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Real-time self-government in the cryptocurrency frontier: NFD and my own plunge into the strait of self-government

By Daniel M. Ryan
web posted October 6, 2014

From The Edgecoin Scam…

If you've followed the course of this series, you've probably figured out that I have a knack for shoving Bitcoins into scammers' Roach Motels. Granted that I lack the "touch" needed to pick the winners in the altcoin jungle, but I can salvage something from my losses by passing what I've learned on to you. In the only regulation-free exchange environ in the entire globe, barring backwater pure-OTC outlets, the more on your guard you are the better.

This particular scam, the Edgecoin scam, was hard to spot. The announcement thread was so slick, it looked like a fully professional presentation. There was a link to a Youtube video purporting to demonstrate the messaging feature. And – this was the convincer for more than a few people, including me – there were two real names near the bottom of the announcement: a graphic designer and a programmer. Boy, did it seem legit. It seemed so legit, almost no-one thought to verify the names by contacting them directly.

It's actually an old trick in the con-artist world. Con artists assume that people are lazy, which they probably use as a rationale to feel good about themselves and what they do. Certainly, they have people skills that are well above average. So for them, it's a small risk to put up fake names for their "projects." Unfortunately, they're all-too-often correct about their marks' disinclination to do any due diligence. Even in the off chance that someone does check and wonders why the people she contacted have no idea about the "project," any con artist worthy of the name can unveil a silver tongue and keep the scam rolling.

In my case, I really was too lazy – especially since I was tipped off about this trick from an old book on penny stock speculating that's now a minor cult classic.

But in the altcoin jungle, naiveté does disappear. At first, his slickness proved to have put people on their guard. He only added those two names because of what he called "a lot of concern" about Edgecoin. 

When the sting came, he actually showed a lot of brassiness. He promised a fully functioning client wallet for Edgecoin on April 17th, and he did release it in two stages. For the first stage, he released a password-locked zip file for downloading. For the second stage, he released the password but not before milking the Big Debut for all it was worth on his thread. Just before, he tried to pre-emptively cover his behind by posting this:

This beta test is primarily to test our mining functions. Some of the other tabs/features are disabled in this release (it's not the first).

I'll be making note of this on the first page, throughout the thread, and on twitter when the [password] is released.

And this: "It's very important that you participate in the beta test if you want a clean, stable, and fair launch."

Right up to his password release, he used his silver keyboard to present himself as a concerned dev who took skeptics seriously. Example:

Threw up a virus total for all the skeptics.

Don't believe it? Scan it AS SOON as you get the [password] please.

Yes, this was the scammer himself.

When he released the password, the first two "beta testers" said that the file crashed. This, the scammer smoothly echoed: "Let us know if it crashes. This is a very unstable version." At first, the initially happy pre-sale participants obligingly chimed in. And so did he, with:

Thank you for the feedback we are working on every issue as quickly as possible.

 If you have yet to test the beta please do, we must know that this is a universal problem.

 Please post what operating system you're on.

Also, to a pesky questioner:

And a video and a beta client, are you not reading the thread?

It's unstable but you can see that Edgecoin is real and here to grow.

These and other quotes illustrate how much gall the scammer was able to muster when he knew full well that his Edgecoin ‘wallet' bore the same resemblance to a real altcoin wallet as a cargo cult ‘plane' does to a real airplane. The first to point this out was Bitcointalk user VanBreuk:

Ok, quite positive this is confirmed as scam.

Just try this... delete all the DLLs plus the conf file. Rename .exe to whatever. It still runs. This is just a toy made with adobe software.

Sorry to whoever put more than a few satoshis.

As is often the case when a cat's head pops out of the bag, the first reactions are shock or incomprehension. The scammer even tried for a time to bull his way past being nailed. But before the cat was completely out of the bag, he smoothly inserted the first iteration of his exit excuse:

We're still assessing this situation as best as we can. It seems there may have been alteration by a separate entity attempting to sabotage us.

We are currently surveying the damages.

It took some time before the believers in the scammer's sincerity, as well as the naïfs, figured out that they had indeed been conned out of their Bitcoin. By that time, the scammer got tired of bulling and vamoosed – but not before changing his original announcement post to:

It's come to our attention that a nefarious 3rd party has decided to target us for a raid, presumably due to our high profile IPO and coin technology. Our code has been dismantled, our hope has been crushed, and your coins are gone.

It saddens me to have to tell everyone that we're calling off the project. I would like to thank Anon136 for providing his escrow services and protecting our investors. Only time will heal these wounds and dampen the impact of such theft.

I would like thank everyone who joined us in this battle. Cryptocurrency will live on, but it's time for us to die.

Please contact Anon136 to recover your investments. Unfortunately there's not much we can do for direct investors. Please email us for details as we will attempt to compensate for your losses.

Myself, I quickly figured out what was going on after confirming VanBreuk's finding. That got me not only erasing any Edgecoin folders but also running two antivirus programs one after the other: the full-drive scans for each. Like about half the others, I had been too cheap to pay the 0.02 Bitcoin escrow fee to Anon136. Had I done so, I would have been out only the fee instead of the 0.5 BTC I lost.

Again, the scammer permitting escrow shows that he had a shrewd if malicious appraisal of human nature. He did get less of a haul, but he also had an appearance of legitimacy. I didn't know this at the time, but this fellow did not post that soon-seen-through cover story to keep up appearances. He had a different motive.

…To "Nxt Fair Distribution"…

One week after the cat was let out of the Edgecoin bag, another pre-sale announcement graced the pages of Bitcointalk. Instead of excited promises of new whiz-bang features, this one's proposed tech was fairly plain.

On March 20th 2014, two days before all three deliberately-implanted source-code flaws were found in Nxt, a bit after all three prizes won in a stellar promo content that got a lot of altcoineers looking into Nxt's source code, a new pre-sale IPO was announced for a plain Nxt clone called Nas.

