Blog Podcast The Squid Game crypto collapse: What you should consider when investing in new crypto

The Squid Game crypto collapse: What you should consider when investing in new crypto

date November 10, 2021 time 10 min read 286 views

By Monday of last week (November 1, 2021), The Squid Game coin was offline. Their white papers gone, social media dark and nearly $3.5M of investors money—stolen. How could this happen? And were there warning signs that the platform was a scam? 

In this episode, we’ll discuss what you need to consider when investing in new DeFi platforms and the red flags that might tell you to park your money elsewhere.

You can also listen to Apple Podcast, Deezer, Spreaker and Podcast Addict. 

Remember: All investing involves risk. The content of the podcast is for informational purposes only and is not investment advice. Please always use caution and diversify.

TREVOR:

Hello and welcome to the 25th episode of Alternative Investing. I’m your host, Trevor Kraus, Communications Manager at MyConstant. 

Once again, crypto is in the news. Today it comes in the form of a hit television show on Netflix: Squid Game. 

I’ll be completely honest. When these sort of massively popular TV shows come onto the scene, I usually avoid them. Not because I’m trying to go against the grain or anything like that, but I’m particular about what I watch and read and I find when movies or TV shows try to appeal to everyone, they end up missing the mark with me. 

For those who don’t know, the premise of Squid Game is a cross between The Hunger Games and Battle Royale. A few hundred people who are down on their luck play children’s games in a mysterious location for the chance to win roughly 40 million dollars. Of course, if you lose, you die in some grisly, bloody way. 

All that said, I did end up watching Squid Game a couple weeks ago and generally, I enjoyed it. It was slickly made, the acting was good. But some of the dialogue and political commentary was janky to say the least. 

So, how does Squid Game factor into this podcast? Well, Squid Game was released on Netflix on September 17th and became over-the-top popular world over. And by mid October, a cryptocurrency was made—aptly called, “Squid.” 

The Squid cryptocurrency skyrocketed in value and investors rushed to buy tokens hyped by promotions on multiple social media platforms. The project’s Twitter account amassed more than 57,000 followers, and its Telegram channel had more than 71,000 subscribers. 

Between October 26th and Monday, November 1st, the value of a Squid coin rose by more than 23 million percent, from a little more than a mere cent to $2,861.

Squid’s popularity came about during a time of parody cryptocurrency market. Shiba Inu and Dogecoin, two canine-themed tokens, have seen their prices sharply take off in the past year.

A “play-to-earn” cryptocurrency, Squid supposedly allowed buyers to partake in online versions of the games depicted in the TV show to earn more coins.

So now how much is Squid coin worth? Nothing. Zero. The entire cryptocurrency was a scam and sadly, many people bought into it. The project’s website, SquidGame.cash has vanished and its social media profiles have gone dark.

When things like this happen, opponents of DeFi jump at the opportunity to underscore how risky and shady the crypto world is. And it’s unfortunate because these sorts of scams obviously do hurt the reputation of legitimate cryptocurrencies. 

But it also brings up the question of risk and what you, as an investor, should look for when investing in crypto or anything really. Some of these points could be applied across the board.  

The biggest red flag to skeptics of Squid coin was the lack of a sell option—you could only buy, but not sell your crypto. Looking at that factor now, it seems so obvious that it was a scam—in the vein of a Ponzi Scheme—not even all that complex. 

A second indication to skeptics about Squid were their white papers. White papers are policy documents that inform you about the intentions of a company, how they operate and their values—very technically, well-written documents. Well, Squids white papers were a mess and riddle with inconsistencies and grammatical mistakes. Clearly created on-the-fly. 

But we live in a world—and I’m sure this has been true since the dawn of time—where people have a tendency of throwing caution to the wind when everyone else is getting on board with something. This compounded with the internet and social media gives people massive FOMO and sometimes glaring faults are ignored.     

So other than sloppily composed white papers and no buy out feature, what are some other factors that you should consider when buying crypto or entering a DeFi platform. As I work for MyConstant, everything I say is applicable to us too. 

LIQUIDITY

With crypto, DeFi platforms or any investment really. It’s important to understand liquidity when it comes to risk. Liquidity refers to the efficiency or ease with which an asset or security can be converted into ready cash without affecting its market price. The most liquid asset of all is cash itself. In the case of the Squid coin, it was completely illiquid because you could not sell it. You could only buy in. 

Right now the most popular cryptos like Bitcoin, Ethereum, XRP and Cardano—I could keep listing—these are desirable assets and can be sold off in a moment’s notice. Of course, you might not make the amount of money that you want if you sell immediately, but you can sell them. Stocks, bonds—these are also considered liquid with varying degrees of time it takes to sell.  

