The Harsh Tales of the Cryptocurrency World: A Trillion-Dollar Air Supported by Anxiety and Scams

This article was first published on January 26, 2018, in the WeChat public account AI Finance Society, by Zhou Tian

I. A Sudden Crash

On the day when cryptocurrencies plummeted, the once vibrant and bustling café near Beijing's East Third Ring Road fell silent. It had always been a place filled with people, from big influencers making billions to hesitant onlookers. There were often "wanderers" from the crypto world dreaming of overnight wealth, each with different backgrounds and personalities. They had sharp instincts, and some were constantly selling their stories, their faces filled with a thirst for money.

It was a paradise for crypto enthusiasts, packed with project teams, brokers, and media personalities, each with their own method of psychological victory. Even on January 19, after the widespread crash, someone quietly told me, "Now is the time to enter; you'll achieve financial freedom within a year." No matter when you entered the crypto world, such voices were always present. Some willingly became fodder for the market out of faith, while others sought quick riches, only to find themselves wiped out overnight.

The lively scene felt like a return to the entrepreneurial street of Zhongguancun in 2015.

"The blockchain has created an incredible dream." In the eyes of Guo Yuhang, founder of the unicorn company Dianrong, it was like dry wood meeting a raging fire: the dry wood represented the unimaginative financial market after the 2008 financial crisis, while the fire was the capital looking for a place to go. Amidst the roaring flames, the anxious sparks of Bitcoin investors flickered.

Unlike the dreamers and ambitious individuals in the crypto world, those in the blockchain circle quietly worked away in office buildings on the south side of Huqing Jiayuan in Wudaokou, developing technology. I visited several of these places, and the scenes were all the same: low ceilings, freshly painted walls, poor-quality desks and chairs, renovation materials scattered on the floor, and the empty rooms filled with a pungent smell. Yet at this moment, they were all in ecstasy, intoxicated by blockchain.

The stories of the crypto and blockchain circles were developing in two extreme directions. Guo Yuhang shared a small story: a post-90s investment banker who originally worked at Morgan Stanley bought 4,000 Bitcoins six years ago. After Bitcoin surged in 2017, he suddenly remembered he was also a "thousand-coin holder," but due to poor wallet and key management, he couldn't retrieve them, ultimately losing hundreds of millions of RMB, equivalent to three of Wang Jianlin's small goals.

Greed and regret intertwined in this vast arena of fame and fortune, with countless lives fluctuating violently. But now, the arena had turned into a meat grinder: from January 7 when Bitcoin began to fall, to the widespread crash starting on January 15, the "crypto world" experienced an unprecedented cliff-like plunge.

The cryptocurrency market website "Feixiaohao" showed that the decline generally reached 20%. Every time people thought it was a good opportunity to "buy the dip," it turned out to be a precursor to an even larger drop. Among over a thousand cryptocurrencies, only a handful saw any increase. By January 21, after the fluctuations, both large and small coins had still not regained their vitality.

"The current coin price is only one-twentieth of the peak, and fans who have lost everything are chasing us and cursing." A team leader who issued digital currency complained to me on January 16. The crypto trader Soft Soft had long been accustomed to this: in the crypto world, stories of dramatic rises and falls were too numerous; waking up one morning to find millions gone was something that happened to him regularly.

"Life has been very painful since entering the crypto world," he summarized.

Coinciding with the crash was the rapid rise of blockchain concepts in the public sphere. On January 9, Xu Xiaoping from ZhenFund's rallying cry saw the WeChat index for the keyword "blockchain" multiply several times in the following days.

More and more large companies were rushing to enter the market. The enormous profits tempted every newcomer. Industry insiders shared a story: an internet giant wanted to taste the waters while avoiding risks, so they devised a clever plan—have the entire team pretend to resign to develop a blockchain project, and if successful, they would split off; if not, they would return to the main company.

Even a group of penny stocks viewed blockchain as a lifeline for market capitalization management: Renren, Xunlei, Kodak, Sifang Jingchuang, Yijian Co., Ltd… They all shared a common trait—weak main businesses, but as long as they added a blockchain concept, their stock prices soared.

Soft Soft told me on January 17, "Today, on one hand, we are frantically selling coins, and on the other, we are desperately buying the dip." Despair and hope, greed and fear, occupied the minds of players big and small in both the crypto and blockchain circles.

II. Unexpected Reshuffle

The plummeting prices were exacerbated by the visible hand of regulation—from rumors of the People's Bank of China banning mining, to South Korea contemplating shutting down cryptocurrency exchanges, to the U.S. SEC preparing to take coercive measures against virtual currencies, a global crackdown on digital currencies was taking shape.

