the thousands of computers used in the mining. Recently thousands of UK government computers were hijacked and the processing power was stolen to mine cryptocurrency in a process that has become known as “cryptojacking”.

There are currently 16.8 million Bitcoins that have been mined out of a maximum of 21 million. According to research from Chainalysis, between 2.8 and 3.8 million Bitcoins are lost forever, which is 17% to 23% of the total coins mined. At today’s prices, that is in the $25 to $34 billion range. This does not include stolen coins as they are still in circulation. It does include 1 million Bitcoin that the founder of Bitcoin mined in 2009 and all the coins that have disappeared or have been lost. In the early years of Bitcoin (2009 to 2013), the coins had little value and many min- ers did not safeguard the private keys to their coins, and have now lost their ability to recover the Bitcoins.25

Who Is Buying Bitcoins?

The market is being fueled by millions of young males across the globe using credit cards to finance the investment. Very few people over age 40 participate in the speculation and gambling in digital gold. A recent article on regarding a 2018 survey of investors stated: “A supermajority of the holders are male, under 34 years of age (58%), white. One analyst phrased the results as basically admitting ten percent of millennials own Bitcoin while older Americans break one percent.”26 The vast majority of millennial investors were only kids during the dotcom bust and were college-age during the Great Recession and have not experienced a bubble collapse. A recent poll by LendEDU, a student loan refinance company, indicates that 20% of all Bitcoin buyers are using credit cards to fund investments. This study was based on an online poll. The study said that 90% of the Bitcoin borrowers planned to pay off the debt by selling Bitcoins.27 With the recent price declines, many recent investors may have had a rude awakening with high credit card balances.

Much of the trading volume is coming from China, Russia and South Korea. It is reported that in South Korea one third of all workers have purchased Bitcoins.28 In Russia, more than 56% of the population knows about Bitcoin, and it is the most popular word in Russian social media.29 David Stockman, former budget director for Ronald Reagan, recently summed up the investor class by stating:

It’s basically a class of really stupid speculators who have convinced themselves that trees grow to the sky. It will burn out in a spectacular crash. All of these latter-day speculators will have their hands burned to a crisp, and they will learn the proper lesson.30

I’ll be posting parts 2 and 3 in upcoming weeks.


1 Mr. Hays is President of NAFER and Managing Principal of Hays Financial Consulting, LLC in Atlanta, GA. He has over 28 years of experience in unwinding investment fraud cases including many appointments as a federal equity receiver and as a bankruptcy trustee.
2 Charles Ponzi and ‘The Best Show Since the Landing of the Pilgrims’, New England Historical Society, available at ponzi-best-show-since-landing-pilgrims/ (emphasis added).
3 See
4 See Olga Kharif, The Bitcoin Whales: 1,000 People Who Own 40 Percent of the Market, Bloomberg (December 8, 2017), available at
5 See infra at footnote 25.
6 See infra at footnote 28.
7 See BitInfoCharts / Wealth Distribution, available at (many investors hold multiple addresses to avoid holding coins in one wallet).
8 See infra at footnote 26.
9 See infra at footnote 27.
10 See The Changing Nature of Cryptocrime, Chainalysis (Jan. 2018), available at
11 See Steve Buchko, How long do Bitcoin Transactions take?, Cointalkcentral (Dec. 12, 2017), available at
12 See Matthew Frankel, 7 Things That Could Make Bitcoin Crash to $1,000 or Less, The Motley Fool (Dec. 24, 2017), available at bitcoin-crash-to-1000-or.aspx.
13 Berkeley Lovelace, Jr. Buffett on Cryptocurrencies: ‘I can Say Almost with Certainty that They Will Come to a Bad Ending’, CNBC (Jan. 10, 2018), available at
14 See Rakesh Sharma, Retail Investors are Bullish On Bitcoin Futures, Investopedia (Jan. 8, 2018), available at https://www.investopedia. com/news/retail-investors-are-bullish-bitcoin-futures/.
15 See Helen Partz, Gold Sales Spike During Crypto Market Crash, Highlighting Inverse Correlation, Cointelegraph (January 19, 2018), available at lighting-inverse-correlation.
16 See Jon Buck, Investors Dumping Gold for Bitcoin? Cointelegraph (Dec. 11, 2017), available at
17 There are 147.3 million ounces of gold in Fort Knox, KY according to the US Mint. The price per ounce on 2/12/18 is $1,320.
18 See Marc Hochstein, Just Because It’s Bad for Your Coin Doesn’t Mean Its FUD, CoinDesk (Jan. 23, 2018), available at mean-fud/.
19 See Kai Sedgwick, The Rise and fall of Ripple is a Case Study in Mass Hysteria, Bitcoin. com (Jan. 20, 2018), available at
20 Bitcoin God claims to be the first charity platform built on a blockchain. The website for Bitcoin God is available at Trading is listed on under the “Bitcoin God”.
21 See Jasper Hamill, Boss of ‘Bitcoin for Porn’ Cryptocurrency Fantasy Market Accused of ‘Disappearing’ With Investor’s Money, available at money-7213986/?ito=cbshare.
22 Gaurav Mokhasi, Why Aren’t Companies Like Facebook, Amazon, And Google Doing More With Blockchain Technology? Forbes, Quora (Dec. 20, 2017), available at
23 See Billy Duberstein, My Interview with IBM’s Vice President of Blockchain Technologies, Jerry Cuomo, The Motley Fool (Jan. 7, 2018), available at 2018/01/07/my-interview-ibms-vice- president-of-blockchain.aspx/.
24 See Ryan Vlastelica, In One Chart, Here’s How Much it Costs to Mine Bitcoin in Your State, Market Watch (Dec. 18, 2017), available at bitcoin-in-your-state-2017-12-15?mg=prod/ accounts-mw.
25 See Jeff John Roberts and Nicholas Rapp, Exclusive: Nearly 4 million Bitcoins Lost Forever, New Study Says, Fortune (Nov. 25, 2017), available at http://fortune. com/2017/11/25/lost-bitcoins/.
26 C. Edward Kelso, Survey: 60% of Americans Have Heard of Bitcoin, 5% Own, Bitcoin. com (Jan 24, 2018), available at https://news. heard-of-bitcoin-5-own/.
27 See David Z. Morris, Way Too Many People Are Using Credit Cards to Buy Bitcoin, Fortune (Jan. 13, 2018), available at http://fortune. com/2018/01/13/credit-cards-to-buy-bitcoin/.
28 See Hailey Jo, In a Country Known for Its “Bitcoin Zombies,” One-Third of Workers are Crypto Investors,” Quartz Media (Dec. 28, 2017), available at
29 Lubomir Tassev, More than Half of Russians Know About Bitcoin Now, (Jan. 21, 2018), available at more-than-half-of-russians-know-about- bitcoin-now/.
30 Stephanie Landsman, Bitcoin Fever to Burn Out in ‘Spectacular Crash,’ David Stockman Warned, (Jan. 1, 2018), available at man-warned.html (emphasis added).