The dev jumped the gun a bit; he left the pre-sale open for only five days and said that Nas would be ready to go on the last second of March 31st Eastern Time. There was scoffing in the thread, and the first sends were amounts less than 0.1 Bitcoin; some were substantially less. Six people decided to only risk 0.01 BTC, or less than six dollars at the time. The highest reported send on the announcement thread was 0.5 BTC, and the fellow who sent it said he didn't know any English. (Actually, the recorded send was 0.4995BTC.)

 In total, only thirty-six people sent in BTC or Nxt and qualified as "IPO" buyers. Of them, only eight had risked more than 0.1 Bitcoin or an equivalent amount in Nxt. The total haul for the Nas dev was only 1.9462 BTC plus 6,179 Nxt. Part of the reason for this paucity was that a Bitcointalk moderator had decided there was something fishy about Nas and had locked the original pre-sale thread; it was later deleted entirely.

At then-prevailing market prices, as of the day of launch, the dev sold 9 billion of his Nas for only a little less than $1,100. The other billion were reserved for bounties, giveaways and a marketing/promotion account. The giveaway allocation was only 0.5% of the total, or 50,000,000 coins.

Since most pre-sale "IPOs" at the time worked by allocating coins by share of the total spends, the fellow who didn't know English and sent in 0.4995 BTC was sent 1,993,005,000 Nas: almost two billion of them. The six who risked only 0.01 Bitcoin received 39,900,000.

In pre-sales of new coins whose total float is over a billion, a normal implied price is around one to three satoshis, or one- to three-hundred-millionths of a Bitcoin. This five-day unpopular IPO probably set a record for the lowest presale price per coin. On distribution day, the implied Bitcoin price for one Nas was only a little more than 0.025 satoshis. So, the lowest indivisible unit in the Bitcoin system – that above-mentioned satoshi – would buy 39.9 Nas at the pre-sale price.

It was almost a replay of its parent coin Nxt, only in miniature. Because the IPO was so little noticed, and mainly noticed by scoffers and skeptics, the stage was set for one of those sudden bonanzas.

Nas got listed on Dgex two weeks after it was launched, in part because the dev offered a one hundred million Nas bounty to the first exchange that listed it. When it made its big debut on Dgex, on April 15th, the usual excitement had built up amongst the punters. The opening trade was for twenty-one satoshis.

So, that lucky fellow who couldn't speak English was sitting on a haunch of Nas whose theoretical value was about 418 Bitcoins or almost $200,000 at Bitcoin's then-recovering price. For the many more modest buyers, five to six bucks' worth of Bitcoin got 39,900,000 Nas; those were valued at a more feasible-to-realize 8.379 Bitcoins: almost four thousand dollars. Those sends were like scratch tickets that yielded big prizes.

And sure enough, the glaring eyes that scrutinize altcoin land for "poor distribution" came out swinging. By this time, economic populism had settled in to the point where the "distribution" politesse was being sidelined. Case in point: this Bitcointalk thread, entitled "NAS the latest GREEDY/PONZI distribution model - 71% to 11 people?? what?" He did get some pushback at first, but many of the later participants took the cue and criticized Nas. As he saw he had picked up some support, the original poster mellowed out somewhat but he later returned to his tub-thumping when he got more disagreement.

One helpful poster, notsoshifty, politely suggested this alternate distribution model:

What I would do:

- Each of the 500 "interested" investors in NAS get 1 share each. Total shares in this group: 500

- Each of the 33 "IPO" investors in NAS get N shares, where N=30*(X+0.2), where X is the BTC donated (or NXT equivalent, at 0.00005 BTC/NXT rate). Total shares in this group: 265.659

Create a NAS clone with 2 billion coins. Distribute it as follows:

- 1 billion: temporary forging account

- 1 billion: Allocated to 533 accounts at 1,306,064 coins per share

Example: non-paid interested stakeholder gets 1 share, or 1,306,064 coins

Example: 0.01 BTC invested (lowest investor) gets 6.3 shares, or 8,228,206 coins

Example: 0.4995 BTC invested (highest investor) gets 69.95 shares, or 27,407,762 coins

The 1 billion NAS in the forging account would be run by a trusted escrow (such as Anon136), for two weeks, on the absolute understanding that it would all be sent to the genesis block (i.e. destroyed) over the period of those two weeks, as forging nodes come online.

The coin would run alongside NAS, and the community would either pick it up and run with it, or not (in which case it would quietly die).

Rationale: you are rewarding paid investors by giving them a much larger share, but not so much that you have whales with up to 20% of the distribution each, and 500 people with 0.001% each. Nobody gets more than 2.74%, or less than 0.13%

EDIT: as all the account numbers and public keys of all 533 accounts are known, all this is possible without having to spend 2 weeks getting information from each investor.

Another Nxt cloner had already had a similar idea, although probably inspired by the rancour against Nxt that NEM had tapped into. His clone, NHZ, was announced on March 31st. The NHZ distribution plan, probably inspired by NEM's, eschewed pre-sales entirely. There later was a sale of some of the 1 billion float more than a month later, but it was merely peripheral; only 20 million were put up for sale. The main way to get NHZ was to earn it through bounty jobs, or by setting up a stable node that would secure the network. The latter paid 666 NHZ daily.

As distribution plans go, it was a neat and unusual idea. The later sale aside, which was justified to speed up distribution to facilitate listing on an exchange, the plan's guiding rule was: "no work, no NHZ" – with "work" encompassing the server costs for running the nodes. It's an interesting social experiment, but it's more-or-less remained under the radar until recently. Until it got noticed and shot up, the implied market cap for all 1 billion NHZ was about the price of a decent used car; as of the time of this writing, its market cap is about the same as a median American house. Nas, which has gone down that inevitable grinding bear market after the speculators flitted away to the next hottie, has the market cap of a luxury car.

Devs and would-be devs in the Nxt part of the altcoin jungle were beginning to see that the economic-populist rancour over Nxt and Nas were thinly-disguised demand for a better-distributed Nxt-like coin. These ranks included one would-be dev that was the opposite of an idealist. Shrewdly, if cynically, he figured out that a lot of the rancour was frustrated greed.

