Threadlines: Crypto's False Marketing

Cryptocurrency’s Rise and Fall

One of the biggest financial stories of the past 3 years is the rapid rise and almost more rapid fall of the cryptocurrency market.

At a basic level, cryptocurrency is an alternative financial system to the standard money we’re used to - in America, the dollar. It is a fully digital currency that is based not on a central financial system, or a bank, but instead based on a digital system maintained between individuals. For a more thorough overview of the system, I’d recommend going here: What is cryptocurrency and how does it work? (kaspersky.com).

Cryptocurrency (also known as, simply, “crypto”) and its proponents have been around for plenty of years, but it was, for the most part, kept to smaller and more niche circles. Crypto was more commonly used for back-room deals than present in the average American’s investment portfolio.

But over time, the asset class continued to rise in value. And as the assets rose in value, crypto investors got richer. And as crypto investors got richer, everyday people began to take notice. The crypto world had some taste of the limelight throughout the 2010s, such as the Bitcoin boom of 2017, but it never went fully mainstream.

Crypto’s massive year - 2021

However, between 2020 and 2021, cryptocurrency got its big break. Young or old, tech-savvy or luddite, everyone was interested in crypto. Anecdotally, I remember hearing folks talk about their cryptocurrency portfolio and which of their holdings they’re staking who, in the same breath, couldn’t work out how to adjust the notification settings on their iPhones.

Simply, crypto was everywhere because this was the same period when the crypto market - and seemingly everything in it - was going straight up, up, up. If something continues to grow in value, people are inevitably going to buy in. During this time of rapid and extreme growth, NBA arenas were getting bought by crypto companies, Elon Musk was tweeting about Dogecoin, and entire countries were adopting bitcoin as their official currency. You couldn’t escape crypto for the first two years of the 2020s. Seemingly everyone wanted to pour money into this alternative form of cash.

However, since the market’s peak in November 2021, the cryptocurrency world has experienced a hard and very public fall from grace.
As interest rates and inflation rose, investors pulled out of risky assets, and high-profile, massive crypto firms like FTX collapsed. This crash led regular people to lose money on their investments, which in turn led many to become disillusioned with crypto.

I’m not here to talk about the myriad and complex reasons contributing to the past two years in the cryptocurrency market. Many authors smarter than I have written on the topic, and I’d defer to their explanations and wisdom.¹

I’m also not here to talk about the legions of stories of scammers and grifters who saw the unregulated crypto world as an opportunity to make quick money from the billions of consumer funds pouring into the market.

I’m just going to highlight one of those stories.

Crypto isn’t regulated

One of the most distinguishing parts of cryptocurrency - of all kinds - is that it is separated from the central regulating system that most financial systems are held to.

Going back to the birth of Bitcoin, Satoshi Nakamoto’s now-famous introductory paper on the topic was titled “Bitcoin: A Peer-To-Peer Electronic Cash System.” Note, “peer-to-peer” not “peer-to-bank-to-peer.” This world of crypto was devised without the middleman of a bank, and without the burdens that come from being a regulated financial institution.

The independence of cryptocurrencies from regulation was important when the crypto world was in its infancy and often used for off-the-books transactions between buyers and sellers of… unknown goods. Without government regulation, bitcoin could easily be used to transfer money for illicit transactions.

As crypto grew widespread, this same independence drew many modern cryptocurrency enthusiasts to clamor about how it can revolutionize the world of money. A world without banks is a world where individuals alone control the flow of money, which is an exciting proposition to many.

However, with all of this hype comes an inevitable downside.

Marketing Fraud

Without regulation, the world of crypto offers plenty of opportunities for less-than-ethical ways to make money.
Matt Levine wrote “If you’re a certain sort of financial person—a financial engineer, an arbitrageur, a market-structure enthusiast, a builder of high-frequency trading systems—this abstract set of facts is incredibly, incredibly beautiful. You wake up one day, and there’s just a whole other financial system. It’s full of smart people building interesting things, and it’s full of idiots making terrible mistakes… so many idiots are getting rich; why shouldn’t you?”

Due to the de-regulated, gray area of cryptocurrency, it’s easy to understand why many grifters ran to the space to make a quick buck. There are hundreds of ways to devise a crypto scam - the pump-and-dump, the rug pull, the classic Ponzi, and of course… marketing fraud.

Modern consumers have a tenuous relationship with the world of marketing. It’s easy - and even encouraged - to be cynical about what we’re being told by big businesses.

However, at some level, we have to trust the basic claims of marketers. This is because businesses’ marketing claims are subject to regulation. Think of “snake oil salesmen who sold tonics that were ‘100% guaranteed to cure whatever ails you,’” - marketers are not allowed to claim whatever they want about their products.