In the history of cryptocurrency speculation in China, the "September Incident" marked a significant reshuffle. On September 4, 2017, seven departments, including the three regulatory commissions, the Cyberspace Administration, the Ministry of Industry and Information Technology, and the State Administration for Industry and Commerce, officially halted ICO financing. Subsequently, ICOs in China went silent for a time, and major exchanges shifted their operations overseas.

During that period, many bizarre events occurred in the crypto world: a person in charge of an ICO project ran to Shangri-La, terrified to use his own ID to book a hotel room, shaking all over. Many others left the country for various reasons.

Incredibly, the crypto world became even more frenzied afterward. Retail funds accelerated their influx; some used cash as bets, while others bet themselves. "Many friends in VC and PE industries even gave up their year-end bonuses and jumped into the crypto world," said an investment industry insider.

People like Soft Soft borrowed hundreds of thousands to trade cryptocurrencies. His civil servant classmates also joined in, "Although I only earn six or seven thousand a month, I'm considered a high-quality borrower in the bank, with a high loan limit." According to a senior figure in the crypto world, after two rounds of bull and bear cycles, the number of people in the crypto world surged from hundreds of thousands to millions.

As the entire crypto market expanded rapidly from 200,000 to 10 million, assuming an average investment of 100,000, its capacity skyrocketed from 20 billion RMB to 1 trillion RMB. The hard currencies of the crypto world, such as Bitcoin and ETH, saw their prices soar, and the astonishing wealth effect of blockchain attracted even more newcomers. The carnival reached a new climax.

A Bitcoin mining farm located in the deep mountains of Sichuan. @Visual China

Even the regulatory authorities may not have anticipated that the intervention on September 4 would unexpectedly rewrite the industry landscape.

Originally a second-tier exchange, Binance seized the opportunity presented by the regulatory crackdown on the three major domestic Bitcoin exchanges, quickly relocating its headquarters from Hong Kong to Japan. Some team members even brought their families along. In just a few months, it skyrocketed to become the industry leader, with registered users soaring to 6 million, and at one point, they had to suspend registrations.

From September 4 until November, after the halt of RMB deposits, old players flocked to Binance. Binance primarily focused on cryptocurrency trading, and since it did not support fiat currency for deposits and withdrawals, it was largely unaffected by regulations, while the established first-tier exchanges were busy rectifying their operations, losing a significant number of members.

"Before the policy crackdown, Binance was a second-tier platform that we ignored," said a leader of a digital currency issuance team valued at nearly 10 billion. "But now, we have to grovel to them, begging them to list our coins."

Surprisingly, a grassroots exchange representative candidly stated, "I actually like regulation; every regulatory move is an opportunity. When legitimate platforms are suffocated by regulations, we wild players can profit. If it weren't for the last round of regulation, our exchange would still be at the bottom; only those bold enough have the chance to rise to the top. Recently, with the tightening of regulations, we changed offices; if that doesn't work, we'll give the team a break for a few months and then come back to fight."

Just as the cash loan industry suffered a devastating blow from regulation, leading to a resurgence of private high-interest lending, each round of regulation has caused relatively compliant cryptocurrency exchanges to stagnate, but demand has not diminished, and chaos has not completely disappeared, instead providing excellent opportunities for grassroots heroes to overtake.

In the eyes of these grassroots players, the recent notice issued by the central bank was merely scratching the surface, "In fact, it restricts corporate accounts; where are there exchanges still using company accounts to collect RMB? It's either cryptocurrency trading or over-the-counter trading."

An insider revealed to AI Finance Society that some newly emerged exchanges have found more clandestine trading methods; they bought thousands of RMB bank accounts on the black market to collect money, and the methods are quite thrilling, "which actually contradicts the spirit of the regulation prohibiting fiat currency deposits."

III. Hidden Chains

There are numerous risks hidden within: exchanges and token issuers change their identities and continue to profit, with rampant token issuance and scams mixed in. A large number of private placement investment behaviors began to unfold in WeChat groups and social circles, where influential figures in the crypto world, at the request of a certain token's team, only needed to create a WeChat group to "harvest the chives," earning tens of millions in price differences, while large companies used blockchain concepts for hype, welcoming rising stock prices.

"From November to December, many new tokens were launched; people who originally engaged in pyramid schemes, micro-businesses, and coal bosses all entered the market. If there's no regulation, I would be scared myself; any project that comes out can easily raise hundreds of millions, and you have no idea what kind of thing is behind it," expressed a representative from an exchange.