So, this fellow – who took the Bitcointalk username "NFDCoin" - unveiled his own pre-sale offering that tapped into the disguised demand for a more tolerably distributed coin. Which of course, I have to admit, included demand for a quick-profit ride if it had taken off like Nas did.

His announcement was made on April 22nd. His adverted Nxt clone was to be called NFD. Nxt Fair Distribution.

A Clever Distribution Framework…

I do have to admit that the fellow came up with a clever distribution scheme. His plan was to clone Nxt straight: no fancy gizmos or doodads. His proclaimed innovation was his distribution plan.

5 billion NFD were to be created in the genesis block, the block that starts off the building of the blockchain ledger. The first eye-catching part of the plan was the amount of coins allocated to the giveaway category. Not 0.5%, as in the case of Nas, but a full 40%! Two billion of the five were to be split between every qualified applicant for a giveaway stake. As NFDCoin was to find out, there were going to be a lot of them.

At first, he let anyone in – and soon got a flood of applicants. After being tipped off about sockpuppet accounts, he smoothly said at first that he'd be able to spot them and would delete them from the sheet. But later, he added a minimum 10-post requirement to qualify with a mere private message. If a Bitcointalk account didn't meet that threshold, the applicant would be obliged to send a token payment of 0.001 Bitcoin with a signed message attached.

That signed message, as well as private messages that would qualify a less newbieish account, had to include a value that's a little unusual to someone outside of the Nxt world. The Nxt brain wallet system, as outlined here, automatically generates an account ID for a particular password. This feature makes it "deposit once, access anywhere;" the holder/user is not tied down to a specific computer that has a specific wallet file. One of the steps needed to generate the ID is to take the SHA-256 hash of the password. This intermediate step makes it convenient for an automated send script to disburse the float of a new Nxt clone to a large number of people, subject only to the limit of the sending computer's capacity and (more realistically) the transactions-per-block limit built into the clone.

So, that's why any application for a giveaway stake in any legitimate Nxt clone – whether made through a Bitcoin send with signed message or directly through private message for accounts that qualify – has to include the SHA-256 hash of the secret passphrase the user selected. Generating the hash isn't that hard: online hash converters like this one generate the hash quickly and easily. You can try it yourself if you like.

As the announcement thread grew and the applicant list grew like Topsy, NFDCoin agreeably tightened up the minimum-post count to 50 and, later, upped the send for accounts below that threshold to 0.0015 Bitcoins.

As indicated above, the other 60% were to be distributed through a pre-sale. The unique facet of this part was how the "IPO" pre-sale was structured. For most IPOs until recently, the structure was as simple as can be: the total amount of BTC sent is the divisor and each person's spend is his or her respective dividend. Each quotient is multiplied by the part of the float allocated to IPO buyers. The other, now-standard model is a pre-sale at a fixed price per alt.

The NFD pre-sale did have the former structure, but within three categories. The first category was for people wishing to spend 0.1 Bitcoin or less; 30%, or 1.5 billion, were to be divided up by the pre-buyers in this tranche. The second was for people sending in 0.1 to 1 Bitcoins; 20%, or one billion, were to be divvied up amongst these spenders. The third and final pre-sale category was for people spending 1 Bitcoin or more: for these big spenders, the allocation was only 10% or 500 million NFDs.

And the icing on the cake, for those who liked the "Fair Distribution," was a hard cap of 100 million NFD per user. Even the biggest of big spenders would only receive at most 2% of the float. Any overage would be kept by the dev; by Bitcointalk custom, all the collected BTC and Nxt were supposed to be put into building a starting ecosystem for the altcoin.

The rationale behind this complex four-tranche allocation, according to NFDCoin, was to ensure a cheaper price per NFD for small buyers. As you'll find out in the final part of this series, he really did pull that off.

But his populist-friendly side only went so far. As he also said in the announcement, he had absolutely nothing against a Bitcointalk user sending Bitcoin to more than one category. He also had created a Bitcointalk address for each category, as well as a common Nxt address for all categories. The Nxt, he would credit at a value close to the then-prevailing trading price: each one would be credited as 0.00005 Bitcoin. He had done so, as well as setting up different destination addresses for each kind of send, to make his organizing life easier. It had been a wise decision.

…A Lot Of Pre-Sale Bookkeeping Work…

NFDCoin was indeed shrewd in his way: his announcement thread grew quickly and application for his giveaway tranche grew even more quickly. That meant the fellow had a lot of bookkeeping work to keep up with, in addition to answering a lot of private messages and frequently posting on his own announcement thread. And he seemed rather diligent in his work. There were skeptics and scoffers in his self-moderated thread, and some scam warnings which he deleted, but the large majority of them were excited participants. Like the typical dev of a new coin, he mostly took an above-the-target approach to the scoffers, skeptics and scam-sniffers. In this case, he had an even better excuse: the bookkeeping workload over the nineteen days of the pre-sale was provably heavy. Especially since, in the spirit of openness, he put the distribution lists on the Web for public inspection. There's still a copy extant as of the time of this writing: a look through it will show how much bookkeeping he did.

Yes, NFDCoin was one busy lad in those nineteen days. During that time, he was engaging and upbeat on his thread. The excitement was so intense, no-one who jumped on board thought to ask him- or herself where this new dev would find the time to actually clone Nxt and get the NFD coin up and running.

In my case, with the blissful ignorance of the non-techie, I had assumed that cloning Nxt would be a straightforward job like cloning a regular proof-of-work coin. Any others, if they thought of it at all, had this assurance from NFDCoin himself in his original announcement post:

As a bitcoin enthusiast I found NXT in late 2013 and was immediately fascinated by the fundamentally different implemention of the POS algorythm. Until that time I only knew about POS implemented in Peercoin et.al. I am a very capable Java programmer and I wanted to fork NXT since they released the source early 2014, but now I found the time and motivation to maintain this project. I really beleive that the better distribution can make this coin really successful!   