They have to make some sort of substantive claim about whatever they’re selling, or else, the government - through the arm of the SEC - can hit you with a hefty fine or worse.

Yet, in practice, firms push the limits of their marketing claims as far as they can to draw in as much business as possible. They get as close as they can get to false advertising as they can get.
And this was nowhere truer than in the crypto world.

Titan’s Crypto False Advertising

In August of this year, the SEC brought charges against Titan Global Management, a cryptocurrency trading firm. Titan Global Management is an investment firm where you can invest money primarily, in cryptocurrencies. Over the crypto boom of the early 2020s, Titan was trying to stand out from the crowd of other crypto investment firms, and they ran a series of advertisements promising a 2,700% annual return.
This is staggeringly high.

Contrast this with the stock market’s historical 7-10% yearly return, or even with the ~4% return of a high-yield savings account. If you were a hedge fund manager and you were able to grow your fund by 2,700% annually, you would be the greatest hedge fund manager of all time, and it wouldn’t be close.

But Titan Global, this crypto fund, promised 2,700%. According to the SEC’s press release, “for a period ranging from August 2021 to October 2022, Titan, which offers multiple complex strategies to retail investors through its mobile trading app, made misleading statements on its website regarding hypothetical performance, including by advertising “annualized” performance results as high as 2,700 percent for its Titan Crypto strategy.”

The inevitable question then is… how? Where did this massive promise come from?

Recall that 2021 was a big year for crypto. Most coins in the crypto world were growing, gaining value seemingly every day. During this time, Titan managers were able to run some simulations on a trading account, and their simulations achieved a return of 21%. However… this return was achieved over a period of only three weeks.

Then, the Titan marketing team took this 21% return over three weeks, annualized it, and then published it as their promised annual return. They said to themselves “If we were able to make a 21% return over three weeks, what’s stopping us from growing every account that fast for every three weeks for an entire year?”

Again from Matt Levine:
“If you buy a stock on Monday morning for $100 and it closes that afternoon at $101, then you have a one-day return of 1%, which is an annualized return of roughly 1,100%. On Tuesday, you can go out to potential investors and say ‘Hello I am an incredibly skilled investment manager, I have achieved an 1,100% annualized return so far this year, invest with me,’ and maybe they will. If the stock keeps going up 1% every day, then in a year it will be worth $1,227.40 and your investors will be thrilled. What are the chances of that? Not zero, I guess. But pretty low.”

In the world of finance and investing, you can’t take results from a very small period and assume they will hold true for a much longer period. Most investments, and especially crypto, are much, much more volatile than that. And you especially can’t promise those same results to potential investors.²

Titan Global Management was engaging in the age-old practice of stretching the limits of the truth of its marketing claims. And as the SEC decided, they stretched those limits too far.

From the complaint filed to the SEC:
“Titan did not disclose in the advertisements that the 2,700 percent annualized return was based on a purely hypothetical account in which no actual trading had occurred, that this annualized return had been extrapolated from a period of only three weeks (from August 10, 2021 to August 31, 2021), that the hypothetical return for this three-week period was calculated at twenty-one percent, that the projected 2,700 percent annualized return was based on the assumption that the Titan Crypto strategy would continuously generate a twenty-one percent return every three weeks for an entire year, or Titan’s views as to the likelihood that this assumption would bear out.”

Of course, Titan’s promise ignores any possibility that crypto markets - the same markets they were investing in - would ever drop. It also ignores any risk of not being successful for weeks after weeks on end.

In other words, Titan’s advertised return was a fairtytale.

Part of me wants to have more faith in my fellow humans and investors. I’d hope that a marketing scheme such as Titan’s that promises astonishingly, impossibly high returns would be met with intense skepticism. I’d hope that no one would buy into it.

But people did buy into it.

Today, Titan Global Management is still around, though they have dialed back the annual return promises.

So, I guess the moral of the story here is that if something feels too good to be true, especially in the finance world, it probably is.
With investing, my recommendation is to do your research, read the fine print, and make sure you understand what you’re putting your money into. And when in doubt, probably just go for an index fund.

¹ I can’t stress this enough if this topic interests you… read this piece by Matt Levine: The Only Crypto Story You Need, by Matt Levine (bloomberg.com)

² Promising these massive returns does seem to be common practice in the crypto world - see this article from November 2021, titled “How to Stake TIME on Wonderland.Money for 83,190% APY”
It’s worth mentioning that when the linked article was written, TIME was worth $8,878.49 per coin. Now, it’s down to $8.44.
(Wonderland TIME Price: TIME Live Price Chart & News | CoinGecko)