In contrast we’d say something like a house, property or a car are illiquid. Depending where you live in the world, you might be able to sell your home quickly and at a good price. Other places, not so much. 

MyConstant has a high amount of liquidity because if you need access to your money, you can get it immediately. And when people borrow money, they put up to 200% of the loan in crypto. That way, if they default, none of our investors lose their capital. We only accept widely used and well-vetted crypto on our platform too. You would never find Squid on MyConstant. 

VOLATILITY 

When you’re looking to buy a new crypto, volatility is another factor you must consider. 

But what is volatility? Well, volatility is a measure of how much the price of any particular asset has moved up or down over time. Generally, the more volatile an asset is, the riskier it’s considered to be as an investment — and the more potential it has to offer either higher returns or higher losses over shorter periods of time than comparatively less volatile assets. 

As a newer asset category, crypto is widely considered to be volatile — with the potential for significant upward and downward movements over shorter time periods. Stocks are considered to have a wide range of volatility, from the relative stability of large-cap stocks (like Apple or Berkshire Hathaway) to often erratic “penny stocks.” Bonds, by contrast, are considered to be a lower-volatility asset—and typically see less dramatic upward and downward swings that take place over longer time frames.

When people talk about measuring volatility, they’re usually referring to “historical volatility,” a number taken from a study of prices over a specific time period (often 30 days or a year). The prediction of future movements is called “implied volatility”—and because nobody can actually predict the future it’s a less exact science.

Volatility is one of the primary factors that goes into assessing investment risk. Traditionally, investors will take on a high level of risk if they believe the potential reward is worth the possibility of losing some of their investment. (Or all of their investment, as in the recent case of high-risk hedge-fund manager Bill Hwang, whose entire $20 billion dollar fund disappeared in two days.) 

Traditionally, retail investors are advised to diversify their investments within an asset class as a way of reducing risk. One popular strategy is to invest in a basket of stocks (or an index fund), rather than just a few. To further reduce the potential for downside, they may also pair investments in more volatile asset classes like stocks with investments in less volatile classes like bonds. 

As an asset class that’s only a little more than a decade old, crypto has seen a series of steep rises and subsequent falls — and is considered to be more volatile as a category than stocks. That said, higher trading volumes on Bitcoin (by far the biggest cryptocurrency by market cap) and increased institutional participation seem to be reducing its volatility over time. Cryptocurrencies with lower trading volumes or emerging crypto assets like DeFi tokens tend to have higher volatility — when experimenting with these assets as a beginner it’s best to risk amounts you can afford to lose. 

Factors that can increase volatility include positive or negative news coverage and earnings reports that are better or worse than expected. Unusually high spikes in volume of trading will usually correspond to volatility. Very low volume (as seen with so-called penny stocks that don’t trade on major markets or smaller cryptocurrencies) also usually corresponds with high volatility.

As well-known as a crypto like bitcoin is, it’s still quite volatile. If you recall in January of this year, one bitcoin was worth around 45,000 dollars. And shortly after it plunged to half of that. Now as of this podcast it’s hovering around 66,000 dollars.

Cryptos like XRP and Ethereum tend to see even more volatility. Now, I’m not telling you to buy bitcoin over another crypto, but it’s important to put this in perspective. 

OPPORTUNITY COST

Another factor that I feel like people don’t consider as much when it comes to investing—in particular with crypto—is opportunity cost. Opportunity costs are the potential benefits you as an investor, or business miss out on when choosing one alternative over another. Because opportunity costs are, by definition, unseen, they can be easily overlooked. This means you really need to think about what you’re spending your time on when it comes to investing. How interested are you in real estate or in crypto. 

For example, I have an American friend (we’ll call him Nick), who lives in Bangkok and he’s quite successful at his job. And recently Nick inherited some money and he was asking me about investing in crypto. And we got to talking and the more we spoke it was clear that he A) knew very little about cryptocurrency and B) viewed it as a “get rich quick” sort of investment. 

We continued talking about its volatility, how you can buy and sell, and it was just clear that he wasn’t super interested in it. And that’s a problem, because as I say on this podcast all the time, you should always understand your investments. And like anything in life, if you’re not interested in what you’re investing in even in the slightest, you should find something else.

My friend Nick happens to be extremely knowledgeable about real estate in the NYC area and on top of that does interior design. So for me, it seemed like purchasing a house or apartment—something in real estate (either solo or with someone else) would make more sense. This would be a better opportunity cost scenario than investing in crypto.