As I hinted above, I did join the pre-launch party but somewhat late. Originally, there was no escrow service offered but NFDCoin said that he was quite amenable to an independent escrower. To an early poster who wrote "looks like total scam, ESCROW?", he replied agreeably and quickly:

Yes. You can ask Anon136 if he can escrow this IPO.

By all means, why would I have something against that?

Smooth as the proverbial silk. Even when engaging outright accusers, he never lost his cool. To borrow an old management saw, he had more than his share of energy and enthusiasm. This self-adverted "very capable Java programmer" was certainly a natural salesman; that was clear.

Interestingly, TheMightyX – a character that had already been a mover-and-shaker of a sort in the NEM part of the wood – popped by with this jaundiced and slightly salty comment…

Don't we already have enough NXT clones?

Why do we need another?

Don't you understand that there is a finite amount of money floating around in this community and most of it has already been soaked up/scammed or invested? Over 3,000 BTC just went into the Safecoin IPO last night.

You need to think of other ways to profit off your ----ty copycoins than IPOs.

…which neatly illustrates that economic populism and a zero-sum attitude go hand-in-hand.

In the midst of the early excitement, NFDCoin announced that he would "donate all the money collected in the free giveaway to Sean's outpost (a charity)." Shortly after, he said that he did do so with the giveaway-fee BTC he had already collected; he also posted a link to the transaction from the biggest Bitcoin block explorer blockchain.info. The transaction link is here; feel free to do a little after-the-fact due diligence by clicking it and see what you find.

He also posted that he was quite amenable to community input – quite amenable:

No portion of the distribution will go towords the bounties.

If there are leftover funds from the categories, than they will go to bounties. I will send them to a treasurer decided by the community.

If there are no remaining funds after the IPO, I will personally pay the bounties in BTC with the IPO money.

When the IPO is finished, the community needs to start a donation fund, where people can donate a % of their holdings, so that projects can be paid and marketing be done.

Please don't forget, that this coin will be only as successful as the community behind it is active. Right after the launch, the community must elect a comitee and a treasurer. There needs to be a good concept for this coin, so that it can thrive!

So there it was, in writing: what altcoineers expect as a matter of convention, he had said explicitly. He promised, in digital writing, to devote all the BTC he collected to the development of the coin's ecosystem.

Four days after the pre-sale started, the above-mentioned Anon136 did agree to offer escrow services for the IPO. And almost right after, NFDCoin thanked him. Everything seemed to be going smoothly and above-board. After all, NFDCoin was provably doing the bookkeeping work. He even said, on May 1st, that "I don't want to promise anything that can't be done, that is not my style ;)"

Oh yes, it seemed legit. Legit enough to lull at least one altcoin vet. In response to a suspicious poster who said that NFD was a lot like an earlier notorious scam, Stackcoin, TwinWinNerD replied: "Yeah, we will see. But at least this one doesn't promise anything unrealistic, or impossible like stackcoin proposed... "

A week before the launch, NFDCoin posted his fifth update that also oozed legitimacy:

In about 1 week NFD will launch! I think that now is an excellent time to start the organising of the community. It is obviously up to the community to decide how you guys want this coin managed, but this would be the way I would propose it:

We need:

Temporary "dictator". (Tasks: Will setup the community vote to decide on the commitee, Decides the direction of this coin UNTIL the commitee is elected)

Social Media Group 2-6 persons (Tasks: Managing Twitter/Facebook/Website/Reddit/Bitcointalk ect)

Commitee 6-8 persons (Tasks: Electing a commitee speaker, deciding what happens with the "dead coins" from the investments, stiring the direction of this coin)

This are only suggestions, but you should act quickly! So nominate a "dictator" soon and then start nominating people for the committe. The best candidates will be people invested in this coin, so >0.1 BTC investment. Good luck :)

By an odd coincidence, the next post was mine. By that time, I had my Community Coin experience under my belt and I was feeling self-confident and chatty. When NFDCoin re-posted the same update, I stepped up and replied: "Well...how about me for dictator? I already look after the Community Coin and Sharecoin subreddits. And, as a recent PM to you revealed [I had sent him an incorrect hash of my passphrase, which I had asked him to correct], I'm enough of a bobblefinger to be a safe dictator. ;D"

At this point, NFDCoin was explicitly encouraging the post-launch work and decisions to be done by "the community," likely in self-conscious imitation of UtopianFuture. After getting a casual endorsement, which was enough to get me posting regularly in the thread, I found a lot of "votes" coming my way. It might seem that I got them by me just stepping up to the plate – no-one else did – but the bulk of my support came from people who remembered the work I did for Community Coin. So, it's more accurate to say I had worked my way up.

While the "vote" was going on, NFDCoin revealed that the above due-diligence fail was the result of his transaction not confirming. He posted a link to a new donation, of 0.05 BTC, to Sean's Outpost. It did come from the giveaway-category wallet, and was followed by another from the same wallet.

As the end-of-IPO date approached, the thread heated up and a lot of last-minute holders of Bitcoin had decided that this IPO was indeed legitimate. When the deadline closed in, there were a few scoffers but they were ignored…

…And Scam

During the last-minute rush, there was an interesting wrinkle. A careful checker named lucky420 looked carefully at an excerpt from the original post which contained the pre-sale's BTC addresses; the excerpter was named thebitcoinexchange.co.in. Seeing something fishy, he warned everyone on the thread:

Everybody, be careful.

Looks like user thebitcoinexchange.co.in is a scammer. He "quoted" NFDcoin but category 2 and 3 addresses are changed.

Although lucky420 did it in good faith, like every NFD supporter still trusting NFDCoin, his warning proved a perfect foreshadowing of how this part of the story would come to an end. Right after NFDCoin proclaimed that there was "40 MINUTES LEFT!" another careful checker named moonriver posted this warning twice:

OH, ---, it is a scam.

