Squid tokens fraud shows why people should invest with caution in cryptos

The high price volatility has already been a concern regarding the unregulated cryptocurrency market. And, now the Squid scam would give a new momentum to the demand for crypto market regulation

Over the last few days, the cryptocurrency world has been jolted by shocking headlines – "Squid Game crypto token collapses in apparent scam," "Gone in five minutes: Investors lose millions in Squid Game cryptocurrency," etc. These headlines relate to a play-to-earn digital token, Squid, which was sold out in just one second when its presale began on October 20. Six days later (October 26), Squid was selling at a rather modest price of one cent. But on October 28, it shot up to $2.22, recording a whopping 2,400 per cent rise over the last 24 hours. After two days, on October 29, its price almost doubled to $4.39. Then on November 1, Squid skyrocketed to $2,860 before tanking to nearly zero.

Before the Squid crash, its buyers were not allowed to resell their tokens by the token promoters. The unknown promoters are reported to have cashed out Squid tokens worth over $3.38 million. The Squid website and its social media accounts are no more functional.

'Rug pull' is the name of the scam committed by the Squid promoters. A 'rug pull' happens when a digital token promoter draws in buyers, suddenly stops token trading, and makes off with the money raised from sales.

The popular South Korean Netflix series Squid Game had inspired the creation of the play-to-earn Squid token. People buy play-to-earn tokens to use in online games. Game wins bring them more tokens which can later be exchanged for other cryptocurrencies or national currencies.

Before the Squid tanked, thousands of people were hypnotized by its skyrocketing price during its short life of 11 days. They invested and unfortunately lost their precious savings in an attempt to make a fast buck. One person from Shanghai is reported to have burnt his life savings of $28,000. The poor fellow considered Squid as a lucrative investment option, hoping that the popularity of the web series 'Squid Game' would rub on the play-to-earn token, bringing him huge returns.

High price volatility

The high price volatility of the Squid token and its subsequent crash may be attributed to a scam. But otherwise also some popular cryptos often show high price volatility. For example, as per the trading data available on coindcx.com, today (November 5, 2021) at 8.30 a.m., the most popular crypto, Bitcoin, showed a price variation between Rs 10.78 lakh and Rs 51.90 lakh during the past year preceding November 5, 2021. There is a huge 80 per cent appreciation for those who bought Bitcoin at its lowest price of the year, Rs 10.78 lakh. (coindcx.com is an Indian platform for crypto trading.)

Another high-priced crypto, Ethereum, fluctuated between Rs 30,000 and Rs 3.69 lakh during the past year preceding November 5, 2021. Today, Ethereum, bought at its lowest price of the year, fetches 90 per cent return.

In comparison to Bitcoin and Ethereum, Polygon Matic is today (November 5) selling at a very low price of around Rs 155. However, its price fluctuation (between 91 paise and Rs 215) over the past one year is very high – around 200 per cent.

The one cent-priced Squid skyrocketed and then tanked, but the story of another low-priced crypto, Shiba Inu, is different. Though selling at even less than a paisa – 0.0039 paisa to be precise, Shiba is going strong. During the last week, Shiba's price doubled and its market value soared to more than $51 billion last week, putting it among the top 10 cryptocurrencies.

Causes of price volatility

Crypto market is quite small as compared to the market of traditional currencies. It is easy for speculators to trigger price volatility in certain cryptos. Some of the causes of price volatility are as follows:

Whales: Small groups of people holding large amounts of cryptos are called whales. The whales even if they are few in numbers can influence the crypto trade. They may crash the price of a certain crypto by suddenly selling it in large numbers. The price crash, if it happens to be in a strong crypto like Bitcoin, may have a ripple crash effect for the entire market.

Limited supply: How much a cryptocurrency can be mined is pre-determined in its protocol. In other words, all cryptocurrencies have a finite supply. Their supply speed is uncertain and not controllable by anyone. In the case of Bitcoins, only 11 million coins can be mined. So, with the expansion of the crypto market, if the Bitcoin demand rises, then the coin price is bound to skyrocket.

Part-time investors: For operating in the crypto market, one doesn't need such expertise as is required for dealing with company stocks. Therefore, the crypto market attracts a large number of part-timers who want to make quick money. Since all part-timers are not able to make money, the market sees frequent entry and exit of part-timers, leading to price volatility.

Pure digital assets: Fiat money or fiat currency represents legal-tender paper money or coins, which are issued and backed by a government. However, cryptocurrencies are pure digital assets, with no government backing or backing of a commodity such as gold. Devoid of any stabilizing government or commodity control, the price of cryptocurrency is determined entirely by the laws of supply-demand. Any factor affecting their supply-demand may lead to a wide fluctuation in their price.

Coin burning: Some crypto promoters also destroy a part of their coin supply, using the burning mechanism. This creates scarcity of the coin and thus raising its demand and value.

The high price volatility has already been a concern regarding the unregulated cryptocurrency market. And, now the Squid scam would give a new momentum to the demand for crypto market regulation. In the absence of regulations, listing new cryptos on decentralized exchanges is quite easy. If the cryptos being listed are created by promoters with malicious intent, then their prices are artificially inflated by the pump and dump practice to lure gullible investors who want to make a fast buck. Experts emphasize market regulation to save naïve investors from losing their small savings by falling prey to wildly inflated valuations of coins like Squid.

(The author is a Delhi-based freelance journalist)