Money Laundering and Fraud: The Dark Side of NFTs
Market Movers
Positive week for the largest coins on the market as shown by the fully green graph
One of the highest, legit rising coins of the week was Woodcoin, or LOG for short.
Founded in 2014, Woodcoin aims to be the “sustainable” version of Bitcoin by implementing a mining system whose finite supply of tokens is met much later than Bitcoins’. Half of Bitcoins’ total supply was mined in the first 4 years. Half of the LOGs supply is projected to be released in around the first 200 years (via Woodcoin.org).
The coin aims to find the middle ground between stagnation and inflation by having its mining reward always be bigger today than it will be tomorrow—making the incentive for miners to secure the network increase over time.
Coincidentally, the co-founder of the coin is a Dartmouth grad. Go Green.
First Sip
This week, we’re featuring a new section to educate newcomers about crypto fundamentals. Our primary goal is to increase accessibility into Cryptocurrencies, NFTs, and all things DeFi.
Phase 1: NFTs.
WHAT THE HECK IS AN NFT?
NFT is an acronym for “non-fungible token.” The term “non-fungible” roughly translates to “unique and unable to be replaced.” For example, gold, the U.S. dollar, and Bitcoin are all fungible assets. If you exchanged one U.S. dollar for another U.S. dollar, there would be no difference in the value of your new dollar, regardless of the dollar’s condition. That dollar is fungible. However, that is not the same for NFTs.
Think of NFTs as digitized trading cards. If you traded a LeBron James 2022 All-Star card for a separate Lebron James 2022 All-Star card, your new card has a different value. Even though your new LeBron James card could be 99.9% of the original, it will never be precisely the same, making it non-fungible. One piece of art is not equal to another. Simple as that.
WHAT MAKES THEM VALUABLE?
Unlike physical trading cards, what makes NFTs so valuable is that they are:
Digital
Based on blockchain technology
Just think of an NFT as a piece of digital art that lives on the blockchain. One can buy/sell/send an NFT just like they can with cryptocurrencies by typing in their desired address/es and paying the transaction fee. What makes one NFT more valuable than the other is straightforward: supply and demand. Some NFTs have better art, utilities, marketing, etc., and therefore cost more, while being inherently scarce.
STILL DON’T BELIEVE IN THEM?
A minimum of $44.2B worth of NFT related transactions were sent on the Ethereum blockchain in 2020 (via Chainalysis). The numbers speak for themselves.
Table Talk
BITCOIN HASH RATE TO HIT RECORD HIGHS
Bitcoin network hash rate quantifies the amount of computing and processing power contributed to the Bitcoin network through mining.
Miners use advanced computers to solve complex mathematical computations to verify Bitcoin transactions, which results in them receiving Bitcoin for their work (via SoFi Learn). In 2021, miners received 6.25 bitcoins each time they mined a new block (via CoinDesk). The reward for BTC miners is cut in half every four years in the “halving event.” Additionally, the time it takes to mine a bitcoin is programmed by the blockchain to always stay around 10 minutes per transaction, on average. When the average time it takes to mine a bitcoin is consistently less than that, the mathematical computations get harder (and vice versa).
WHY IS THIS IMPORTANT?
A rising hash rate indicates that current miners are either
Investing more money into powerful mining equipment
and/or
There are new miners entering the network.
Although hash rate and BTC price aren’t always directly correlated, an increase in hash rate can signal an increase in demand for BTC.
The largest publicly traded Bitcoin mining company in the U.S. is Marathon Digital Holdings (MARA). The graph below portrays the company’s February production update, which presents past/current hash rates, and projects future hash rates (via cryptosrus).
As we can see, Marathon Digital Holdings’ hash rate has steadily increased since January of 2021. However, the company is projecting the hash rate to triple by mid-2022 and more than quadruple by early 2023. Bullish.
BITCOIN LEAVES EXTREME FEAR RANGE
Several weeks ago, in our first newsletter, we highlighted the Alternative’s Fear & Greed Index, which produces a number that indicates public sentiment surrounding BTC and other large cryptocurrencies.
Last month’s Fear & Greed average was 18 or in the “Extreme Fear” range. However, as we write this, public judgment has become more bullish. The Index rose to 33 this past week, known as the “Fear” range. A further breakout in price could be in store, given the shift in the public sentiment. As we can see on the graph below, periods of extreme fear/fear (dark orange) are almost always followed by an increase in BTC price. Something to ponder. However, this is not financial advice, do your own research before investing.
NFT Buzz
WASH TRADING NETS SCAMMERS 8 MILLION
NFT wash trading is when one person sells their own digital art back to themselves at a higher price than its actual market value (via Fortune).
Blockchain data platform Chainalysis came out with a report this past week highlighting the presence of wash trading and money laundering in the NFT world. Their report indicated that in the past year, 110 NFT traders netted a combined $8.9 million in profits by using the market manipulation method.
However, not all wash traders were successful as the gas fees that some had to pay for each transaction surpassed the profits they gained from artificially raising the value of their art. In the end, the tactic was successful for most as the study revealed a little over $8M in profits from the 262 wash traders that they identified. They also note that their study likely underestimated the damages caused by wash trading as 110 traders identified are likely only the tip of the iceberg. Remember, most blockchains are pseudonymous, not anonymous.
MONEY LAUNDERING
Money laundering in the physical art world has made its way to the digital art world as well for some time now. Chainalysis found there was $8.6B of cryptocurrency-based money laundering in 2021.
Lack of regulation and the ability of people to connect their wallets without verification contributes to both of these scam cycles.
DeFi Demographic
With the Biden Administration's impending Executive Action about cryptocurrency that we discussed in last week’s newsletter, we’ve been reading about potential government actions in the crypto space.
One such action, support for which has been rekindled in recent months, is the Fed’s creation of a Central Bank Digital Currency (CBDC)—a digital legal tender. China has discussed the creation of its own CBDC for much time, but the U.S. should seriously invest in beating them to deployment.
With the burgeoning widespread adoption of digital currencies, a non-US CBDC would seriously threaten the U.S. Dollar’s global legal tender status. “CBDCs could enable seamless movement of money across borders, yet they could also presage the fragmentation of international payment systems and the emergence of a Chinese sphere of financial influence to help insulate nations from U.S.-led financial sanctions,” said Sewall and Luo (via Belfer Center). A U.S., first-to-market CBDC would help prevent this.
Current cryptocurrency/blockchain technology could provide an avenue for creating such a CBDC for the Fed. While many crypto natives may find this offensive, it does provide an opportunity for on-boarding a large swathe of the more skeptical public to crypto and could serve as a gateway for the rest of DeFi.
Final Cup
The top 18 cryptocurrencies by market cap were all in the green for the week
Hash Rate is expected to rise in 2022 and beyond as miners fight over Bitcoin and other large cryptocurrencies. Great sign for network strength/security and potential future price.
NFT space hides a dark forest of fraud beneath the surface. Do your due diligence before investing in a collection, especially when purchasing from secondary markets.
CBDCs provide an avenue for the government to get involved in their own regulated form of crypto. Let us know your thoughts about Crypto CBDCs in the comments or on twitter.
Meme of the Week
Happy wife, happy life. Unless…
Pat + Ari ✌️
Disclaimer: None of this is investment advice, financial advice, or trading advice. CRYPTOPONG does not endorse any of the cryptocurrencies, DeFi applications, or NFT collections mentioned in this article. Perform your own due diligence and/or consult a financial advisor before investing.