He even changed the escrow address from 1Dkh4oqMmXLavHV3Xms7bCDXnkaTMDnDB4 to 1Dkh4dS6CWCD7nMCa1mvfNoqCCnrBkX7nx now [What this meant was, NFDCoin had changed the escrow address to one he had set up to scoop the BTC that the "investors" wanted to send to the custodianship of the escrower – your author.]

The last post on the unaltered thread was confirmation of the exact same ‘mistake'. At that point, NFDCoin locked the thread and vamoosed – but not before altering his original post to an exact copy of the vamoose excuse used by the Edgecoin scammer.

The Wider World: Lost In The Tank Of A Bubble

One of the most important things to remember about scams is that, except for ones that are blown to smithereens early, there are no definite "tells." Normal people, especially if stung, will look back at the scam and compile a list of "tells" that they felt should have tipped them off at the time. You can see people like that on Bitcontalk's announcement thread in the Announcement sub-board. They're the ones posting "Scam!" or some such on the announcement threads of various alts.

The trouble is, the common-sense way does end up catching a lot of false positives – including some big winners The latter kind of false positive is one of the reason why some people seem to make a hobby of calling an established altcoin a "scam" for various reasons. Some are jealous of the early Boom Town Bonanza, true, but some of them had called it a "scam" at the outset and were basically shown up by the coin taking off.

Since the lines are blurry, and since it's so easy to rack up false positives by doing it the normal way, becoming a would-be scam-buster is a lot harder than it looks. It's the sucker bet on the help-the-community side of things. Instead of losing your money, you lose your credibility.

A more feasible way is content yourself with protecting yourself, through cultivating the old-fashioned and largely forgotten virtue of prudence. The good news is that doing so will not only save you from being bilked or holding the bag of a hottie turned cold in the altcoin jungle, but it will also save you from being sucked into much bigger bubbles in the stock market. The latter practice will save you a lot of money once the next bubble arrives on the NASDAQ or suchlike.

In a very real way, the cryptocurrency frontier is a social experiment. As long it remains too small-time and disorganized to be bothered with by legislators and regulators, as long as Internet anonymity confounds even skilled and professional police detectives, it's a good field test for the ideal of anarcho-capitalism.

It certainly seems that the altcoin jungle features a bubble a week, which makes it a hot-house experimental garden for a home remedy to protect yourself against being sucked into bubbles in the stock market. Bubbles really make for an awful tragedy. The point near the burst is the point where the ordinary and ordinarily skeptical investor thinks that the underlying industry or asset is no longer dodgy but legitimate…because it seems to have proven itself over time to be a stayer.

Case in point: the Internet bubble. When Amazon got listed on the NASDAQ in mid-May of 1997, it debuted in a climate where the hotties of 1995 and '96 like Netscape and Yahoo had gotten pummelled. 1996 was not a good year for YHOO holders, particularly for those who bought excitedly shortly after it debuted on the NASDAQ in April of that year. The stock did recover a little after New Year's Day 1997, though. In the case of Netscape, the punters had accepted the – by old-fashioned standards – profoundly questionable business model wherein a company was supposed to make a profit by giving away its flagship product. But the Internet mania had not gone much farther that that as of May '97. In Yahoo!'s case, the model was the tried-and-true one of garnering revenue and profits through advertising.

When Amazon debuted, the skeptics still had the upper hand in normal investor circles. They looked at the excitement surrounding the new, revolutionary, transformative, world-shaking, money-geysering Internet and only saw a bunch of technology freaks and the usual slimy characters dishing out a lot of hype.

At least Amazon was a real business, but the same skeptics – particularly those who knew how to read financial statements – looked at its financials and saw a new, revolutionary company with a new revolutionary earnings record: loss after loss. And yet, the summer of 1997 – when the first stage of the Internet frenzy licked its wounds and started to get back on track – was the ideal time to buy AMZN. It was also a great time to buy YHOO. Strangely, buying and holding both from the summer of '97 forward – and not doing anything else such as buying more as the excitement heated up – would have still left you with a substantial profit when the post-bubble carnage was at its worst. In Amazon's case, you would have been left with a huge profit.

But the trouble is, the only ones who were buying and holding at that time were true believers and naifs. Bubbles have a way of bloating up your vanity to the point of blind bliss; sadly, many of those early buyers – particularly the naifs – later got the idea that they couldn't go wrong with the great Interent bonanza. So, they fell for those seductive day-trader techniques that – market history always shows – ends up turning a hot hand into an account statement bleeding red ink. Many of the ones who thought they were prudent, raised their cost base by buying more and more as the bubble ballooned to its bursting. Some others yielded to the temptation to outright pyramid via margin. This double-or-nothing tactic has a proven track record of turning big winners into sorry losers. The sad part is, they piddled away the gains they would have gotten for their summer-'97 foresight and acumen. Some of them ended up with nothing to show for their foresight but huge margin debts when the carnage got its second wind in 2001.

The hell of it is, the only person who got through the Internet bubble in style is someone with the vision to see past the '97 gloom, to cast aside the usual crop of skeptics saying "I told you so," to ignore the chortlers dancing on the apparent grave of early Netscape competitor Spyglass, and buy into only the best two companies at the time: Yahoo, the then-dominant search engine at the time, and Amazon, the still-dominant Internet retailer.

And afterwards, he would have had to order up the physical stock certificates – still possible back then – and greeted the subsequent hysteria with phlegmatic aplomb. Treating the Great Internet Excitement With Boundless Possibilities as nothing more than a reality show for his interest and entertainment. Popping the proverbial popcorn, sitting back, and just watching. And not being swayed at all from this course.

If you're a reasonably open-minded person, as we have to be in business during this Information Age, you will find this aplomb very hard to acquire. Living through a bubble is like living through a perfect storm of psychological pressure, although it's more like Chinese water torture. Again, common sense applied to a bubble makes for a dangerous trap. In the ordinary world, waiting until a new and controversial technology has a track record before using it yourself makes sense. It's that same common sense that sucks people into a bubble near its climax.

