Can you trust the price? What’s behind crypto’s irrational markets

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In the past few months, there have been three events that have made me question the sanity of the crypto markets.

In each case, news came out of major flaws in a project’s governance or business model. And the market did… nothing. The valuation of these projects remained totally unchanged or even increased, signaling to me that there is a significant disconnect between reality and crypto market prices.

Thankfully, Crypto Law Insider is not an investment guide. We do not profess to advise on which tokens to buy or sell. 

But that doesn’t mean that we don’t keep a close eye on what’s happening and notice when absurdity rocks the markets.

To make sure that you don’t get blindsided when playing in the crypto markets, read on to get a better sense of the challenges you face…

Tether’s Serious Valuation Issue & Governance

Two months ago, New York State regulators dragged Tether to court for misleading investors about its reserves. 

Finally, Tether had to come clean that it only had 75 cents to back every Tether Coin. Though they promised users a 1:1 USD stablecoin valuation.

The point of a stablecoin is to bridge the gap between crypto and fiat currency by pegging the two at a fixed price.

This peg makes asset-backed coins attractive to buyers by reducing the potential for wild highs and lows in their value. In theory, it also makes them more user-friendly for everyone from a bank to your corner grocer. 

Why? Because they can trust it.

But for a stablecoin to deliver on that promise, it must be solidly backed by its reserve asset. Without this, significant fluctuation in the asset’s value could undermine the peg.

And the currency could come crashing down overnight.

So you would think that when people found out about Tether’s insufficient reserves that the price would tank, right? 

It didn’t. Even in the face of irrefutable evidence that Tether is no longer a stablecoin, the coin is still trading at $1.00. The same as if it were backed 1:1. 

Komodo’s Broken Wallet

Next, there’s Komodo, the project that stole from its own users to ‘protect’ them.

Earlier this month, news broke that the privacy coin, Komodo, had a major vulnerability in its Agama wallet

Immediately, the project’s leadership leaped to protect its users from a potential hack. And took it upon itself to go into user wallets and take some of their funds for ‘safekeeping’.

This was no small sum, amounting to an estimated $11.84 million in KMD and $750,000 in BTC.

Now the project’s leadership is still struggling to figure out how to return the funds that it took. This will be a difficult, time consuming and imperfect process.

Again, you would assume that after such an erosion of trust in its platform Komodo would see a drop in its valuation. 

Yet, to the contrary, Komodo’s market price has risen

ZCoin: Open for Inflation

Then there’s Zcoin.

ZCoin forged its own path and went to market offering its own ‘Zerocoin protocol’.

The Zerocoin protocol works by allowing people to burn their own coins and then spend an equivalent amount. This protects the user’s privacy as the new coins have no transaction history.

In April this year, it came out that there was a critical flaw in the Zerocoin protocol. This flaw enabled attackers to potentially mint an unlimited number of their own coins. In fact, they found that these fake coins already made up 1 percent of Zcoin’s circulating supply.

Worse yet, this wasn’t a vulnerability from a coding error that the developers could fix with a quick patch. 

It was an inherent cryptographic flaw in one of the project’s original zero-knowledge proofs. This essentially rendered the privacy in transactions on the Zerocoin protocol worthless.

What was the leadership’s response to this serious vulnerability

Although we believe that Zerocoin can be fixed given sufficient time, we have decided not to dedicate further resources to it. This is in line with our roadmap to transition away from Zerocoin to Sigma…

So for three months now, the Zerocoin protocol has been wide open to potential attacks. 

Once again, after news like this, you would think that the price of ZCoin would have dropped.

Instead, like Komodo, ZCoin has risen from its mid-May 2019 low of $7.22 to hold steady between $11 and $12. 

Note: ZCoin is releasing Sigma in two weeks, and we will have to wait and see how this new privacy protocol performs. Though given the project’s response to the vulnerability and their track record, I have my concerns.

What does this mean for Crypto Law Insiders

How is it that even after finding major failures in governance, trust and technology in these projects– the market didn’t flinch?

I have no idea and truthfully nobody does. 

As the late great John Maynard Keynes warned, “Markets can remain irrational longer than you can remain solvent.”

Crypto markets are irrational and it appears that investors simply don’t understand the risk of trading tokens on Tether, Komodo or ZCoin. 

A stablecoin that’s not stable, a platform that’s not secure and a privacy coin that’s not private—these are huge flaws, and it’s only a matter of time before the market values them accordingly.  

Dean Steinbeck

Dean Steinbeck

Dean Steinbeck, Managing Director of Crypto Law Insider, is the leading authority on legal issues related to cryptocurrency and blockchain technologies.