Original author | Ignas, DeFi Research
Original translation | Bai Ze Research Institute
“After doing a thorough study of cryptocurrency, anyone with the ability to understand it can come to one conclusion – it needs to be completely destroyed because it is a huge scam.”
— Stephen Diel, cryptocurrency critic with 60k followers on Twitter
As crypto enthusiasts, we often only see positive things about cryptocurrencies on Twitter, and let’s be honest, most cryptocurrencies at the moment are financial tokens, which also attracts scammers.
So, the sad truth is that a lot of people don’t like cryptocurrencies as much as we do, instead they think “cryptocurrency is a scam”.
There are many reasons for this, and in this article, I decided to explore different critical arguments and try to understand why some people call cryptocurrencies (and DeFi) the biggest scam ever.
Cryptocurrency: Changing the World Monetary Order <-> The World’s Biggest Scam
As cryptocurrencies grow, so do the criticisms. I believe we, the crypto enthusiasts, are currently in the minority.
Molly White is a well-known cryptocurrency critic who founded the ironically named website “Web3 is going great,” which chronicles disastrous events in the cryptocurrency, DeFi, and NFT sectors.
This is evidence of the growing skepticism towards cryptocurrencies.
But what really inspired me to write this article was a video by James Jani called Cryptocurrency: The World’s Biggest Scam, which covers all the critical arguments against cryptocurrency.
The video has been viewed 2.9 million times on Youtube and was even named “Best Video of 2023” by one of my favorite top tech bloggers, Marques Brownlee.
However, it all started with criticism of Bitcoin.
Bitcoin: Revolutionary Digital Currency <-> Failed Currency
Bitcoin emerged during the 2008 financial crisis as a digital currency not controlled by governments or institutions, attracting a small group of early adopters who distrusted the traditional financial system.
However, the value of Bitcoin soon attracted prominent investors, who changed its use from a global trading currency to speculation. For example, the Winklevoss twins, well-known investors, had been hoarding Bitcoin since its early days, and by 2013, they owned about 1% of all Bitcoins in circulation.
In fact, 34.4% of the BTC supply is held by whales (entities with 1,000+ BTC). However, this concentration has been slowly decreasing, and the number of small wallets holding small amounts of BTC is increasing.
Nonetheless, the purpose of this article is not to counter all criticism, but to listen to and understand the critics.
Nouriel Roubini, a professor at New York University who is famous for predicting the 2008 US subprime mortgage crisis and the subsequent global financial crisis, criticized the Bitcoin ecosystem as completely corrupt, consisting of seven Cs: Concealed, Corrupt, Crooks, Criminals, Con men, Carnival barkers, and Cult.
Critics of bitcoin argue that its design is deeply flawed. Its deflationary nature, which comes from its fixed supply of 21 million, encourages people to hoard rather than trade, undermining its function as a global currency.
In addition, Bitcoin’s technical limitations are becoming increasingly apparent. It can only process seven transactions per second, which is very slow compared to traditional payment networks such as Visa and Mastercard, which can process thousands of transactions per second.
Bitcoin is also quite expensive to use, especially with the BRC-20 craze clogging up the blockchain.
Equally problematic is Bitcoin’s energy-intensive proof-of-work (PoW) consensus model, which critics say has fueled a race to build more powerful mining equipment to mine more bitcoins, leading to massive energy consumption without an increase in transaction rates.
Ultimately, Bitcoin will fail as a global currency. Critics are remarkably consistent in their argument.
Other notable critics:
Nobel Prize winner in economics Paul Krugman believes that Bitcoin is useless, inefficient, and largely a Ponzi scheme. ——"The Bitcoin community attracts investors by combining technology with libertarianism, using part of the cash flow to drive up prices, which brings in more investors."
Warren Buffett considers Bitcoin to be “rat poison squared” and says it will have no effect.
Gary Gensler, chairman of the Securities and Exchange Commission, said cryptocurrencies are all about “hucksters, fraudsters, charlatans.”
