Fake Apple Stock and More

The Synthetix and Mirror Protocol projects have created synthetic copies of not only Apple but Amazon.com, Testa and other blue chip stocks as well as exchange traded funds. All of this has happened in the last year or so. While these “stocks” are valued in the blockchain system to follow the real thing, no one buys or sells the real stocks. And, these “assets” are not subject to any of the regulation that investors expect of the stocks. Terraform Labs in South Korea created the Mirror Protocol and is perfectly happy being out ahead of regulators. The question is if investors should be happy with fake stocks on blockchains where regulation may never be possible.

What Are Fake Stocks on Blockchains Worth?

Synthetic assets traded on blockchains would ideally be worth a cryptocurrency equivalent of the real thing. Of course, cryptocurrencies vary widely in value and the only way that these tokens can track real world values is via arbitrage within the blockchain system. One wonders if some “investors” may be willing to pay a premium for the sort of anonymity they believe they are getting by using a blockchain product. In this case, they should read our article, How Secure Is Bitcoin? Currently a “stock” like Apple in this system trades within a few dollars of the price of the real thing once you do the exchange rate calculations.

Are There Advantages to Buying Fake Stocks on Blockchains?

The advantages touted by those running these systems are that you can trade twenty-four hours a day, every day of the week, and yearlong from anywhere. There are no capital controls and ownership is (so far as the system is able to make it so) anonymous. There do not appear to by any fees and commissions related to sales or purchases which makes you wonder how the system can function. According to the head of Terraform Labs, they charge no fees but profits from liquidity of its own cryptocurrency which benefits from growth of the Mirror Project and related schemes.

Where Do Fake Stocks on Blockchains Trade?

The markets where Mirror Project “stocks” trade are automated ones like Terraswap and Uniswap. These systems allow direct purchase of the tokens related to the individual stocks. This is a different way to work in the blockchain system than used by the likes of Coinbase or Binance which are centralized crypto exchanges. The estimated current value of Apple “stocks” in this system is about $34 million compared to the 2.3 trillion market cap of Apple.

How Long Can Fake Stocks on Blockchains Remain Unregulated?

To the extent that these systems remain tiny in relation to the like of NASDAQ or the New York Stock exchange one would not expect to see a lot of concern. However, folks like the SEC are tasked with protecting investors are likely to become concerned as such systems grow and fail to follow any of rules meant to create orderly, efficient, and fair markets. Also, systems that are found to be ignoring know your client norms and turning a blind eye to money laundering are likely to get in trouble and bring their system and its tokens down with them!

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Remember the 2017 Bitcoin pump and dump? It seemed like an epic bull run for the cryptocurrency but ended in a crash. Bitcoin started 2017 just below $1,000 and rose during the year. Bitcoin “enthusiasts” hyped the cryptocurrency as the “investment “of the future while long term successful investors called it a scam. After Bitcoin fell from the $20,000 range to the $3,000 range at the end of 2017, all of the Bitcoin hype went away, for a couple of years. However, it appears that we are seeing a Bitcoin pump and dump again. This writer was watching the morning CNN business show and an interview with the “head investment analyst” of an outfit I had never heard of. The storyline was that central banks are all competing to devalue their currencies and that only gold and Bitcoin are safe stores of value. Then, we saw a security warning about Bitcoin in Forbes as well. What is going on?

Bitcoin and Pump and Dump Scams

Investopedia explains pump and dump scams.

A pump and dump scam is the illegal act of an investor or group of investors promoting a stock they hold and selling once the stock price has risen following the surge in interest as a result of the endorsement.

As Investopedia explains, the pump consists of an “information campaign” or series of “hot tips” suggesting that the stock, or in this case the cryptocurrency, is about to skyrocket. And, to the degree that the first efforts are successful, the “pumpers” can point to recent price increases as “proof” of the validity of their “predictions.” Usually, this approach is limited to OTC micro-cap stocks or penny stocks and is intended to corral a handful of unsuspecting (and greedy) investors. However, in the internet and mass information age, the approach can work with things like Bitcoin as well.

