Look out for snake oil

The space is new, hyped, and full of misleading information

Published May 6, 2019Updated May 7, 2021

So I mean for today, you could have, some Bitcoin business have a tab, so you pay them and then you work your tab there and presumably you cash your tab out if you don’t use it.
If you have repeat custom… or maybe the shops in the local area could make a shared tab or something in anticipation of… you know somebody in the local area … technology expert could make a local Bitcoin tab that’s interoperable between the shops and some sort of app to do it.
Adam Back, Baltic Honeybadger 2017 Bitcoin Conference

A snake oil salesperson sells, or promotes, a valueless or fraudulent solution. The cryptocurrency space is full of such people and broken solutions.

Not really cryptocurrencies

There are many projects in the cryptocurrency space that, curiously enough, aren’t actually cryptocurrencies. Some even go so far as to call them cryptocurrencies even though they don’t fulfil the criteria. For example, I don’t consider these real cryptocurrencies:

OneCoin and Bitconnect—they’re simple pyramid schemes¹
Ripple²
Stablecoins like Tether³ or JP Morgan’s JPM coin
“Second layer solutions” like the Lightning Network
Smart tokens like the ERC20 tokens running on top of Ethereum⁴
Facebook’s Diem (renamed from Libra due to bad publicity)

Some might be useful, but they don’t have the same properties as cryptocurrencies like Bitcoin, and they don’t work the same way.

For example, stablecoins depend on a third-party issuer and redeemer—the very thing cryptocurrencies are meant to remove. Second layer solutions have fundamentally different security trade-offs and they work differently; they’re built on top of—but they are not—cryptocurrencies.

Be very skeptical of sites like CoinMarketCap that says it lists the “Top 100 Cryptocurrencies by Market Capitalization” because most of the coins listed aren’t real cryptocurrencies. Like how Tether is currently #3 on the list (2020-09-21), but that’s meaningless since they can be printed out of thin air, significantly warping the market cap.

The blockchain hype

There’s the phenomena where a technology gets hyped up and businesses all over rush to adopt it in any way they can, even if it’s totally the wrong solution for their problems.

Removing the consensus mechanism from a cryptocurrency, so they can just use the blockchain, removes what makes cryptocurrencies useful. The blockchain data-structure by itself is neither new nor interesting, yet that’s all people seem to focus on.

Be aware of “the blockchain” being used only as a buzzword.

Warning signs to look out for

When evaluating cryptocurrencies, here are some red flags to look out for:

Heavily slanted initial coin supply
Like only creating 21 million coins, but keeping 20 million for yourself.
Slanting the coin supply comes in many variants. It’s common to assign large parts of the initial supply to the creators or to mine the chain in secret before releasing it to the public.
A more sinister tactic is to introduce a bug in the code that allows miners to mine extremely fast—and only fix it after you’ve mined a big portion. This is what Dash did in a so-called instamine.
Central authorities
A “centralized cryptocurrency” is an oxymoron because it’s not trustless or permissionless and it doesn’t prevent a single entity from manipulating the supply, the very things that define a cryptocurrency. A “private blockchain” has the same fatal flaws.
If someone can freeze your coins, prevent them from being used in a particular country or generate them from thin air then it’s not a cryptocurrency.
Bad consensus algorithms or centralized governance protocols
If a cryptocurrency isn’t working as I describe in How do cryptocurrencies work?, then chances are it’s not actually decentralized and calling it a cryptocurrency might be a stretch.
Promises that sound too good to be true
For example promising instant transactions and infinite scalability, while compromising the decentralization and security of the network. Proof-of-stake coins are usually guilty of this.
Propaganda
Social media is chock-full of users who try to sell snake oil to you. Slander, lies, and censorship is a daily occurrence.
Imagine the irony of censorship being a problem in communities supporting censorship-free money. Unfortunately, examples of censorship on Reddit are plentiful.
Large drawbacks
Like having expensive and unreliable transactions or having to be online to receive payments.
Problems are hand-waved away
“We’ll figure it out” or “It’ll be ready in 18 months” (forever).

There are many traps to fall into in this space. I think the best antidote is to try and learn as much as possible, and never be afraid to question everything.