New and game-changing industries and technologies are first met with a lot of indifference, some humoring and very little support. They also attract skeptics. The more their workings or business model is at odds with ordinary common sense, the more skepticism they attract. Early adopters need a lot of knowledge of the tech and a lot of faith.

As the disruptive industry develops, more adopters jump on board but more skeptics take notice. Some people might become skeptical solely because they're off-put by the early adopters' evangelism. "If it sounds like hype, it is hype" – this rule creates a fair bit of skepticism and a little bit of mockery.

Once it's widely seen as revolutionary, however, the early adopters and boosters – particularly for technologies or business models that seem to violate ordinary common sense – have acquired a bucket list of "They Said We Were Crazy…" stories. If you like invention and innovation, you'll love those stories. The trouble with them, though, is that they inculcate the hidden message that you should leave your common sense in the parking lot.

If you're think of buying or using this disruptive technology, "They Said We Were Crazy…" phase is actually a good time to buy or use. By this time, there is a track record of service you can examine. The early bugs and unforeseeable difficulties have been mostly worked out by this time. For example, using the Internet and buying from Amazon were a lot safer and easier in 1999 than in 1994.

But when it comes to buying stock, that same common sense that works for you as a consumer is dangerous when you apply it to speculation. Here's why:

Imagine that you sailed over to some part of the New World in the 17th century. Your neighbours said you were crazy: you hear tales about how difficult the journey is, why "free land" means "freedom to starve" on raw land, and so on. You listen to them, but make up your mind to go anyway. You're fortunate enough to have acquired enough money to pay for the journey, so you'll arrive a free man.

The journey is as rough as your skeptical neighbours said, but when the ship carrying you and your fellow pioneers reaches land you feel the arduousness was worth it. You're now in the New World.

You disembark into the welcoming colony and hear stories of lush land that practically springs up good food after sticking seeds into it. Happy, well-fed people in a tight-knit but friendly community. You wonder why there's no hunger, for you heard stories of people starving in the New World and have seen people go hungry back home. "'Tis truth, such did happene, but we were neue." Now that the colony is no longer "neue," they're eating pretty well. The most odd part is seeing all those old people; you're used to so many people dying young, you assume that each village has only one elder through attrition. But here, there are several – more, even.

Eyes wide, you realize that you made a very good decision. You're not the fool that so many of your old neighbours thought you were.

Now getting excited, you ask how much more of this wonderful land there is. One of the elders replied, soberly, "Ye muste confine to the towne and its outelands. ‘Tis aught but woodes and dark landes afar."

The gentleman who responds is clearly respectable and respected; he is a man of sound sense. But part of you wonders if he's not unlike the neighbours you left behind. As a youngster, you are inclined to wonder in that way.

You have a little money left, enough to buy you food for a week. After suggesting that you'd like to explore further, you find a quick consensus deeming you a "Foole with his Follie." But being a young and adventurous sort, you find the warnings hardening your desire for some more adventure.

As you go into the woods with your food, and with a bought jug for water, you're wished well – in much the same way your ex-neighbours in the old land wished you well.

The first two days are exactly as warned. But you are surprised to find cricks and ponds that allow you to refill your jug with reasonably clean water. Surprised and also encouraged.

On your third day, you emerge from the forest to find a clearing with land that's a lot like the green and pleasant fields you disembarked to. Looking around, you can't tell how many thousands of acres are just waiting to be cleared and planted. As you continue to look and wonder, near the horizon you seem to see some kind of dwelling on the side of what appears to be rudimentarily cleared land with some tall plants in it. Striding over, you now see a small figure in the plants; soon the figure grows larger as his strides match yours.

He greets you with a broad smile and a welcome salutation, and explains that he too had the adventuresomeness to proceed despite the warnings of wise and sober heads. When he found this long stretch of fertile field, he went back to the town, gathered what little he owned, spent what he had to buy more land-proving supplies, and said slyly to all that he would "surely" find more than woods. His former employer let him go, as there were regular ships with indentured servants. The employer, sly himself, implored the Governor to put him at the front of the indentured-servant list because of the exigency of his employee being "doused in Follie."

When back, he picked out a nice spot and marked out a hundred acres for himself. Only a small fraction was proved so far, but it was only a matter of time before hard work and a pious heart made all of it farmland. His rough hands show mute evidence of his hard work, and his rough-hewn manner is mixed well with a friendly and cheery soul.

Seeing your eyes widen, he makes you an offer: if you're willing to prove his land on a half-day basis, he'll lend you his tools so you could prove your own hundred-acre lot which he'll stake out with you. He'll also let you use his axe and tell you how to put together a serviceable log cabin if you agree to be his next-door neighbour and help him out with half your day. Except for Sundays, of course; those were for rest and prayer. He'll also feed you if you come up short, but only the basics from his own land. If you want more, you have to learn how to hunt and trap.

It's almost too good to be true. The land in the landing town seems entirely proved, which means that there are price tags attached to new plots. In order to become a yeoman farmer, you would have had to work and save for what would likely be a long time. The choice for you is really between work and work.

But here, you work partly on your own plot right away! With a title deed inscribed in the steady and pious heart of this new town's founder. 

Two years later, you've settled in and are close friends with your mentor. Neither you nor he is up to the level of surplus that could be traded, but he's eating quite well and you're finally getting by. You're surprised to see a third figure emerge from the woods towards the town: another adventurer like you were?

The youngster, with hands not yet calloused like your mentor's and yours, is openly astonished. You hint at him settling here and making it a threesome, but he shakes his head vigorously. "Sir, I dost say that the goode lande spanes vistas without limite! I muste goe further!"

That's what it's like to be an early or first adopter n a soon-to-be-bubblicious industry. The first workers in the field are largely there for the love of it, just like that young man's love of adventure and discovery. They have dreams and ambition, but the common-sensical part of them says that they won't make much money from their pioneering…if they make any at all. Growth predictions at the time are optimistic but not hysterical or exaggerated.

