The People Who Will Be Most Harmed by Crypto Scams Are Our Own Loved Ones

Apr 18, 2022

Below I will share an email exchange I had with a former co-worker over the past few months as his family wrestled with whether to dive in to a web3 investment token.

The point of sharing is not to demonstrate that I’m smarter than anyone else, or as an “I told you so”, or anything like that. The reason I’m sharing is that people need to realize that when financial schemes come into vogue, whether it’s collateralized mortgages or Albanian pyramid schemes, the people who ultimately pay the price are the vulnerable, the economically precarious, and the financially semi-literate (“my brother-in-law who has not always made the best financial decisions”).

If and when the crypto bubble implodes, I won’t be worrying about Chris Dixon and the Winklevoss twins losing 98% of their net worth, I’ll be concerned about people in my own extended family having to pick up the pieces after economic ruin.

This also isn’t intended as an indictment of the entirety of the web3 technology stack and ecosystem… I’ll leave those takedowns to others.

10/26/2021 - From: Former Colleague - To: Patrick

Hi Patrick, how is fatherhood treating you? He’s growing! Big boyyyyyyy! I miss those days. I’m coaching [daughter] now and it’s a hoot. Really cool to see the girls on the team get better each week.

Quick question. My brother-in-law, who has not always made the best financial decisions, is all in on a company called strongblock. https://strongblock.com/

It’s crypto related. Something I don’t follow. I’m concerned he’s putting all his eggs in one basket on something that could be one ponzi scheme. Wanted to know if you heard of the company.

Note that Strongblock ended Oct 26th valued at $1,104.27 and this was one day before its all-time high. One fascinating aspect of financial manias is how the average participant (“my brother in law who has not always made the best financial decisions”) gets most excited about these assets when they are most expensive and thus most likely to decline. This reminds me of how I never heard more people talking about SPACs and Zoom and Rivian etc. as when they were at their peak valuations.

I replied by saying that I had never heard of Strongblock but some of the commentary I could find from the token-holders didn’t give me much confidence:

"Explain your thought process behind why it’s a scam? Lol I own 15 NODES and been making 2k/ per day since 3 months ago. Believing in the process will get you Further than being negative on it."
"as long as new peeps keep coming in, price will be stable or going up. have you read their white paper?"

I also shared this video from a crypto investor who was skeptical.

10/27/2021 - From: Former Colleague - To: Patrick

I have to tread lightly with this. My wife is so protective of her brother.

Appreciate your input on StrongBlock. That video makes sense. Will show to wife so she can at least hear someone other than me saying it’s super risky and possibly ponzi scheme. She can decide if she wants to express concern to her brother. I’m already “that guy” who tells you worst case scenario – I’m a buzz kill.

I circled back to him in February, once I noticed that Strongblock was down below $500, checking to see what was going on with his family.

I also mentioned that I had done a lot more reading on crypto and had become more convinced that projects like Strongblock were literal ponzi schemes. I used the analogy of “beanie babies”, comparing these tokens to pure speculative assets that don’t have economic value but whose prices are sustained only by the existence of buyers.

2/11/2022 - From: Former Colleague - To: Patrick

Anything specific you found that I can use as ammo to convince at least my wife?

He is really involved in that space and believe he is investing in other companies that are related to crypto, blockchain, etc. I believe he is slowly getting rid of the “Beanie Babies” from what I understand. However, my wife wants to buy two nodes from him, which caused a little argument to say the least.

I know nothing about Metaverse, NFTs, or Crypto and feel like I am missing the boat [PM: emphasis mine]. We need to have that lunch so you can give me the lowdown. If you see potential and I need to do at least a little investing, let me know. My cousins 23 year old son apparently is making a lot of money with Crypto etc. Smart kid. He is someone else I need to have to invite to that lunch.

Thanks for reaching out. I will mention again to my wife that numerous people whose opinion I respect have told me they think it’s a Ponzi Scheme.

2/11/2022 - From: Patrick - To: Former Colleague

So I personally believe that most of these crypto projects are eventually going to zero and this will be an embarrassing time period that everyone involved will later pretend never actually happened. With maybe the exception of bitcoin because that one is so entrenched, and is the only one that is actually doing what it purports to do (which is to be a ledger as a store of value with really no other purpose built on top of it), digital gold, blah blah blah.