Despite this, Bitcoin has survived for 14 years and is now the most prominent investment asset traded on centralized exchanges.
But critics believe this is one of the reasons why Bitcoin's creator, Satoshi Nakamoto, suddenly disappeared - leaving behind an invention that has strayed far from its original purpose.
Ethereum: The blockchain 2.0 revolution <-> leads to a flood of scams
The debate continues over Ethereum, a blockchain that allows for the programming of smart contracts, leading me (and most likely you) to believe that it will offer revolutionary use cases in the crypto world.
Ironically, however, Ethereum’s first major use case was the creation of more crypto tokens, leading to the era of the initial coin offering (ICO) craze.
Companies began creating their own tokens, publishing white papers explaining their project goals, and then selling these tokens to the public. Some tokens were imitations, and some were outright scams, but that didn’t stop people from investing in them, hoping to sell them for a profit once the tokens rose in value.
For example, the “Jesus Coin” is designed to call for the decentralization of Jesus’ power and hopes to become the currency adopted by all Christians.
The ICO craze also sparked an alliance between crypto and real-world celebrities. Influencers such as Floyd Mayweather and DJ Khaled were paid to promote Centra Tech’s token, which turned out to be a scam.
They raised $32 million even though the CEO wasn’t even a real person.
Despite the increase in scams, cryptocurrency enthusiasts continue to find potential new use cases to prove that the value of cryptocurrencies will continue to increase.
This is NFT.
NFTs: A new era for digital art <-> A new era for scams
NFTs are generally considered a new way for digital artists to monetize their works on the blockchain. In theory, the ownership of artworks can be verified through the blockchain.
The most notable example is digital artist Michael Winkelmann, aka Beeple, who sold an NFT of his first 5,000 daily works, a collage titled Everydays: The First 5,000 Days, for $69.3 million. The sale was one of the largest in the history of digital art.
However, you may not have heard of this part:
The buyer of the artwork NFT was Vignesh Sundaresan, a cryptocurrency entrepreneur who previously co-founded a cryptocurrency investment firm called Metapurse with Beeple.
Before spending $69.3 million to buy NFTs, Metapurse had already used more than $2.2 million to buy more NFTs of Beeple. Metapurse then bundled Beeple's NFTs together, put them in the virtual museum, and issued a token called B20, which represents your partial ownership of the virtual museum.
Critics believe the $69.3 million transaction was largely a marketing gimmick to inflate the value of the B20 token and manipulate the market.
Indeed, the price of B20 is now down 99.66%, and Metapurse’s Twitter account is completely silent.
The NFT market has also been criticized for being highly speculative, with most NFTs essentially just a set of data on a blockchain containing a link to an image that anyone else can access.
Critics argue that this is not true ownership and that NFTs are primarily used for speculation, driving more money into the cryptocurrency market.
David Gerard, in his book on “Why Crypto is Bad,” summarizes the scams of NFTs:
Telling artists that they can make a lot of money
Tell artists they need to hold cryptocurrency as a fee to make money
Some artists have made money through NFTs
But you may not be the one making money.
DeFi: Revolutionizing Traditional Finance<->Decentralized “Mirage”
In 2020, DeFi Summer arrived, and the DeFi field achieved substantial growth, but it was criticized by many parties for its lack of true decentralization and fragility. Critics include Charlie Lee, the founder of Litecoin LTC, and the Bank for International Settlements (BIS).
The DeFi Paradox
I remember back in 2020, Lee tweeted that he didn’t believe in DeFi. Lee pointed out that DeFi lacks true decentralization, which is a fundamental principle of blockchain, and that more centralization is needed to solve the frequent hacking attacks in the DeFi space.
In fact, DeFi did face some technical limitations in 2020-2021, causing the disconnect between vision and reality to become increasingly apparent:
DeFi faces high gas fees, making it less attractive to low-capital users
The level of DeFi is increasingly questionable, as across all protocols, teams are centrally controlling development and updates
More importantly, DeFi protocols and their governance are dominated by a small number of wealthy “whales”, most of whom are the founders of the protocols.