But once the technology becomes hot, they discover that they're sitting on a real Boom Town. Even their most optimistic predictions look timid in retrospect. The excitement is palpable as they realize that they could be in for a lot of money. Now, instead of the former hopes, there's serious talk about venture capital and a track to a NASDAQ listing. The old hacker-house type of skunk works has grown considerably; there's now close to thirty people working on it.

These fortunate techies now seriously imagine endless vistas of prosperity for the world. What they don't notice is: their real results - which have blasted away even their most optimistic early predictions - have subtly stifled their common sense.  The vistas really do seem endless; their white-hot disruptive industry seems a veritable Cornucopia to any techie willing to put in those eighteen-hour days. Elsewhere in the rapidly growing industry, "instant millionaires" are sprouting up and CNBC has a whole new roster of faces to let in.

But only into the antechamber, for now. The skeptics and the doubters still hold the upper hand. When the industry stumbles, the business press is peppered with "I-told-you-this-was-a-bubble" commentaries from people deemed older and wiser heads. The evangelists are now on the defensive; some get angry. Their brief moment in the CNBC sun fades back into the underground as that network returns to its regularly scheduled rally-ho'ing.

This sketched-out thumbnail is more-or-less where the Internet was at the time when our foresightful hypothetical investor bought equal-dollar stakes of AMZN and YHOO. The summer of 1997, when the skeptics were patting themselves on the back and the Internet was in a kind of bubble chrysalis.

In 1998, the bubble jambouree came back and made the earlier excitement look weak-sauce tepid. And more so 1999.

Imagine now that you're a more-or-less conservative investor who, in the summer of 1999, gets a call from your broker about "an intriguing but speculative special situation." By this time, the Internet is all over the business press as the hot new thing. More sophisticated evangelists, girded by the notion that the skeptics being wrong in '97 shows that the Internet is no bubble, are unveiling metrics like "eyeballs" to gauge the business power of more and more listed Internet companies. These metric seem strange to you, as they seem to have little to do with revenue and earnings. And yet, you can't argue with the price charts of the Internet stocks. You're even less inclined to argue with the now-hot "They Said We Were Crazy…" mantra. You're already hearing stories about young punters becoming Internet-trading millionaires; many of them have given up their day jobs to be full-time traders in their pajamas. All of your friends are at least intrigued about this seemingly unstoppable growth machine. As someone who's a skeptic by nature, you increasingly feel like the odd man out. Sometimes, you wonder if you'll be singled out or even called out if you voice your skepticism outspokenly. Consequently, you keep your doubts to yourself and murmur agreeably about this hot new bonanza.

After all, no-one wants to be in the same shoes as that notorious physicist a hundred years prior who insisted that heavier-than-air flight was impossible! No-one wants to be the butt of next century's jokes like that anonymous (perhaps apocryphal) patent-office chief clerk who quit his job because "everything had already been invented." Those tales of old fools, always enjoyable in ordinary times, now act as a subtle vise squeezing you towards a certain direction.

The information package you get from your broker has ten pages. The first is a printed copy of an Email, with addresses blotted out, that has all names but one blotted out too. That name is Jeff Bezos. The text of the Email, from 1994, casts his new Amazon as essentially a hobby started by a man who had to put himself out to pasture because the pressures of investment banking ended up being too much for him to take.

The other eight contain critiques of Amazon's business model. Margins too low, delivery system too unproven, seems to be nothing but a loss generator, too hypey, too bubbleish, and so on. The tenth page mutely contains a price chart of AMZN from its NASDAQ debut in May 1997. When you look at how much it's gone up in little more than two years, your eyes google like you're in a Tex Avery cartoon.

"They Said We Were Crazy, But Look At Us Now!" The insiders, the new movers-and-shakers of the Internet industry are now quite self-assured. And really, why shouldn't they be? It's their moment in the sun. The formerly dominant skeptics, most of which haven't changed their opinion one bit, are now muted. Many of them confine their opinion to a kind of outsider's club that overlaps quote well with the value-investing circuit. They know what they know – many of them have lived through several bubbles – but they also know that if they voice their skepticism openly and proudly, they'll become the butt of jokes all over the Internet. It takes a certain kind of inner strength, strengthened by habit and usually bitter memories of being burned earlier, to keep to the old-time analysis in a time like 1999. It takes a lot more inner strength to risk becoming the next patent-office-clerk figure - or kind of "this-is-impossible" laughable old fool – by standing up and going public with a bubble warning.

Moreover, your common sense as a consumer is working against you too. Those debunked debunkers do demonstrate that Amazon is entirely for real - if you wanted to buy books from them. Buying your reading list from Amazon was more convenient and less risky than buying from them in 1995 or even 1997. For this purpose, "Look At Us Now!" makes perfect sense.

But as an investor, it's profoundly the wrong time. Since you don't know this, however, you pick up the phone and put 5% of your portfolio in Amazon. Now you're in with your crowd again. Now you're communing with the future like the Wright Brothers. For the next seven months, you too have a brag for the cocktail-party circuit. You're in with the new thing, and it isn't long before you openly enjoy it. Like every investor on this planet, you become openly bullish about the stock you've already bought. What that implies when everyone is openly bullish, doesn't occur to you or anyone else.

On the inside, the growing legions of movers and shakers have their spines stiffened and confidence strengthened by a whole suite of "They Said We Were Crazy…" stories. Many of them consider the skeptics, both early and late, to be nothing more than old buffoons. Without knowing it, they've stripped their brakes. Through a gradual process of escalation, invisible in the hurly-burly of real time, they've drifted from optimism to excitement to a bubble's answer to La-La Land. Nothing seems impossible anymore. All because "They Said We Were Crazy, But Look At Us Now!" Some of the wags, in their spare moments crack jokes like, "I said I was crazy, and look at me now!" The usual cautions turn slowly but inexorably into mere boilerplate.

