Crypto Kleptos: Scams and Crookery on the BlockChain

Not all coins are currencies

I’m old. Or I’m old by some measures. I finally understand the crookery behind most cryptocurrencies. While I never say 'never' or 'always', I can say that while not every token or coin is a scam, you would be best served to approach every single one as such until you use this simple logic to determine otherwise. I'm giving you the equation to unlock that profit potential: to discriminate, find, and invest in the winners. The equation is ALWAYS right. You'll see why.

You first need to understand Blockchain in its most simplistic terms.

Think of blockchain like a car. The car represents the totality of your investment. However, you need a key to use the car. In Crypto, you are buying a key and thinking you bought the car that goes with it. The key is virtually valueless. A keys value is no more than the cost to make a new one. The key is not unique, but it is necessary. You now understand the Blockchain. Really.

You need to understand coins and tokens. The distinction is merely their underlying technology. They both do the same thing so we will refer to both as tokens, because for our purposes, TOKEN is what they truly are.

First, Tokens are not physical. They are nothing more than a string of code, or a digital check in a ledger. When you buy a token via ICO or exchange you are merely spawning a new arbitrary piece of code (Your address.) and sending that pre-made arbitrary code string to it.

Following so far? With tokens being the same thing as a key to a car you can see that any value resides in the company, not in the token. And like a car key needed to start the car, the tokens are used to transact on the blockchain and can be used and reused millions of times.

What is the Blockchain?

Unlike the internet that is a thing, blockchain is the term for a technology (Unless referring to a specific blockchain, ie: Bitcoin's Blockchain is a thing.) For our discourse, how it works is unimportant. It’s only necessary that you understand that every company that starts a Blockchain business is creating their own blockchain. They are not sharing use like on the internet. So when creating a blockchain business, any logical developer would bake in safeguards to protect it. The tokens are just security like a car key, but a whole lot safer.

Therefore, starting a new Blockchain company requires the creation of a number of tokens so that you can transact on your blockchain. When you are done, just like the car key, you can reuse it over and over. (Theoretically, and in MOST cases.)

Everyone still with me? By now you should be asking, "If tokens are reusable why do so many Block Chain companies issue so many?" Therein lies the crookery. While there ARE different company types and different token uses; unless the token was created to be a currency: most companies can exist forever on a few thousand tokens without a need for any more. I will get to the currencies and value tokens later.

BBC (Before Blockchain)

When we started companies, like everyone else; we first determined what we would do or make. Then we figured out how to make it and what it would cost. We compared that cost estimate data to the known market data and determined if we had a viable company. Of course, any venture must be funded. You don't merely wish a company into being, or at least you didn’t use to. To start a company you either used your own money, you borrowed it from a bank or venture capitalists, or employed some combination of all of the above. Those were the choices. You either had debt or gave up ownership to get started. Now comes Crypto and entirely new funding methods are born, ones that steal money from unsuspecting investors.

In our day, and still for every non-blockchain company; investors give you money and you give them stock. A stock is a legal document that is protected by laws. It limits the behavior of the company officers and founders and protects your investment. Most people don’t know for instance that if your company wants to borrow money at some point, every bank will require a vote of the stockholders as evidence that they are aware of not merely that you are borrowing, but also what you intend to do with the money. Keep in mind that none of this is true for blockchain companies and crypto.

We all have seen companies go public at $5 and quickly rise to $500. Their IPO (initial public offering) price was reflective of true value on that day. The $500 was the truth 4-years later. They earned their way to $500 a share through hard work and success evidenced thru financial reporting and tax returns.

There are basically two types of ownership for normal companies, Closely Held and Public. Public company’s stocks are traded on exchanges. With closely held companies, the stock remains available only to the founders or their chosen buyers. Blockchain companies are a hybrid, as far as I know, all are closely held, but their coin/tokens are publicly traded. This is a recipe for crookery. This happened with no regulations or oversight by government, and no protections for investors. If you are keeping score you should be starting to squirm in your chair.

“Shouldn’t Crypto be the same you should ask?” Yes, it should, but it is not.