"I just sat on a plane for a while, turned off my phone, and when I landed and turned it back on, I saw over a dozen ICO projects needing me to create WeChat groups for connections; the market is too enthusiastic!" he told me.

A paradox facing the crypto world is that a new technology aimed at establishing a decentralized trust mechanism is, in its early stages, heavily reliant on centralized trust chains—new entrants urgently need to solve the problem of information asymmetry, which brings astonishing wealth to everyone in the chain: project teams, exchanges, brokers, and media.

"In order to promote our newly launched tokens, I've given money to many self-media outlets; just for one influential online media outlet, I've spent nearly one to two million in six months. At one point, I was spending over a hundred thousand a day on promotions, and it hurt to sign the checks," a founder of a token issuance team told me.

According to several insiders in the crypto world, some influential media outlets primarily profit not from advertising revenue but by influencing token prices through articles or promoting new tokens, sometimes charging several Bitcoins for a single article, allowing a crypto media outlet to earn around ten million RMB monthly.

There is also the role of endorsers: when an ICO project is launched, they seek endorsers to stand on stage. These individuals either have been in the crypto world for a long time and have a certain influence, or hold important positions in academia, financial institutions, or internet companies. By endorsing the ICO project, they have the opportunity to participate in profit-sharing.

This later evolved into a broker game for private placement investments. Project parties would provide certain internal tokens or low-price subscription quotas to private placement investment institutions or relevant self-media. The prices usually ranged from 30% to 80% of the ICO sale price.

Many such stories unfolded in the crypto world.

A senior figure with considerable influence in the crypto world, after establishing his own venture, initiated private placement investments and made tens of millions in just a few weeks. Some ICO projects approached him, and if the issuance price was two yuan, he could acquire shares for 80 cents and then resell them to the next buyer for one yuan fifty. Essentially, he became a primary agent. He would then distribute the shares layer by layer; his disciples would continue to create groups for sales, also profiting from the price differences. Many ICO projects sought him for promotion.

In no time, such group-creating actions became a trend in social circles. Some crypto influencers could earn a fortune just by writing articles recommending tokens or charging fees for access to exclusive groups. More and more indistinguishable information flooded the crypto world, noise had long drowned out the truth, and both bulls and bears were profiting from various messages.

On January 22, in a WeChat group, a user sent a message crying out for help, "Currently, the XX project confirmed to be endorsed by XX has run off with the money, and the project team has gone dark." Soon, another influencer stepped forward to refute the rumors, claiming the exit was purely fictitious.

In the turbulent market, manipulators also took the opportunity to harvest retail investors. Soft Soft recalled his harrowing experience: "Exchanges are 24/7, and manipulators start dumping at night when no one is watching. They dump heavily, and when you wake up in the morning, it's terrifying; you feel like you've lost everything. By the afternoon, the manipulators start to pump it back up. During that time, it was like this every day; it was very painful, and I never had a good night's sleep."

Exchanges are the guaranteed harvesters; they charge "listing fees" from ICO teams, and for some, this fee can reach tens of millions. A token team member said that in the past two months, the number of new tokens has increased, and there aren't enough retail investors; some new tokens hit the market and immediately dropped in value, ultimately raising only a few tens of millions, which is worse than not launching at all. "This circle is too close to money; all the rules of the game are paved with cash."

The substantial profits of exchanges are no secret—"Platforms like OKEX and Huobi have daily trading volumes around 10 billion RMB. Such exchanges can collect over 100 million in fees daily, and their annual profits could reach hundreds of millions, which is terrifying. Even many long-tail exchanges can earn tens of millions in fees each month," said the aforementioned exchange representative.

With a daily trading volume reaching 16.8 billion RMB, Binance issued its own platform token, Binance Coin, in November, which once had a market value of 15 billion. Even after the decline, it still had a market value of nearly 9 billion, opening up new revenue streams for the exchange.

Compared to other projects that are still in the conceptual stage, Binance has already seen tangible profits, and as soon as it was launched, it was snatched up.

"I got my hands on it, and it multiplied several times, but precisely because of the ICO, they just got 'tea' (a euphemism for regulatory scrutiny)," said the COO of another platform that also focuses on cryptocurrency trading.

As regulatory scrutiny intensified, the established exchanges Huobi and OKex, having regained their vitality, began to imitate the issuance of platform tokens. On the evening of January 20, Huobi announced that its overseas registered Huobi Pro would launch a points system based on blockchain issuance and management. Just minutes later, OKex also announced that its strategic partner, the OKB Foundation, would issue the application token OKB, with two new platform tokens emerging.

