News that Walmart Inc. had partnered with the cryptocurrency Litecoin this past Monday seemed to shock many — including the retail giant itself.
According to Bloomberg, a statement appeared on GlobeNewswire that morning, announcing that Walmart would accept Litecoin as a viable payment in future transactions. To make an unfortunate matter worse, The Litecoin Foundation’s own social media manager was fooled and retweeted the story.
“It was wrong to retweet it.” said Charlie Lee, the cryptocurrency’s creator. “We deleted it quickly afterwards. But the damage is done.”
For a brief, subsequent moment, Litecoin’s market value skyrocketed 33%, only to drop when Walmart refuted the claim. It lost almost all of its gains as many most likely lost invested money.
No one knows who’s behind the stunt.
According to CoinMarketCap, as of Wednesday, Litecoin is now the 15th largest cryptocurrency, with a market cap of around $12 billion. This makes it billions of dollars smaller than other currencies and, therefore, an ideal candidate for fraud:
“You can manipulate that,” said one analyst, quoted by The Wall Street Journal. “You can really have a big move because of that.”
Yet, however harmful, the Walmart-Litecoin case isn’t a standalone event for cryptocurrencies. If anything, it serves to demonstrate a rather common issue.
‘Vegas money’
Morgan Benton, a professor in JMU’s integrated sciences department, invests in a number of cryptocurrencies. In 2018, he gave a talk on the subject, with a cautionary undertone. His message hasn’t changed since.
“I’d still caution anybody who’s thinking about getting involved in investing in cryptocurrency to treat it like Vegas money,” Benson said. “Don’t spend anything you can’t afford to lose.”
Cryptocurrencies like Litecoin work by being decentralized and largely unregulated. This is to say, they operate without the need for any banking bureaucracy or an entity responsible for it.
However, since such virtual currency isn’t backed by any government or real-world asset, it’s much easier to drive the price up and down. This leads to huge payloads for some manipulative investors.
One strategy to achieve this is called “pump and dump.” Here, a group of traders will invest in a given currency, inflate its value to entice others to put money into it and then sell off their assets at a profit and a loss to others. Litecoin’s stunt is an ideal example.
A 2018 Wall Street Journal investigation revealed that, within half a year, 175 pump and dump operations took place, costing millions of dollars in losses for some.
As of right now, pumping and dumping is perfectly legal for cryptocurrencies, unlike stocks. This is because, until legalities are shifted, cryptocurrencies don’t fully fall under the Security and Exchange Commission’s jurisdiction.
This has consequences. According to a Motley Fool study released in August, over $80 million has been lost to cryptocurrency fraud since last October. That’s a median loss of $1,900 shared between 7,000 American victims.
Adding on to those statistics, cryptocurrency appears to be the most popular payment method for investment scams due to its common and easy use.
“If you’re an investor, you should expect that to happen,” Benton said. “It’s part of the cost of getting into this area of investing.”
Risk now, profit later
This isn’t to say the cost isn’t worth it.
The unregulated nature of cryptocurrency markets opens the door for transactions that are limited in current banking infrastructure, points out Benton. In other words, cryptomarkets may have a democratizing effect for economic participation.
Cryptocurrencies provide “the ability to remove banks and credit card companies as the middle-man, so to speak,” Benson explains. “I don’t think we yet know what the full potential of that is.”
Benton also offers alternative perspectives for those worried about cryptocurrency’s environmental effects — a valid concern, as just Bitcoin is said to “burn 120 million megawatt hours of energy” each year, according to an NPR interview.
“How much environmental impact … do all of those bank branches and skyscrapers in New York City … have?” Benton speculates. “The truth is, a lot of the newer cryptocurrencies are finding less electricity-intensive ways to accomplish the same things.”
Future investors shouldn’t shy away from participating in the cryptocurrency world — a world growing in legitimacy and profitability. However, they should do so cautiously.
As a general rule, when looking to buy or sell in crypto markets, following normal business safety practices can go a long way. As outlined by the AARP, these include avoiding bad websites, questioning certain “endorsements” and not investing in Ponzi schemes — for starters, checking if a suggested cryptocurrency even exists.
Inversely, when it comes to a Walmart-Litecoin-type of announcement, some risk can be avoided through extra research, learning about the cryptocurrency and seeing who’s pushing it out.
Maybe next time, Walmart will be the one making the announcement.
Contact Filip De Mott at demottfs@dukes.jmu.edu. Filip is a School of Media and Arts and International Affairs senior.