Unlike IPOs, which are closely regulated, ICOs are the wild west. In the example above my stock was worth $10.00 per share. Now let's look at a Blockchain Startup. You should know that anyone can copy a white paper and for $250 they can start a Block chain company and ICO tokens. If we assume the founders are starting a legit company, they will go thru the same estimation process we all go thru. They will determine how much capital it will take to build out the infrastructure, hardware software, etc. How much it will take to pay themselves and any help until the company cash flow begins. They will write the code for their product and know exactly how many tokens it will take to run the company.

Here’s one of the little truths. Let’s say they determine they need $100,000 to get up and running. They need 1000 coins to operate. They need to keep 1000 but they also need to raise $100,000. They could very well sell 1000 coins for $100 each, or 10,000 for $10 each. People are generally stupid, but for those prices most would want to see financials, sales estimates, market share estimates, profit and loss estimates before plunking down their hard earned cash for a token that carries no legal rights or remedies whatsoever. The founders cannot issue just 1,000,000 coins, no one would take them seriously.

If you are going to sell coins today you have to create enough to get listed on an exchange so people can trade your coins. So you issue 100 million at a penny or a billion at $.001. Our intrepid entrepreneurs, decide to issue 100 million tokens at a penny for a cool million dollars. Investors don’t ask questions at a penny. Nope, most will buy $100 worth. Some will buy $20 or even $1000 worth. The owners will carve out the thousand they need to run the company. Then they will do an ICO in three phases. If all gives well, in a 60-day Phase they will sell 20 million at the penny. ($200,000) Investors love this 3 Phase process. because there is profit for the investor built into each phase. In the 30-day Phase II they will double the ICO price and sell another 40 Million @ $.02 for $800,000 and in Phase three they will sell another 10 million for $.03 ea or $300,000. They will keep 10-million for themselves to sell into the market when their token is listed and the price doubles. (Or More!)

What have you just purchased?

You think if the company becomes the next Amazon you will be rich right? Read the white paper. You did not buy stock when you bought tokens. You just funded a start up and also ensured that the founders own 100% of their stock with no debt. So if they ever do become the next Amazon they can go to Wall Street and sell their stock for billions and do you know what you get? Laughed at.

Now there are value tokens where the founders tell you they are going to return a 20% portion of their profits from each transaction fee back to the coin holders by sending you free coin. (Staking, Self-Mining, Etc.) OK, so the token ICO'd for $.05 You have 1000 you bought at $.15 or $150 worth. The company’s transaction fee is $1. They do 100 million transactions a year. (the truth is there are 1000 data storage companies now and 100 million is unlikely. But even at that their profit on the $1 transaction is $.10. They give 100,000,000 trans x 2 cents / 1 billion coins and you get $.002 for each coin you own. What about miners? Well, not all coins have miners, and even if they do, nodes most likely exist that are company run to recycle their tokens and 'make sure' transaction speed is snappy, all the while filling the coffers.

...Then you have the coins that were intended to be currencies.

Most of the ICO tokens I have been discussing are scams. The coins have no utility. They have no value unto themselves. You cannot use them to transact with the company that issued them. In case you think you just invested in the next Bitcoin, think again. Lowes, Amazon, OutBack are never going to accept some dilettante crypto that is nothing more than a money grab bi-product of a startup financing scam engineered to make the owners rich. (The Cayman Islands are home to thousands of ICO owners... no, seriously.)

Imagine this, for a large portion of these Cryptos, there is a better than even chance the founders had no intention of ever starting a company. It’s unlikely you would know if they did or did not because there is no legal requirement that they report financials. The only thing these founders are going to do is create the next Blockchain fantasy company and do ICO after ICO until the government/s steps in.

You are seeing volatility in the crypto market because people are beginning to understand that these ICOs are misty junk and beautiful wishes. The market is unstable because it is not built on value. At least half of today's market cap depends completely on you selling your coin to the next guy in the pyramid. You do not want to be the last person standing when the music stops.