Everything is over-collateralized, increasing the opportunity cost of funds
In terms of trading, leverage, and synthetic assets, DeFi lags far behind the centralized platforms it seeks to replace
The immutable nature of the blockchain means that mistakes made by users interacting with DeFi protocols are irreversible and costly.
In the three years of development of DeFi, many new protocols have attempted to change these problems.
But interestingly, DeFi, which originally had the mission of “debanking the banked,” now seems to prioritize the pursuit of higher yields over its original purpose.
The fantasy of decentralization
BIS, an international financial institution serving central banks, also questioned the level of decentralization of DeFi in its 2021 quarterly report.
The organization believes that full decentralization of DeFi is a fantasy:
Due to the inevitable need for centralized governance and the tendency of blockchain consensus mechanisms to concentrate power, DeFi has a “decentralized fantasy”
DeFi’s inherent governance structure is a natural entry point for public policy (as evidenced by the fact that multiple DAOs have already been sued)
DeFi is extremely vulnerable due to high leverage, liquidity mismatch, inherent interconnectedness, and lack of risk resistance.
BIS believes that these three aspects make the DeFi ecosystem particularly vulnerable to shocks caused by financial instability.
Leverage in DeFi: A Double-Edged Sword
Although most DeFi advocates over-collateralization, DeFi users’ use of leverage has raised concerns. (Funds borrowed in one DeFi transaction can be reused as collateral in other transactions)
This allows investors to build increasingly larger exposure to a certain amount of collateral, which, while beneficial in a bull market, can result in significant losses during a bear market or market downturn.
“Cryptocurrency is a cult”
Additionally, cryptocurrency community culture is often likened to a “cult,” with factions such as Bitcoin maximalists and Ethereum enthusiasts promoting their different visions.
The Bloomberg article “The Story of Crypto Winter” describes how the cryptocurrency community remained enthusiastic during the bear market.
Cryptocurrency researcher Molly White called the cryptocurrency community "predatory," and the Fame Lady Squad NFT, hailed as an "all-female-led project," was actually created by three white men.
Jemima Kelly, a columnist for the Financial Times, has repeatedly called cryptocurrency a “cult”:
In the cryptocurrency community, everything is filled with optimism, which keeps you in the frenzy.
Buzzwords you’re no doubt familiar with, like “Hodl” and “Wagmi” (crypto holders are encouraged to hold onto their coins come rain or shine), may sound a bit bizarre to outsiders.
Some holders are assuring other holders that they haven’t missed their chance to get rich by saying “we’re still early”.
Those who hold onto their tokens even when they have reason to sell them are praised as having “diamond hands.”
In the cryptocurrency community, criticism is often dismissed as “FUD” (fear, uncertainty, doubt) or with statements like “you just don’t understand.”
Critics are often rebuffed, told to "enjoy the pleasures of poverty".
Scam or not? Depends on the future
In general, the “anti-crypto movement” has a large following, i.e., the number of cryptocurrency critics is increasing. For example, the subreddit Buttcoin has 159,000 members who come together just to celebrate the ultimate failure of cryptocurrencies. Their motto: “Buttcoin - it’s a scam, and we’re honest about it!”
Interestingly, both cryptocurrency enthusiasts and critics agree on issues such as scams, centralization, and pump and dumps.
A scam or not? The difference lies in the future.
As a cryptocurrency supporter, I believe we can shape a healthier ecosystem and convince critics that blockchain does bring unique benefits to improve society.
risk warning:
According to the "Notice on Further Preventing and Dealing with the Risks of Virtual Currency Trading Speculation" issued by the Central Bank and other departments, the content of this article is for information sharing only and does not promote or endorse any business or investment activities. Readers are requested to strictly abide by the laws and regulations in their area and not participate in any illegal financial activities.