It’s important to drive home the point of spending time and energy on investment opportunities that make sense to you and that you have a good understanding of. I don’t know for sure, but I’d venture to say that many of the people who jumped on the Squid bandwagon saw it as an easy way to make money and had very little understanding of their investment—which is clearly hazardous to your wallet. 

A final point I want to make about cryptocurrency is its lack of regulation. This is an external factor and applied to all cryptocurrencies. But it is a risk that needs to be kept in the front of everyone’s mind. 

The stock market is regulated. So is real estate and the art world. These are industries that while they still have risk, there are contracts and tools built in to mitigate some of the risk. When you go on Robinhood or if you consult a financial advisor, you can rest assured that there’s backing to your investments. 

Cryptocurrencies? Not so much. Governments around the world are trying to regulate crypto or at least they keep putting their fingers in and get a little foot hold—some more successful than others. Recently China—the country where most crypto is mined—declared crypto trading illegal. Part of the joy or satisfaction that people get from crypto is it’s lack of regulation and nannying going on. But that also poses a risk to novice investors. 

In fact, cryptocurrency regulation has been a frequent point of interest lately for US lawmakers. A recent report from the Biden administration outlines proposed legislation that would bring more regulation to the cryptocurrency market. And in recent months, US Federal Reserve Chairman Jerome Powell, and Security and Exchange Commission (SEC) Chairman Gary Gensler have both expressed concern over lack of cryptocurrency regulation.

But in spite of all the back-and-forth, a few key themes have emerged on the subject of new US cryptocurrency regulation: stopping cryptocurrency crime and tax evasion, stablecoin regulation, and the potential for investment vehicles like crypto ETFs and other funds.

Crypto crime or cybercrime are major problems with cryptocurrency. Not just in the case of phony cryptos like Squid. But legitimate platforms getting hacked. And with no regulation, if you lose all your crypto assets. That’s it—there’s no getting them back. 

As a side note, if you do start accruing a large amount of crypto, I’d advise getting a cold wallet. Hot wallets are apps on your phone and are generally secure. But cold wallets are super secure since they’re not always online and kept in your possession. 

Just in August of this year there was a massive hack on the poly network and a hacker stole nearly 600 million dollars worth of Poly crypto. This hacker exploited a flaw in their system and ran off. Miraculously, the hacker ended up returning most of the stolen crypto. But in many cases that doesn’t happen—this is a rarity. The hacker actually claimed he or she did it for fun. 

As terrible as the Squid coin scam was and Poly hack. Instances like these are wake up calls to crypto and DeFi investors everywhere. It forces you to look at what you’re investing in and realize that there are bad actors out there and many people don’t have your best interest in mind so you have to do your due diligence anytime you’re going to plop your money—anywhere. 

While MyConstant is not a cryptocurrency—we’re a peer-to-peer lender—we take many measures to keep your crypto and USD secured on our platform. We store your crypto across different hot and cold wallets that are insured up to 10 million dollars. That’s the MyConstant guarantee. And as I said earlier, we only accept thoroughly-vetted, widely used cryptocurrencies. We’d never accept something like Squid. 

Wrapping up, I want to reiterate  some of the points I made. With any new crypto, make sure there’s a buy-out option. If it’s super easy to buy in and nearly impossible to sell—that’s a big red flag that something is amiss. And look at their website and white papers. Is the site riddled with spelling and grammatical mistakes? Does it look like it was created in a hot minute? Things like these are glaring and show that something might not be quite right. 

You should also consider the cryptos liquidity. If you can sell it on a secondary market, how easy is it to sell? Is this a crypto on the rise, or is it just a fad? 

Along with liquidity, study its volatility. All crypto is volatile, but some more than others. Study it for a few weeks or a month and see where the price is going. 

Lastly, do your due diligence and make sure you’re investing in a crypto or platform that you understand. And beyond understanding, get some enjoyment out of it. I think a lot of young people are drawn to crypto because it’s so new and fresh and constantly evolving which heightens their interest. Of course, anytime you enjoy something, doing research, feels fun—not like doing homework. 

I think that’s all for today. I just wanted to note that usually this podcast is produced two times per month on a Monday. For the next few months however, this podcast will be one time per month. 

I think a lot of our listeners are interested in the current events and it makes it easier to pick them out after some time has elapsed. But definitely check back here for when I air next. As always, check our blogs too because I put the transcript up there so you don’t miss anything. 

For all our US based listeners, I want to wish you a happy and safe Thanksgiving. Thank you for listening today. 

Good bye! 

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Trevor Kraus

Trevor Kraus

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