Stay with the coins that were created to be currency. Their entire foundation and infrastructure are built around consumer utility. Bitcoin, Ethereum, Lite Coin and the anonymous coins like Monero, Zcash, Decred are the only real value I see right now. Yes they are volatile, but that volitily is coming from they instability of the junk, not thru any direct issues with them. Try to remember, crypto is about coin count, not value. The market and values will stabilize. The junk will fall. The gold will rise and when it does: coin count will be king.

Until Crypto 2.0 happens stay with the blue chips.

Great things are around the corner. Some of which we can talk about. Have you ever wondered what crypto might look like in a few years? There are a few rules in business. First in best in. If you are the first currencies, you are most likely the ones with such a head start that you will be the best currencies. If you were the first doc storage or music distribution, the odds are the next 200 companies doing the same thing will fail. And, very soon you are going to see the marriage of crypto to established business practice. You will see companies commit legally to the coin holders, just as they would for stock. You will see companies evolve where their coins are not merely a funding source but are as big a part of their model as the service side.

At some point you will see a payment processing company that will handle transactions in almost any crypto and pay for your goods anywhere in the world. You will see consolidation of markets into digital delivery. I think you will see the delivery of the US mail go to blockchain printable/signable docs very soon. Companies with sell currency that they will then accept back for good and services, guaranteeing value. Companies will manage the value of their coins like they manage inventory. All of this is coming, and sooner than you might think. We just need people to stop enabling the Crypto Kleptos.

Buyer Beware

Think of the coin as a token you buy and use in a game arcade. You purchase tokens when you enter and you can play all the games in the arcade. When the Arcade runs low on tokens they send someone out to empty the machines and replenish (recycle) the token booth’s supply. This is how Crypto works. Each blockchain company has a huge puzzle. The coin is just the one piece of the puzzle that completes the picture. That piece can be used over and over, and the prices slowly increase over time; resulting in a 'successful' crypto. The simple answers are not many and not much. In most cases a Crypto company could run forever on a few thousand coins. How much are they worth, really nothing because they are recycled and reused over and over. They are merely a transactional medium.

"Why do Blockchain companies issue so many coins if they only need a few thousand?” Greed.

The founders of these companies are in large part young tech types with little or no business experience whatsoever. They understand the tech, but not how business works.

Who is investing in these currencies? Same type of people. Young people who simply do not understand how business is supposed to work.

Consider this, you start a small blockchain document storage company where you are one of a thousand other document storage companies, and you are going to charge $1.00 per transaction. And your payment is in US Dollars, not your coin. Remember, most if not all these companies tell you right in their white paper that they will not redeem their coins. Those that will are only committed to redeem them at their ICO price. So if they ICO for a penny and are trading at $1.00, your insurance is only the penny.

The fictional company needs $10,000 to start their company, they do not borrow it or give up ownership. With crypto they ICO a coin and raise all the money they need. They decide on 21 MILLION tokens at .1 each, netting a cool $90k. If the company grows to Apple's size they can take it to Wall street, sell the stock (remember no debt cause they used your money) and they owe the coin holders nothing. The stock price will be all profit. Everything from nothing, the perfect mirage.

The upside: if you can read the code you can determine how many coins the company needs to run its technology. Issuing one more coin than that is a scam. Issuing any coin to an exchange is a scam if that same coin is not for transaction purposes (Think Accelerator (ACC)). Period. By investing in these companies you are participating in a pyramid scheme. This is not to say the company is not legit or does not have a real product or service. We are trying to make you understand that you own nothing. You have no piece of the company. You own no piece of the profits or growth.

So, I promised you an equation and here it is: Total Circulating Supply X Token Cost

If this number comes out to MORE than what you think that company is worth, than we have an issue. There are VERY FEW exceptions to this rule, and NONE that you will ever see again because the technology has already been created and failed. With that being said, go buy some BTC while it's low, some ETH and LTC for diversity, some DeCred, Monero, and ZCash for anonymity, and throw a few bucks at someof thse legitimate ICOs found in our reviews section.

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Original post : https://www.cryptocriterion.com/crypto-kleptos-scams-crookery-blockchain/

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