A whole lot of other very smart people don't agree with me about that, but that's what I think.

In the case of Strongblock I haven't read any of the papers or anything but if you read through the comments on CoinMarketCap (see this summary page and look at the right side of the screen under "Live Strong Chat") you can deduce in a few minutes what is going on. People buy Strongblock at the market price, a certain amount of which entitles you to a "node", which mints more Strongblock for you. Thus, money enters the system as people buy into the network, but supply goes up continuously as more is made from increasingly more nodes. The network is not generating any value in and of itself because Strongblock has no economic usefulness, so the only thing that is supporting the market price is new buyers (or, people who bought a few nodes deciding to buy a whole lot more). It needs new money entering the system otherwise the price would collapse due to the supply expansion from all the nodes. And it needs more new money faster because the more nodes already exist, the faster the supply of Strongblock is increasing.

To be clear, this is not "sort of like" or "mostly like" a Ponzi, this is the precise textbook definition of what a Ponzi is. And it's actually a naked Ponzi because the rules of Strongblock don't seem to be masqueraded in any way, they seem pretty upfront about how this works, although the people in the comments section will of course never admit that because it would dissuade new people from buying into the network and sustaining prices. Whereas Bernie Madoff was pretending that the money he raised was being put into investments that were delivering actual value, Strongblock seems pretty clear about the fact that all its tokens do is mine more tokens. Most of the chatter among node-holders is sort of an elaborate fiction/pump to avoid having to ask the question of where exactly the money comes from.

The thing about Ponzis is that everybody in them looks like a genius right until the whole thing collapses. Because the entire system is dependent on new capital coming in, that's why everyone evangelizes (look at what they are doing in the comment section, just euphorically talking about how rich they're getting), and the floor price for the asset goes directly to $0 once new cash stops coming in. This is a mathematical certainty that it will eventually happen-- might not happen tomorrow, might not happen next year, but eventually it will (one of the comments that made me laugh was "Cant call something a ponzi that has payed out for 18months straight-TO EVERYONE" this is a perfect example of how these things work on the mind). Another good illustration of the general principle is this thread from twitter.

And of course the fact that (1) your not-so-terrific-with-finances brother in law thinks this is awesome, and (2) you don't understand any of it but feel like you're "missing the boat", is PRECISELY what you should expect everyone involved to feel like in the midst of an unsustainable financial scheme where everyone involved seems to be getting rich yet the fallout has not yet transpired. It's like in 2006 when everyone who didn't take out six mortgages to buy six condos felt like a total inept loser while their brother in law was building a real estate empire.

So, I think the general message to your brother in law is: Strongblock is by definition a ponzi scheme, that's not an opinion it's a fact which you can verify in 30 seconds by having him explain to you how it works and you respond by saying "yes and that's exactly what a Ponzi scheme is", and in the Ponzi scheme everybody makes a lot of money until the whole thing disintegrates, so if you want to invest in an asset class that prints you stupid money until the day the whole thing annihilates (basically playing chicken) and if you time it right and get out before everyone else you can keep that stupid money as long as you don't forget that this whole thing will go to zero, then by all means, I hope you get rich. But when the inevitable end comes it will be bloody and swift and there will be no opportunity to get out after the end gets started.

2/11/2022 - From: Former Colleague - To: Patrick

Now that is a response!! I read it to my wife and I can tell she wasn’t happy with it. She believes and supports her brother. I get it - she wants to believe he is right. I get it. But it just doesn’t make sense.

Thanks for your time on this. I will keep you posted.

4/8/2022 - From: Former Colleague - To: Patrick

Strong at $47.22.

Make sure I pay for dinner when we do meet. I wasn’t planning on investing, but your advice meant and means a lot. I did mention to your thoughts to my wife, who was wanting to invest due to being convinced by her brother to do it. Wasn’t a pretty discussion, but ultimately she gave up.

Hope the family is well!

So where are we today? Strong is trading at $32 as I publish this blog post, down 97% from when this exchange began ~6 months ago. Also, when I went back to the CoinMarketCap page while putting together this blog post, I came across this gem:

Hilarious. What a f***ing joke. Nothing is real anymore because we are already in the multiverse. This stuff is complete nonsense obfuscated by techno-jargon to make it seem like something interesting is actually going on. Stay thirsty, my friends.

The Down Round

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