Fast forward to February 10th, 2000. Your broker, all-but sure that he'll bag a commission, calls you and smoothly tells you about the latest hot new eCommerce IPO: Pets.com. You've already seen its sock puppet commercials; you're sure it's huge. The punters who were well-connected enough to get a slice of Pets.com at its IPO price of $11 are already sitting on huge gains. The "buy!" is on the tip of your tongue, but a residual prudence makes you say you'll call him back. You get on the Internet and search around for someone less than excited about the company.

After a bit of Yahoo!ing, you find out that the company is bleeding red ink. In fact, like the recent deb Buy.com, you also see that Pets.com's gross margins are negative. Its cost of goods sold is higher than its corresponding revenue. A professional-investor critic points out that the margins for the goods Pets.com sells are somewhere around 3% - for bricks-and-mortar companies that have to pay zero shipping costs. And pet food is heavy, with consequent heavy shipping costs. Therefore, Pets.com's business model will kill the company dead. Regardless of the continuous improvement that the company's workaholic and motivated management and staff can come up with, its negative margins are an insurmountable brick wall. This company is DOA.

You read the criticism, but for some reason it doesn't register. You, by now completely in the New Economy bubble tank, feel as if you were just looking at it. On the other hand, the fact that Amazon.com itself holds a 30% stake in the company – now, that registers quickly!

Your broker was very polite when you ended the call; he had good reason to be. He was iron-clad certain you would call him back with a buy order – which you do when you're finished your searches.

One month less a day afterwards, it was over. The NASDAQ peaked 5,408.60 on March 5, 2000; a level it has yet to best even in today's bull market. Then, it headed to two years of grinding bear market and consequent carnage.

The first paragraph of Wikipedia section "Free Spending" section in its entry on the Dot-Com Bubble is as follows:

According to dot-com theory, an Internet company's survival depended on expanding its customer base as rapidly as possible, even if it produced large annual losses. For instance, Google and Amazon.com did not see any profit in their first years. Amazon was spending to alert people to its existence and expand its customer base, and Google was busy spending to create more powerful machine capacity to serve its expanding search engine.[citation needed] The phrase "Get large or get lost" was the wisdom of the day. [11] At the height of the boom, it was possible for a promising dot-com to make an initial public offering (IPO) of its stock and raise a substantial amount of money even though it had never made a profit—or, in some cases, earned any revenue whatsoever.[citation needed] In such a situation, a company's lifespan was measured by its burn rate: that is, the rate at which a non-profitable company lacking a viable business model ran through its capital.[citation needed]

In one sense, this description is Wikipedia-anodyne. In another sense, it's jarring. Prior to the dot-com era, the "burn rate" was an obscure metric taught in third-year accounting courses. In the world of listed companies, its only practical use was for assessing the future of obscure mining-exploration penny stocks. And yet, in the bubble years, it became a go-to metric known by more than a few high-school kids.

I've taken this lengthy detour, complete with after-the-fact reconstructive fabrications, in order to depict how hard it is to see a bubble forming, and how difficult it is to realize that you're in one once you are.  Really, a special kind of inner strength is needed to steer clear entirely – and to contentedly stick to your own knitting without jealously, urge to join in, or even a care: the ability to put a bubble's excitement completely out of mind; to fuggedaboutit. Thankfully, the stock market – albeit a wee bit frothy at the time of this writing – seems a long way away from an all-out Bubble. That gives us all time to cultivate the inner strength and inner detachment for the next bubble, with the much-needed help of the right kind of Authority: the right kind of mind-easing dogma, if you will. (If you're interested, the value-investing circuit offers a lot of help and support in this self-protection.) Sure as twisters in tornado country, there's sure to be another Bubble.

If I had to name the most important compensatory virtue of hothouse altcoin speculation, it's the fact that bubble rise, climax and pop more quickly than they ever will in the stock market. Consequently, being knocked about in the altcoin jungle wises you up about bubbles a lot more swiftly that stock-market punting ever will. Six months should suffice to jade you enough to elicit a fast, firm and final "No" to the next crop of NASDAQ hotties.

That said, real bubbles are not recognized as such – except by the vindicated skeptics – for a long time after they start collapsing. "They Said We Were Crazy" still hypnotizes. Its lock on believers' minds means that a real bubble won't be widely seen for what it is until it bottoms. A "bubble" that's called such right after the first plunge, either isn't one or it's one in its early stages. I saw this several times when watching the gold market through the last part of its 2001-‘11 bull market. The gold ‘bubble' allegedly ‘popped' as far back as 2006. What really happened, after the sharp intermediate plunge, was quiescence followed by recovery. The only exception to this rule was after the ten-year bull ended. There was a bear market lasting about two years, but after it bottomed gold remained quiescent. Instead of the second-stage carnage that the burst of a real bubble inflicts, gold has been running more-or-less sideways for a year. This 10-year Kitco chart will show you.   

My Plunge Into The Vortex

Returning to my next serving of Scam, NFD was one I had fallen for harder than usual. Not only had I sent in more than one Bitcoin to NFDCoin's Roach Motel, but I had also begun to pitch in due to me being appointed temporary ‘dictator' in the stead of the scammer himself. When I saw him changing his original post to the same cop-out excuse that the Edgecoin scammer had left, it didn't take me all that long to figure out that once again I had been had. I had to pop outside for a minute to assimilate the news.

But when I was outside and ruminating, I remembered that NFDCoin's distribution list was still live and webbed. When I came back to my computer, I was asking myself: "why can't I clone NXT and distribute the NFD to the people who were scammed like me?" Thankfully, someone with Java experience since 1999 had asked himself the same question at more-or-less the same time.

The decision to go for it, obviously influenced by my legacy position as NFD's organizer, would plunge me into five weeks' worth of strait-and-narrow sailing where I learned the art of old-style self-government on the cryptocurrency frontier. You'll read my blow-by-blow recounting in the final part of this series.

In those five weeks, I would find myself working harder than I had worked in years… ESR

Daniel M. Ryan is a long-time contributor to Enter Stage Right and has returned to the fold. © 2014 Daniel M. Ryan.

 

 

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