The old advice is that when you start hearing an investment being promoted by your taxi driver, it is time to avoid the investment or get out if you have already invested. This writer was looking at vacation and retirement property in Colombia in late 2017 as Bitcoin was passing the $12,000 mark. The realtor I was using was more interested in explaining how she had taken all of her savings out of the bank to buy Bitcoins and was thinking of putting a mortgage on her home. I never did hear how it worked out for her but two months later Bitcoin had peaked at $20,000 and was down to the $5,000 range on its way to $3,000.

Are Gold and Bitcoin Stores of Value?

Your home is a store of value as someone can always live there. Your farmland in Iowa is a store of value because people will always need food. A multinational company with a huge range of products, like 3M, is generally a store of value because they make things that people use all over the world. Investing in gold is being hyped right now along with Bitcoin as a way to protect your wealth as central banks rush to devalue currencies. The argument of gold is that it has held its value in relation to things like food and clothing for centuries. However, that is not really true. Gold goes up and down as investors worry about the stock market, their nation’s currency, war, and social unrest. Gold started the 1970s at $32 an ounce and hit $800 in the early 1980s before it crashed. It sat in the $200 range for nearly 20 years until the next bull market. Gold always has uses in industry and for jewelry. That is not the case with Bitcoin.

The Fiat Cryptocurrency

The current “pump” for Bitcoin is that paper currencies have no intrinsic value. And, central banks are working actively to devalue them all across the globe. But, currencies like the US dollar, Euro, Yen, and Yuan all have substantial economies to fall back on. Bitcoin, the other hand, has no backing, no economy on which it is based, and no “use” such as for jewelry or in industry. Nevertheless, the current “pump” for Bitcoin plays on the fear few or predicted economic collapse.

Can You Make Money Trading Bitcoin?

Anyone who had the good fortune to buy Bitcoin years ago for pennies each or even at the start of 2017 when it sold for less than $1,000 has done well by simply holding on to their Bitcoins. And, anyone who had the good luck to sell at the end of 2017 when Bitcoin sold for nearly $20,000 made out like a bandit. But, aside from listening to the “pump” arguments, there is no good rational way to buy and sell Bitcoin. If you believe that currencies across the world will lose their value, there are always precious metals like gold. Real estate in growing areas will tend to hold its value as well. These and other investments have two things in common. They have a bottom price that is not zero and they have a way to assess intrinsic value. The same cannot be said for Bitcoin and other cryptocurrencies. And, then there is the risk of having your Bitcoins stolen or being scammed in some other way.

Bitcoin Security Alert

Forbes published a report about a Bitcoin security warning.

Researchers have warned a staggering four out of the first five results returned when asking Google for a “bitcoin qr generator” led to scam websites.

If a user of one of these scam sites tries to generate a QR code for their own bitcoin address, it will create a QR code for the scammer’s wallet, researchers from ZenGo, a bitcoin and cryptocurrency wallet provider, found.

The amount of money that has been stolen this way is not clear.

Last month, it was found bitcoin and cryptocurrency fraudsters stole over $4 billion of digital currency from investors and users in the first six months of 2019, a significant increase on the $1.7bn stolen in 2018.

These stolen funds were a result of “outright thefts” from cryptocurrency exchanges, but also scams, according to U.S. cyber security research company Ciphertrace.

Money that you put in a US bank is insured by the Federal Deposit Insurance Corporation. US Treasuries are good unless the government collapses. Put your money into Bitcoins and no one is going to insure your losses when a hacker breaks the code and transfers a few million from your wallet to theirs.

Is This the Bitcoin Pump and Dump Again?

When we write about “stock tips,” we always recommend that you use some sort of fundamental analysis to make sure that the investment makes sense. Unfortunately, there is no way to examine fundamentals of Bitcoin and other cryptocurrencies as they have not basic or intrinsic value. Thus, all of the talk in support of investing in Bitcoin amounts to hype and a return to the pump and dump of 2017. For more insights check out our article, Buying Cryptocurrency 101.