The rapid wealth accumulation has further boosted the morale of exchanges aiming to change the world. Huobi's CTO boldly stated on social media, "Our boss has declared, don't ask when Huobi will go public on Nasdaq; we are in competition with Nasdaq."

Under this status, a well-meaning commenter remarked, "I think the goal can be bigger, like the Federal Reserve." Another chimed in, "Yes, for example, to take down the dollar."

IV. Trillions of Air

To many in the blockchain circle, those in the crypto world seem to be playing a bit too recklessly. Zhou Zhengjun, founder of Trustnote, stated that his company also has tokens, but they are not meant for employees to speculate on; instead, they are used for talent incentives. The higher the quality of technological research and development, the more it directly contributes to the value of the digital currency itself.

Zhou also pointed out a secret behind the popularity of tokens in the blockchain circle. Some technical personnel are willing to accept digital currencies primarily for tax evasion considerations, "Currently, the tax policies regarding digital currencies are unclear, and you can basically avoid taxes. Just think, if one day they say you have to pay taxes on digital currencies, wouldn't that be an implicit acknowledgment of the legitimacy of digital currencies?"

However, the value of digital currencies is currently severely distorted. Angel investor Sun Jiangtao, who has laid out the entire blockchain industry chain, expressed his disappointment with the current state of the industry. They have conducted statistics and found that at least 80% of ICO projects on the market are "traps" packaged under the guise of a digital currency ecosystem, either lacking project support and devolving into pyramid schemes or being filled with "water," "even games that use blockchain to raise cats and dogs are considered decent applications."

A representative from an exchange told me that in the crypto world, marketing ability is paramount, "After all, it's a bunch of air; as long as you can help people sell their tokens, any amount is acceptable." In his view, the blockchain industry is extremely low-quality; the products they create are buggy and crash-prone, yet they can easily raise hundreds of millions.

"In this circle, a big player appears every three months, and then one disappears," he said, "the turnover is extraordinarily rapid." Yet, many high-risk individuals still want to enter. The various financial imaginations created by humanity in the past have concentrated and exploded in this field.

In the mobile internet world, a track typically has only two or three unicorns, while the blockchain field is quite unique; through ICOs and token issuance, there are dozens of companies that have reached the 1 billion USD market value threshold. In Sun Jiangtao's view, most of the top ten blockchain projects currently lack application scenarios, and most are bubbles and air, destined to burst eventually.

A Bitcoin ATM machine endorsed by boxing champion Tyson located in Las Vegas. @Visual China

The essence of ICOs is asset securitization, bypassing the investment banking and exchange systems, achieving small-scale IPOs without audits or legal oversight.

Wu Tianhua, founder of Tiger Securities, stated that the trading system and trust mechanism currently employed by human society indeed waste social resources, but this extra cost is to ensure transaction safety. At this stage, bypassing this system before technology matures provides a pleasant user experience but carries significant risks. In the end, it is likely that there will be more scammers than good people, leading to a situation where bad money drives out good. This is one reason for the proliferation of blockchain scams at this stage.

"Air tokens are essentially a high-level form of pyramid schemes; the blockchain concept is indeed an excellent theme for pyramid schemes. Pyramid schemes have survived for so many years, and at least a few hundred people stay in one place, making it easy to expose them, but air tokens are not so easily discovered," said a token representative.

Zhou Zhengjun is considered a veteran in the blockchain circle. He is worried about the tricks played by these young people in the crypto world: "These scam projects are consuming resources in this field; the more scammers take away, the less is left for those who genuinely want to work." He fears that the entire industry will face a catastrophic disaster, dragging the blockchain circle down with it.

Even those who are serious have their own agendas.

Sun Jiangtao mentioned that the blockchain industry has three different layers, and for a long time, they have looked down on and been estranged from each other—those focused on digital assets look down on those working hard on public chains, those focused on developing underlying technologies for public chains disdain the "local bumpkins" in the crypto world who are always trading digital assets, while internet giants find it difficult to lower themselves to seek cooperation with the pioneers; they often start anew based on traditional experiences but achieve little.

Despite the various chaotic phenomena, Sun Jiangtao remains optimistic. He believes that the funds currently wasted in the blockchain field are not as much as those in mobile internet, and that scams and bubbles are actually the best investor education. The speculative mindset first captures everyone's attention, creating an opportunity for a gradual unification of understanding and the birth of great enterprises.

After experiencing so many rounds of dramatic rises and falls, some people have found that their views on wealth have changed. "I now feel that money is not money; it's just a chip in a game. Being able to participate in a collective trial and error in human history is not a regret."