This Was the Year FUD Came for Crypto
12.28.2018

There’s a certain species of crypto adherent who sees any negative information about crypto projects as part of a vast conspiracy to undermine the greatest innovation the world has ever seen. Whether it’s the hack of a major exchange or new SEC rulings, what they see is “FUD”—fear, uncertainty, and doubt—spread purely out of deep hostility towards bitcoin, blockchain, and anything adjacent.

The term FUD was coined by open-source software pioneers in the early 2000s. It was a response to efforts by corporate software vendors—primarily Microsoft—to make consumers afraid of community-developed software. But while the developers of open-source projects like Linux and Apache weren’t selling much of anything, crypto projects have managed to raise billions of dollars on the back of white papers and ambitious plans. They have inescapable motivations to misbehave, deceive, or merely over-promise.

Asking hard questions about projects’ ability to deliver on their plans, then, isn’t an attempt to undermine the promise of blockchain, but a healthy form of accountability. This year proved that: as last year’s crypto-mania unwound, it became clear just how much capital and effort had been misplaced thanks to unchecked hype, rank ineptitude, and outright lies. It seems clear that a little more skepticism will be in order if there’s any hope for Crypto Winter to give way to the next generation of real, operational, and possibly even money-making projects.

With that in mind, then, here are a few of the biggest moments when the cryptosphere might have been better off listening to a little more FUD.

Something’s Not Right About Tether
Since mid-2017, the pseudonymous Twitter account Bitfinex’ed has aggressively charged that the stablecoin Tether was being created without its claimed dollar backing, and was perhaps used to prop up the price of bitcoin. In return, the critic was harassed, threatened, and eventually doxxed.

While not all of the big claims from Bitfinex’ed have been confirmed, many gained a lot of serious support over the course of 2018. It became clear that Bitfinex and Tether share a leadership team, after a long period of evasiveness by the companies. Tether repeatedly failed to deliver on a long-promised audit, and their banking troubles continued, preventing Tether redemptions. Then the U.S. Department of Justice and CFTC launched a criminal probe into possible price manipulation using Tether. Finally, a University of Texas study found evidence that Tether issuance had helped prop up the price of bitcoin throughout 2017 and 2018.

A brand-new report from Bloomberg found evidence that Tether does now have the backing it claims, but the failure to provide faster, clearer proof has done its damage. Tether is losing market share to other, more transparent stablecoins, and it seems reasonable to assume that worries about its trustworthiness helped destabilize the broader market.

Ethereum Doesn’t Scale
In early December of 2017, a short, sharp craze for digital cats exposed a catastrophic shortcoming of Ethereum. When CryptoKitties suddenly got really popular (for a blockchain app), the traffic slowed Ethereum to a crawl. In the year since, efforts to increase Ethereum’s throughput to support more applications have hit a few roadblocks, including confusion over the Casper proof-of-stake upgrade and the apparent failure of an upgrade known as Plasma.

There are still a lot of possible ways forward, including sharding and transaction batching with zkSNARKs. But 2019 will definitely be when things get real: Ethereum has legitimate competition in the form of TRON and EOS (ew), and there’s a whole new wave of blockchain-based games that could create far more strain than CryptoKitties.

“Utility Tokens”? Maaaaaaybe
In December 2017, an investor named John Pfeffer published a paper called “An (Institutional) Investor’s Take on Cryptoassets.” The paper, which had been circulating privately for months, poked holes in the “utility token” thesis, one of the key tenets of the ICO boom.

Essentially, utility tokens were purported to have value because users of a blockchain-backed service would want them to use the network. The utility token thesis is related to Joel Monegro’s famous “fat protocols” argument, which claimed that blockchain allows value to be captured by tokens linked to the protocol layer, rather than the application layer. Together, the arguments underpinned much of the enthusiasm for ICOs, which didn’t offer token-buyers any actual equity or other rights, but were promised to increase in value as users joined a platform.

Pfeffer’s rebuttal of utility tokens has too many elements to summarize here, but most importantly, he pointed out that the value of a crypto-asset went down when it was used more frequently. Because a digital currency could move so fast, Pfeffer argued, its value was fundamentally tenuous. Pfeffer hasn’t quite been proven right in 2018, but faith in the many utility tokens that ICO’d in 2017 has certainly taken a harsh beating. Too many founders, it now seems clear, had a very loose understanding of the principles they were raising money on, claiming “utility” where there was none, just so they had an excuse to sell a useless, worthless token.

“Pivot to Blockchain” Isn’t a Thing
Eventually in this life, you learn some really important things. One of those things is: literally any giant idiot can start a company. When the crypto bull run really heated up, some of those idiots decided that their money-losing biotech company or money-losing analog film company or money-losing iced tea company (which shouldn’t be a thing either, because iced tea is delicious) should become a blockchain company. Or at least have it in the name!

These were mostly, of course, craven attempts at pumping the stocks of failing companies. Shortly after its pivot and ensuing pump, Long Blockchain effectively canceled its publicized plan to buy mining equipment, attracting the all-seeing eye of the SEC. It quickly got delisted from the NASDAQ. Riot Blockchain was caught in a literal pump-and-dump, and it’s now losing millions while under a separate SEC investigation. Kodak’s story is easily the saddest, as the storied company launched something called the “Kodak Kashminer” and offered an ICO for the KODAKCoin. Skepticism abounded, with the BBC declaring Kodak’s plan the “Worst Idea” of CES.

Of course, that doesn’t make them much different from many “real” blockchain companies, just far, far funnier. Long before BREAKER gave my angry id a chance to run buck wild, even Fortune saw fit to let me imagine a fading company putting corn dogs on the blockchain.

The SEC Is Coming to Get You, Barbara
For many, many years, crypto entrepreneurs loudly argued that what they were doing had nothing to do with traditional financial regulation. They would shout down anyone—including experienced lawyers—who warned them they might be on the radar of the U.S. Securities and Exchange Commission or related agencies.

2018 was the year that confirmed those warnings. U.S. regulators, perhaps finally egged on by obvious signs of widespread fraud, set out to pound two-fisted justice into the hearts of evildoers and/or people who just didn’t want to be regulated. That included serious action against touts like DJ Khaled, pump and dump shills, ICO issuers, distributed exchange operators, and market manipulators.

The most devoted libertarian ideologues in crypto are surely unhappy that their regulation-free zone has been infiltrated. But for those of us interested in a slightly safer and more predictable environment, it’s FUD we can celebrate.

It’s a Bubble, Dingus
I’m not going to be nice about this one (but you already knew that). I was referring to bitcoin’s bull run as a bubble back in September 2017, though I’d already been beaten by months by my colleague Robert Hackett. I wrote about a bubble again in November, and four more times in December.

In return, I was called out by Twitter geniuses as an ignorant mainstream media creature who didn’t understand the magical new reality of the crypto-economy. Oh, if only I’d taken those incisive critics more seriously! Now I wouldn’t be sitting here, regretting my past declarations, bitcoin sitting at $50,000 and only headed up with each passing day!

Yep, just more FUD. Feel free to ignore it.