Cryp­tocur­rency crash is com­ing, warns Do­ge­coin cre­ator

The Straits Times - - BUSINESS -

NEW YORK Aus­tralian Jack­son Palmer no longer thinks it’s funny to i mi­tate Doge, t he I nter­net meme about a Shiba Inu dog whose awestruck ex­pres­sions and gar­bled syn­tax (“Wow. So pizza. Much de­li­cious.”) made it a vi­ral sen­sa­tion sev­eral years ago.

But if he did, he might chan­nel Doge to of­fer a few cau­tion­ary words to in­vestors who are fall­ing for cryp­tocur­rency start-ups, which are Sil­i­con Val­ley’s lat­est mon­ey­mak­ing craze: “Very bub­ble. Much scam. So avoid.”

Mr Palmer, the cre­ator of Do­ge­coin, was an early fan of cryp­tocur­rency, a form of en­crypted dig­i­tal money that is traded from per­son to per­son. He saw in­vestors talk­ing about bit­coin, t he old­est and best-known cryp­tocur­rency, and wanted to find a way to poke fun at the hype sur­round­ing the emerg­ing tech­nol­ogy.

So, in 2013, he built his own cryp­tocur­rency, a satir­i­cal mash-up that com­bined bit­coin with the Doge meme he had seen on so­cial me­dia.

He hoped to use Do­ge­coin to show the ab­sur­dity of wager­ing huge sums of money on un­sta­ble ven­tures. But in­vestors did not get the joke and bought Do­ge­coin any­way, rais­ing its mar­ket value to as high as US$400 mil­lion (S$538 mil­lion).

Along the way, the cur­rency be­came a mag­net for greed and at­tracted a group of scam­mers and hack­ers who de­frauded in­vestors, hyped fake prod­ucts and left many of the cur­rency’s orig­i­nal back­ers empty-handed.

Today, Mr Palmer, 30, is one of the loud­est voices warn­ing that a sim­i­lar fate might soon be­fall the en­tire cryp­tocur­rency in­dus­try.

“What’s hap­pen­ing to crypto now is what hap­pened to Do­ge­coin,” he said in a re­cent in­ter­view. “I’m wor­ried that, this time, it’s on a much grander scale.”

Al­ready, there are signs of trou­ble on the hori­zon. Last week, af­ter the Chi­nese au­thor­i­ties an­nounced a crack­down on vir­tual cur­ren­cies, the value of bit­coin tum­bled briefly by 30 per cent be­fore re­cov­er­ing par­tially. The value of Do­ge­coin fell over 50 per cent the week be­fore.

But there is still no greater ma­nia among tech in­vestors than cryp­tocur­rency, which some see as an even­tual re­place­ment for tra­di­tional, gov­ern­ment-is­sued money.

Even with the re­cent de­clines, the price of bit­coin has more than tripled this year. An­other cryp­tocur­rency, Ethereum, has gained more than 2,300 per cent.

Their suc­cess has spawned hun­dreds of other dig­i­tal cur­ren­cies, and given rise to an en­tire cat­e­gory of start-ups that take ad­van­tage of cryp­tocur­rency’s pub­lic ledger sys­tem, known as the blockchain.

Many cryp­tocur­rency start-ups have raised money through an ini- tial coin of­fer­ing (ICO), a type of fund-rais­ing cam­paign in which in­vestors buy into a new ven­ture us­ing bit­coin or an­other cryp­tocur­rency. They then re­ceive vir­tual “to­kens” in­stead of stock or vot­ing rights in the com­pany.

These to­kens grant in­vestors ac­cess to a prod­uct or service that will be built with the money raised in the ICO, such as cloud data stor­age or ac­cess to a new so­cial network.

(If you’re hav­ing trou­ble pic­tur­ing it: Imag­ine that a friend is build­ing a casino and asks you to in­vest. In ex­change, you get chips that can be used at the casino’s ta­bles once it is fin­ished. Now, imag­ine that the value of the chips is not fixed, and in­stead will fluc­tu­ate de­pend­ing on the pop­u­lar­ity of the casino, the num­ber of other gam­blers and the reg­u­la­tory en­vi­ron­ment for casi­nos.)

De­spite the ob­vi­ous risks of such ven­tures, in­vestor ap­petite has been rav­en­ous. This year, 140 coin of­fer­ings have raised a to­tal of US$2.1 bil­lion from in­vestors, ac­cord­ing to Coin­sched­ule, a web­site that tracks such ac­tiv­ity.

ICOs are largely un­reg­u­lated in the United States, al­though that could soon change. The Se­cu­ri­ties and Ex­change Com­mis­sion warned in­vestors this year about the grow­ing num­ber of coin of­fer­ings, say­ing that “fraud­sters of­ten try to use the lure of new and emerg­ing tech­nolo­gies to con­vince po­ten­tial vic­tims to in­vest their money in scams”.

Un­like bit­coin, whose early adopters of­ten used it to buy drugs, weapons or other il­licit goods on the dark Web, Do­ge­coin at­tracted a crowd of earnest do-good­ers at first.

As the price of bit­coin climbed, in­vestors got in­ter­ested in other cryp­tocur­ren­cies. With no ex­pla­na­tion, the price of Do­ge­coin dou­bled, then tripled. Two months af­ter it was in­tro­duced, Mr Palmer’s joke was worth US$50 mil­lion.

The suc­cess of Do­ge­coin at­tracted un­savoury char­ac­ters. One scam­mer raised US$750,000 from Do­ge­coin sup­port­ers for a cryp­tocur­rency start-up that never ma­te­ri­alised. A hacker broke into Do­ge­wal­let, a web­site where users stored their coins, and stole thou­sands of dol­lars’ worth of the cur­rency.

Mr Palmer, a laid-back Aus­tralian who works as a prod­uct man­ager in San Fran­cisco, was dis­turbed by the com­mer­cial­i­sa­tion of his joke cur­rency. In 2015, he an­nounced he was leav­ing Do­ge­coin be­hind.

He wor­ries that the com­ing reck­on­ing in the cryp­tocur­rency mar­ket – and it is com­ing, he says con­fi­dently – will de­ter peo­ple from us­ing the tech­nol­ogy for more le­git­i­mate projects.

“The big­ger this bub­ble goes, the big­ger neg­a­tive con­no­ta­tion it’s go­ing to have,” he said. “It’s go­ing to be like the bust, but on a much more epic scale.”


Prod­uct man­ager Jack­son Palmer cre­ated Do­ge­coin as a joke to show the ab­sur­dity of stak­ing for­tunes on un­sta­ble ven­tures. Con­cerned by the po­ten­tial for abuse in the cryp­tocur­rency mar­ket, he is now one of the loud­est voices urg­ing in­vestors to be­ware.

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